Replacing income tax with tariffs

A story making the rounds right now is that Trump proposed eliminating the federal income tax and replacing it with tariffs. I don't think this will happen but it does make me reflect again on the idea of income taxes and the history of income taxes.

ChatGPT History:

Pre-Civil War Era: Early Taxation Efforts

1789-1800: The U.S. government primarily relied on tariffs and excise taxes for revenue. Alexander Hamilton, the first Secretary of the Treasury, introduced these as part of his financial plan.

1794: The Whiskey Rebellion was a direct response to the first excise tax on domestically produced distilled spirits, highlighting early resistance to federal taxation.

Civil War and Introduction of Income Tax

1861: To fund the Civil War, Congress passed the Revenue Act, introducing the first federal income tax at 3% on incomes over $800.

1862: The Revenue Act was revised to include a progressive tax structure, ranging from 3% to 5% on incomes above $600, and established the Office of the Commissioner of Internal Revenue.

1872: The income tax was repealed after the Civil War debts were settled, and federal revenue needs declined.
Gilded Age and Push for Tax Reform

1894: The Wilson-Gorman Tariff Act introduced a 2% tax on incomes over $4,000, which was aimed at addressing income inequality.

1895: The Supreme Court, in Pollock v. Farmers' Loan & Trust Co., declared the income tax unconstitutional as a direct tax not apportioned according to state populations.

16th Amendment and Permanent Income Tax

1909: Congress passed the 16th Amendment, allowing for the federal income tax without apportioning it among the states or basing it on Census data.

1913: The 16th Amendment was ratified, and Congress enacted a new income tax law with rates ranging from
1% to 7% on incomes above $3,000 for individuals and $4,000 for married couples.

World War I and Expansion

1917-1918: To fund World War I, the War Revenue Act significantly increased income tax rates, with top rates reaching 77% on incomes over $1 million. The number of taxpayers expanded significantly.

1920s: Post-war, tax rates were reduced during the Harding and Coolidge administrations, favoring economic growth.

Great Depression and New Deal

1930s: The economic collapse led to increased federal spending. The Revenue Act of 1932 raised tax rates again, and the New Deal expanded federal programs funded by taxes.

1935: The Social Security Act introduced a payroll tax to fund the new social insurance program.
World War II and the Modern Income Tax

1942: The Revenue Act of 1942 expanded the tax base, lowered exemptions, and introduced withholding from wages. The top tax rate rose to 94% on incomes over $200,000.

1943: The Current Tax Payment Act mandated withholding from wages, making income tax collection more efficient.

Post-War Era and Tax Reforms

1950s-1960s: High marginal tax rates persisted, but the economy grew. Tax policy focused on economic stability and funding the Cold War.

1964: The Revenue Act of 1964, influenced by President Kennedy, cut top marginal rates from 91% to 70%.

1981: The Economic Recovery Tax Act under President Reagan reduced the top rate from 70% to 50%.

Tax Reform Act of 1986

1986: The Tax Reform Act, a significant overhaul, simplified the tax code, reduced the number of tax brackets, and lowered the top rate to 28% while broadening the tax base.

1990s-2000s: Adjustments and Surpluses

1990: The Omnibus Budget Reconciliation Act raised the top rate to 31% and introduced a phased-out exemption for high earners.

1993: The Omnibus Budget Reconciliation Act of 1993 increased the top rate to 39.6% under President Clinton, contributing to budget surpluses.

2001 & 2003: The Economic Growth and Tax Relief Reconciliation Act and Jobs and Growth Tax Relief

Reconciliation Act under President George W. Bush cut rates across all brackets and introduced tax cuts.

Recent Developments

2010: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act extended the Bush-era tax cuts.

2013: The American Taxpayer Relief Act raised the top rate to 39.6% for incomes over $400,000.

2017: The Tax Cuts and Jobs Act under President Trump reduced the top rate to 37%, doubled the standard deduction, and capped the state and local tax (SALT) deduction at $10,000.

2021: The American Rescue Plan provided direct payments and extended tax credits, increasing federal spending to address the COVID-19 pandemic.

Current Trends and Debates

2024: Discussions continue over tax policy, including proposals for higher taxes on wealthy individuals and corporations, addressing inequality, and managing national debt.