This is the first of a two-part series. Part II covers progressive tax brackets and income levels.
By Jeannette N. Bennett, Senior Economic Education Specialist
Few things generate more anxiety than filing taxes.
And with good reason: In 1913, the federal income tax form was four pages and included one page of instructions. Today’s federal tax code spans thousands of pages, and the Internal Revenue Service (IRS) website lists more than 2,000 forms and publications.
With tax season upon us, now’s the time to reflect on federal income taxes—how they originated and what purpose they serve.
The United States’ first federal income tax was levied during the Civil War. It became clear to Congress that this would not be a quick war, and the government needed to generate more revenue. It was also during this period, in 1862, that a Commissioner of Internal Revenue was established.
Here’s a rundown of some key dates in income tax history:
After an up-and-down history, the income tax now makes up a large chunk of federal tax revenue. In fact, according to the federal Office of Management and Budget, individual income taxes represented more than $1.58 trillion of the $3.3 trillion in total federal tax revenue for fiscal year 2017. That’s slightly less than half of all other sources combined, as shown in the figure below.
Payroll taxes—The Federal Insurance Contributions Act (FICA) requires withholding Social Security and Medicare from an employee's wages. Employers must also pay a matching amount of the amount withheld.
Corporate income taxes—Taxes owed by businesses and firms based on their profits.
Excise taxes—Taxes paid when purchases are made on a specific good, such as gasoline; excise taxes are often included in the price of the product. There are also excise taxes on activities.
Congress and the president determine how tax revenue is spent, and spending priorities vary based on who is in power. For a detailed accounting of federal outlays by agency (such as the departments of Agriculture, Transportation or State) or by function (such as international affairs or veterans benefits), the Office of Management and Budget provides downloadable spreadsheets going back decades.
Broadly, though, today’s tax revenue allows the government to operate and provide goods and services for citizens. These goods and services include roads, bridges, national parks, education, research and national defense.
In economic terms, a government service such as national security is considered a “public good.” Public goods are those that are:
Nonexcludable—The supplier of the good or service (in this case, the government) cannot keep people who don’t pay for it (in this case, those who are exempt from taxes) from consuming/using it.
Nonrival—A good or service is nonrival if one person’s consumption does not hinder anyone else’s consumption of it. In the national security example, even if the U.S. population grows, the level of protection for those already benefitting from it remains the same.
The IRS expects about 155 million individual returns to be filed this tax season. The filing deadline is April 17. As the IRS explains, this is because April 15 falls on a Sunday, and Monday is Emancipation Day, which is a legal holiday in the District of Columbia. So, this year there’s a two-day extension for filing.
