History Tax: Where The First Income Tax and Impact on Society

This paper focuses on what taxes are, where the first income tax started, and where we are today and how, where we are today, affects our agricultural community. Many presidents before Trump, have signed tax cut acts in hopes to make taxes easier on one class or another. As tax cut bills are signed, they are in favor of Americans stimulating the economy and may even encourage Americans to save, invest and work for more money.

In December of 2017 President Donald J. Trump signed the Tax Cuts and Jobs Act (TCJA). This document was intended to help the middle class tax payers. This document made significant changes to income tax deductions and tax rates along with many other changes to provisions. This document makes it much easier on the average households so they do not have to itemize their deductions. This document is also foreseen to stimulate the economy in the near future. President Trump is taking matters into his own hands to make sure Americans are being taxed fairly and constitutionally.

The Power of Taxes

Taxes have been a burden and a blessing on families for several generations. A burden because no one wants to pay money out of their paycheck every week, where half of it you’re still wondering what it’s paying for. A blessing because we would not have proper road systems, plowed streets, Medicare/Medicaid systems, social security and so forth. Having all of these have helped almost every single American in The United States whether they realize it now or not. In December of 2017 President Trump signed the biggest tax overhaul since 1986. It has created simplicity in that tax payer will not have to itemize their deductions anymore, but it will take longer to fill out their tax forms. “It will raise health care premiums and reduce health insurance coverage. It will affect activities in many sectors, including state and local public spending, charitable organizations, and housing”.

In 1862, as the Civil War was going on, The United States congress introduced the very first form of income tax. Persons who earned six hundred dollars to ten thousand dollars were taxed on average around three percent and earning more than ten thousand you were subjected to a higher tax and so forth.

In 1913, the sixth amendment was created as the tax system was now permanent. Stated in the United States constitution “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration (Constitution).” Collections from U.S. citizens in 1918 were over one million dollars. In 1920, it was over five billion. This made taxation the main income for the United States Government.

Types of Taxes

Consumption Tax

A consumption tax is a tax that is based on your money spent not your money earned. It is also associated with sales taxes which differ in different states. Sales taxes are used to raise revenue and can be taxed on certain goods. Such as, gas, alcohol, clothing, and food.

Progressive Tax

A progressive tax is one that increases with how much money is made by the individual. In America, the system is set up so higher classes pay more than the middle class and so forth (Smart Asset). An advantage of the progressive tax is that it leaves more money in the pockets of low income workers that will more than likely stimulate the economy and spend more.

Regressive Tax

A regressive tax is different from the progressive tax in which the rates are lower for the rich or they are flat. Flat taxes are described as they are the same amount for everyone to pay, but depending on your level of income, of course you will be paying different amounts.

Proportional Tax

A proportional tax means that all levels of income will be paying the same proportion in taxes. As explained, proportional taxes are the same as regressive taxes. These two types of taxes are the same at the state-level sales taxes but not at federal-level. At the 2012 Presidential campaign there was a big fuss about the 9-9-9 plan. Which called for 9 percent business transaction tax, a 9 percent income tax and a 9 percent federal sales tax.

Property Tax

Are paid on the land, real estate and commercial real estate. Most people do not own homes because living off rental properties are less expensive due to all the taxes that come along with owning their own home.

Inheritance/Estate Tax

Inheritance tax is determined by the net worth of the deceased. This tax comes with the privilege of passing down your assets to your heirs. There are federal estate taxes, but inheritance taxes are only lawful in a few states.

Payroll Tax

Payroll taxes occur when you are receiving a paycheck and your state taxes you on that money you earn. There are also other factors that are in payroll taxes, you can opt in for a 401K or a healthcare plan. Also, there are federal taxes and social security and Medicare. These are the most common taxes for every person working on the books in The United States. These are the taxes you could possibly get back at tax return time.

Income Tax

Income taxes explain themselves. The government taxes you on the money you earn. This type of tax is marginal so everyone pays something different depending on the tax bracket you are in. Trump has changed these tax brackets as I will later explain.

Previous President Tax Plans

Between 2001 and 2018 tax cuts keep significantly reducing federal revenue and chopping taxes and being beneficial for American households. Most of which in the Bush-era were tax cuts to the well off and wealthy class. While as the Obama-era were cuts to the low and middle class. It is estimated that by the end of 2025, tax cuts will grow to 10.6 trillion dollars with more than two-thirds of that going to the top five percent. Below I showed one important tax act that had been enacted within 2001-2017 for each president.

The Economic Growth and Tax Relief Reconciliation Act of 2001 was signed by President George W. Bush, was one of the biggest cuts to American taxes. “This act introduced a new low income tax rate of 10%, increased the child tax credit, adjusted the tax brackets for married couples, and reduced the top 4 tax rates”. Helping families make ends meet and get higher returns or just lower pay-ins.

