August 2016

More Than a Century of Paying Income Taxes

By Amy K. Frantz

The U.S. Constitution was amended in 1913 to allow the establishment of a federal income tax. The Internal Revenue Service (IRS) briefly describes the ratification of the 16th Amendment and the first income tax adopted by Congress in 1913:

“In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.”

Paying federal income taxes has become increasingly complex over the last century, as demonstrated by the National Taxpayers Union Foundation’s (NTUF) annual analysis of the complexity of complying with the federal tax code.  One of NTUF’s measures of the code’s growing complexity is the number of lines in Form 1040 and the pages of instructions required to fill it out:

“For many years, National Taxpayers Union and NTUF have tracked the length of the Form 1040 and its accompanying instruction booklet – materials that many American taxpayers are all too familiar with on a yearly basis. In 1935 the Form was a single page consisting of 34 lines, with two pages of instructions. Now, it has 79 lines over two pages, requiring the equivalent of 211 pages of instructions.”

But just how different was paying federal income taxes when first adopted, back in 1913? The Internal Revenue Service has posted a copy of the first Form 1040, from 1913.  The form itself was three pages, but the lines and spaces to fill out are more spread out than our current form.  The instructions for filling out Form 1040 in 1913 are only a single page.

The first paragraph of the 1913 instructions state that “This return shall be made by every citizen of the United States, whether residing at home or abroad, and by every person residing in the United States, though not a citizen thereof, having a net income of $3,000 or over for the taxable year…” The $3,000 in 1913 would be the equivalent of just over $73,000 today, according to the Bureau of Labor Statistic’s CPI Inflation Calculator.  Obviously, today, those with income levels much lower than $73,000 are required to file income taxes, in part due to the changing focus of the income tax from simply collecting revenue.  As NTUF writes, “In the words of Congress’ chief tax analyzers, the Joint Economic Committee, ‘…since its 1913 enactment, the income tax system has fallen prey to a multitude of unintended purposes including income redistribution, social engineering, and government micro-management of saving, investing, and spending decisions.’”

One other interesting item of note is at the top of the 1913 Form 1040, which states that “the penalty for failure to have this return in the hands of the Collector of Internal Revenue on or before March 1 is $20 to $1,000.” In today’s dollars, those fines would be between roughly $500 and $25,000.  However, calculating fines for non-filing are more complex as well in today’s tax system.  “The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late.  This penalty will not exceed 25 percent of your unpaid taxes” according to the IRS.  If you file more than 60 days after the due date, there is a minimum penalty; however, there is no penalty if you are receiving a refund and you file within three years of the deadline.  There are a number of other factors that determine whether you owe a penalty for non-filing and non-payment, and how high those penalties will be.

Our federal elected officials should work to simplify our income tax system. Returning to the days when the instructions to file income taxes fit on one page is a worthy goal!

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.