Theme 2: Taxes in U.S. HistoryLesson 3: Income Tax Issues

Educational Standards

State and National Standards

Time Frame

One to three hours

Curriculum Area(s)

• History/Social Studies
• Civics/Government
• Economics
• Technology

Purpose

To help students understand how and why a federal income tax was implemented by Congress during the Civil War and in 1913

Objectives

Students will be able to

• describe the history of the federal income tax.
• explain the purpose of a federal income tax.

Background

The federal income tax has not always been a part of the American taxation system. Civil War debts caused Congress to enact the first federal income tax. It was a progressive tax that was based on citizens ability to pay-only people above a certain income level were expected to pay. The government relied on voluntary compliance with the income tax. Many were willing to pay the tax, but many were not. Less than one percent of all households actually paid the tax, yet it generated $55 million. The federal income tax was repealed in 1872.

1894-1895

Congress passed a new version of the federal income tax in 1894. It required people to pay a flat income tax rate of 2 percent. The following year, the Supreme Court declared the income tax unconstitutional because it violated the part of the Constitution that requires any direct tax to be divided among the states according to population. Higher regressive taxes, such as tariffs and excise taxes, were put in place instead.

Early 1900s

By the turn of the twentieth century, the American economy had grown as a result of industrialization and modernization. The government supported more people and more programs than ever before. With industrialization, a small section of the population became wealthy, but many remained poor.

1909-1913

In 1909 Congress proposed an income tax that would not be based on the population of the states. Ratification of the Sixteenth Amendment in 1913 made the income tax legal and constitutional. It allowed the federal government to tax citizens' incomes directly.

Key Terms

ability to pay

A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

progressive tax

A tax that takes a larger percentage of income from high-income groups than from low-income groups.

voluntary compliance

A system of compliance that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time.

Opening the Lesson

Ask students how the income tax might seem different from other taxes they have studied. Print Info Sheet 1: Timeline of Events: 1861-1913 and have students follow along as you present the background material.

Developing the Lesson

Ask students:

• Do you think a direct tax on every worker's income is fair? (Answers will vary. Explain that fairness to taxpayers was one of the reasons lawmakers supported a federal income tax.)

Ask:

• What are some arguments for and against a progressive federal income tax? (Students may suggest that by taking money away from people, the government is keeping them from enjoying the results of their labor and preventing them from investing. Others may suggest that a tax that takes more from people with higher incomes is fair.)

Concluding the Lesson

Have students recall the history of the federal income tax and its purposes. Visit U.S. Constitution. Have students read the text of the Sixteenth Amendment. Ask them to identify how the language of the amendment makes the once unconstitutional idea of a direct tax acceptable. (Answers will vary.)