The American Opportunity Tax Credit enacted in 2009 under President Obama, allowed families and students to get a tax credit up to ten thousand dollars over four years of their college career. This made it so students or parents of students could claim their expenses of college and get a chance at getting some of that money back. Usually, in my case, the parents of the student get that money because the student may not make enough and will have to be claimed under the parents’ name. Even though the student paid for those expenses, the parents will get that money back. This tax credit act saved families thousands.

Signed in December of 2017 President Trump passed the document that made significant changed to income taxes. Even though these changes are temporary, ending in 2025, the changes will revert to pre-TCJA status. “These changes include a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions. In all, these changes simplify the individual income tax by eliminating the need for millions of households to itemize their deductions”.

The Tax Cuts and Jobs Act reduced the taxation levels on each tax bracket shown in Table 1. These level are set for inflation as well. Income tax is the single largest income for the United States government. Cutting government income is positive in hopes that it will stimulate the economy and create more jobs and get money flowing. The TCJA is set to do this. Up until 2025 that is, because the TCJA is temporary.

Previously before TCJA the child tax credit was an 1,000 dollar write off per child under seventeen years of age. This tax phased out when joint income reached over 110,000 dollars and 75,000 for singles.

Currently, with the TCJA in full swing, the child write off is now 2,000 dollars under seventeen years of age. Also, the joint income is now under 400,000 and single filling is under 200,000 to be eligible to claim your children, which in my opinion is substantially high.

Unlike pre-TCJA, these deductibles are now only offered to children who have a social security number, which is a good thing because there were instances where “parents” claimed children that they didn’t have to get a higher tax refund.

There is also now a 500-dollar credit for any other dependent that the filer can claim. Making this more beneficial to tax payers because since the cut off for claiming your children is seventeen, some kids live in their parents’ house for a while after they are done with college and the average age to graduate is twenty-one. That is also beneficial to the tax payer because they can claim any other adult in the house that they give financial support to. For example, their parents that come to live with them at an old age.

The Tax Cuts and Jobs Act almost doubles the standard deduction by changes the previous deduction of 13,000 to 24,000 for joint filling and 6,500 to 12,000 for single filers. This was intentionally done to reduce the amount of taxpayers itemizing their deductions. The TCJA limits every single household in every state to only 10,000 dollars in itemized deductions each year.

The TCJA has now made better deductions for pass through entities. A pass through entity is “a special business structure that is used to reduce the effects of double taxation. Pass-through entities don't pay income taxes at the corporate level. Instead, corporate income is allocated among the owners, and income taxes are only levied at the individual owners' level”. Some examples of a pass through entity would be an LLC, partnerships, proprietorships, and S corporations.

Some numbers

These deductions include a 20 percent reduction on their qualified business income (QBI), regardless of what kind of pass through entity they may be. For example, if your qualified business income was 150,000, there would be a 20 percent deduction on that number, and you would only have to pay income taxes on 120,000 dollars instead of 150,000.

Pass through entities can now claim 100 percent of their deprecation in one year if they wanted, but this also phases out in 20 percent increments starting in 2022.

The Tax Cuts and Jobs Act also simplified the accounting process for smaller entities. It is allowing cash accounting and the section 179 expensing limit to be up to 1 million dollars. For larger entities, the expensing limit has increased to 25 million dollars.

Net operating losses have also changed. Firstly, the Tax Cuts and Jobs Act the net operating loss deduction to eighty percent of its total net income in a year. Losses can be carried forward, but not backwards. Previously, businesses were able to carry back losses backward two years and forward twenty years.

Another interesting change, The Tax Cuts and Jobs Act cuts taxes for alcohol producers. The TCJA cuts excise taxes from 7 dollars to 3.50 cents on the first 60,000 barrels of beer produced by the seller. They also cut the tax from “13 dollars to 2.70 cents on the first 100,000 proof gallons of distilled spirits, and from 0.17 cent to 0.07 cents on the first 30,000 gallons of most wine”. Though, these tax cuts are temporary among all the other tax cuts. These cuts are the shortest. They expire after 2019.

“In 2016, farms organized as pass-through entities constituted over 98 percent of family farms and 90 percent of the total value of U.S. agricultural production; thus, the biggest effects of the TCJA on farmers are from changes to the Federal individual income tax code”.

“Most family farms are run as small businesses, and they should be able to keep more of what they earn to reinvest in their operations and take care of their families,” Perdue said. “Simplifying the tax code and easing the burden on farmers will free them up to make choices for themselves, create jobs, and boost the overall American economy. This report just shows what we knew all along: the tax cuts and reforms will benefit farmers.”