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The IRS: The Agency Becomes a Powerhouse
The 20th century saw a great deal of formative events surrounding Government revenue collection via taxes. In effect, these historical episodes were a series of taxation touchdowns in the Federal effort to raise revenue for Governmental objectives. Since the Constitution protected States with less people from being levied at the same rate as more populated States, it was amended in 1913. Had this not been the case, it would be likely that some very rich people would live in less populated State tax havens to take advantage of the Constitution’s population proportional tax law.
In the early days of the income tax, it was small with a standard rate of 1% for most income taxpayers. The exception to this was World War I, when the maximum income tax reached a whopping 77%. From the 1860’s through the early 1950’s, The Bureau of Internal Revenue was charged with the responsibility of collecting taxes from the public. These taxes supplemented the excise, customs and tariff taxes that had been in place since the early days of the Constitution. In 1953, during the Eisenhower administration, the agency underwent a reorganization and was renamed the Internal Revenue Service.
Exciting Tax Plays in IRS History
In terms of Federal revenue collected, the growth of the IRS is clear. By the last year of the 20th century, the Internal Revenue Service collected $1.9 trillion dollars i.e. approximately 20% of the United States annual Gross Domestic Product (GDP). Compared to the beginning of the century when taxation revenue neared 1% of GDP, the growth in Federal taxation revenue has been astounding. Furthermore, by the late 1990's the number of IRS employees had grown to over 100,000 with an operating budget of $8.3 billion.
- The Internal Revenue Service has a bill of rights
- The Current Tax Payment Act of 1943 made employer tax withholdings universal.
- Form 1040 has been used since 1913
- In 1954 the maximum income tax was 87%
- The Social Security tax withholdings began in 1935
- Income tax is indexed for inflation
- Computers were used in the IRS as early as the 1950's and the 1st computer center was dedicated in 1961.
Rules of the Game
Between the time the income tax was permanently instituted and the end of World War II, several Acts were passed to regulate existing and new federal sources of income. These Acts refined and enhanced the purpose and method of tax collection. In doing so, the Bureau of Internal Revenue became an increasingly important Government agent under the authority of the U.S. Department of the Treasury.
Legislation had a lot to do with the development of the Internal Revenue Service. As the United States' economic and political goals evolved and changed, so too did the laws governing the collection and distribution of taxes. Federal tax laws are codified in the Internal Revenue Code in Title 26 of the United States Code. Some examples of additions and changes to the Internal Revenue Code are as follows:
- 16th Amendment to the Constitution
- Revenue Acts of 1914, 1916, and 1918
- The War Revenue Act of 1917
- The Tax Act of 1932
- The Revenue Act of 1942
- 1943 Tax Payment Act
- 1944 Individual Income Tax Act
- Economic Recovery Tax Act of 1981
- Tax Reform Act 1986
- Taxpayer Relief Act of 1997
- IRS Restructuring and Reform Act of 1998
State and Local Join the Taxation Game
The transformation of tax law didn't just occur at the Federal level. By the 1930's, State and local governments wanted in on the action and started income tax teams of their own. By 1999, 43 states were involved with income tax collections. The emergence of new taxes such as property, vendo, use, fuel and tobacco tax etc… all of which hit the tax playing field with such success (in terms of revenue generation) that even county and city governments joined the game.
In summary, the 20th century saw a mind-blowing rise in federal revenue due to the evolution of taxation in the United States. Beginning in 1913, and up until the 1980's tax collections continued to grow. It wasn't until the Reagan administration that consumers, businesses and the wealthy scored a few points with tax reductions and relief. Despite these reductions, the booming economy of the 1990's continued to generate ever-higher amounts of federal government revenue. By the end of the century, the IRS had become an institutional heavyweight, accepted by Americans as an everyday and necessary part of life.
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