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Financial Tip

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Quick Look at the History of Taxes

Supreme Court Justice Oliver Wendell Holmes said, "Taxes are what we pay for a civilized society." Given that much of the tax collected is used to provide services and resources that serve our communities and country, his analysis certainly rings true. Paying taxes, whether on property or sales, is a long-standing practice. In fact, taxes have been levied since early civilization dating back to ancient Egypt which had the first known tax system starting in 3000 B. C.

In the United States, taxes have been a part of American history since colonial days. Taxes levied by British parliament were one of the few links the colonies had to England. This dependence to England was one of the major contributors to the Revolutionary War.

"Property was essential to individual liberty, so there were disputes over who can tax and what could be taxed," explains Vicki Arndt Helgesen, advanced placement American history teacher at Shawnee Mission East High School in Prairie Village, Kan.

In 1773, British Parliament passed the Tea Act, which imposed a tax on tea delivered to the colonies. Given that Colonist didn't have a representative in British parliament, they felt they were being taxed unfairly and took up the rallying cry of "No taxation without representation." In December of that year, they made their grievances against Parliament clear when they boarded British cargo ships filled with tea and destroyed the shipment by throwing it into Boston Harbor. This "Boston Tea Party" is an iconic event in American history.

Following the Revolutionary War, taxes were symbolic of independence. Even so, before the U.S. Constitution was ratified in 1788, the federal government lacked the power to raise revenue directly as taxes were controlled by the individual states. Even after the Constitution was ratified, federal revenues came mostly from businesses through taxes on imports and exports, known as tariffs, and excise taxes based on the amount of business they did.

Income taxes were proposed during the War of 1812 as a means to retire the $100 million debt the federal government had accumulated during the war. The tax was never imposed as the war ended before the taxes began.

During the Civil War, the federal government required much more revenue than the tariffs and excise taxes could provide. To raise cash, a three percent tax on individual net annual income of $600 to $10,000 and five percent on individual net incomes from $10,000 to $50,000 was established in 1862. During the next 10 years, the tax amount changed and in 1872 it expired.

Finally, in 1913, our current tax system was born with the ratification of the 16th Amendment which provided Congress the right to levy and collect income taxes.

The Social Security Tax
The state of the economy during the Great Depression led to passage of the Social Security Act in 1935. This law provided payments known as "unemployment compensation" to workers who lost their jobs. Other sections of the Act gave public aid to the aged, the needy, the handicapped, and to certain minors. These programs were financed by a 2 percent tax. Social Security tax is now 6.2 percent.

Collected taxes are used to fund many of the services and resources that support us. For example, local taxes may be used to fund schools, fire and police departments, road repair and basic city services. Nationally, taxes are used to cover the cost of things like law enforcement, social programs, human and community development, Social Security, Medicare and national defense. To learn more about U.S. taxes, visit the U.S. Department of Treasury or the Internal Revenue Service.

Teachable Moments

More than likely, whenever you or your kids buy something they pay taxes. Have them save their receipts for a month,and total the taxes paid. List and discuss what taxes pay for, such as roads, libraries, schools and fire protection.

For more information about taxes, how they are used and additional discussion ideas, refer to Module 1, Lesson 5, in the Yes, You Can curriculum.