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I remember hearing that income tax was specifically created to finance the war effort during World War I. Is this true? If so was it originally intended to be a temporary measure?

  • @JohnFX - Actually this question applies to more than just the United States. Not sure if the UK is also affected by this question - folks from UK please feel free to comment. – Zephyr Mar 25 '10 at 15:51
  • I'm not sure I agree. I'm assuming each country made the decision to impose income taxes for their own reasons. It seems to me this question would have to be specific the country you were interested in. I assumed US (and added the tag thusly) because I had heard that story too about US taxation history. – JohnFx Mar 25 '10 at 19:09
  • Actually I had heard about this for the US, Canada and the UK and welcome answers for all 3. I know that when income tax was introduced in most countries it was a contentious issue. – Zephyr Mar 25 '10 at 20:29
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Canada did not introduce income taxes before World War I. Specifically deficits forced them to in the later part of the war:

The Conservatives opposed income tax as they wanted to attract immigrants primarily from the United Kingdom and the United States, as opposed to Eastern Europe, and they wanted to give their preferred choice of newcomers some incentive to come to Canada. Wartime expenses forced the Tories to re-consider their options and in 1917 the wartime government imposed a "temporary" income tax to cover expenses. Despite the new tax the Canadian government ran up considerable debts during the war and were unable to forego income tax revenue after the war ended. With the election of the Mackenzie King-led Liberal government, much of the National Policy was dismantled and income tax has remained in place ever since.

So from a Canadian point of view they were introduced as part of the war effort.

3

The Income Tax was put into effect during the Civil War, but was later revoked because it was deemed "Unconstitutional".

It was re-instated in 1913, just one year before World War 1. This is largely the reason why people think it was created "for the war", when it actually pre-dated World War 1.

Edit: I don't have any sources, per-se. This is just what little information I remember from Grade 10 History class.

I remember this because I had a real ethical problem with how the government instituted the Income Tax, since it is effectively a tax on Productivity. I find this absurd, since it motivates people to do less, in an effort to be taxed less. This in turn promotes workers doing "cash jobs" and other such things to get around it.

I personally have refused a raise because it would put me into a higher tax bracket, and I wouldn't actaully see the new money. In exchange, I asked for other non-monetary perks instead. I personally think this situation should not exist.

...however, I don't have a better solution. So I suppose I can't really pass judgment. :)

  • +1 cause I remember that from history class, but could you cite anything? – MrChrister Mar 25 '10 at 16:07
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    By the way, on your "refused a raise" anecdote: Considering the tax system is progressive, and there being no "100%" tax bracket, you should always see some of the money you get in a raise. But yes it's fair to say you don't get the full effect of a raise because the gov't gets a good share at marginal rates. – Chris W. Rea Mar 25 '10 at 17:11
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Income tax was seen as a way to exploit the revenues available from the rapidly expanding ranks of people with mid to high incomes. It was initially targeted at the very wealthy.

Previously, most Federal revenues came from excise taxes and tariffs, both of which have many negative economic effects, leave the government with limited revenue generating ability and bring a host of international and domestic political problems.

Since the successful implementation of the income tax required a constitutional amendment, it is very unlikely that anyone at the time seriously considered the income tax a temporary measure.

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As regards the United Kingdom, this politics.co.uk page has a good history (under "Background"). Notable highlights:

  • It was introduced in 1799 as a temporary measure to fund the Napoleonic Wars (with France).

  • It remains to this day a "temporary" tax that has to be renewed each year in a provision of the annual Finance Bill.

  • It was repealed in 1816 (a year after the Battle of Waterloo) but re-introduced in 1842 to deal with massive public debt. At this time, it was levied only on the very rich.

  • Rates rose dramatically at the beginning of the 20th century, as did the number of people paying it. By 1918 the standard rate was 30% and by 1930 arond 10 million people were liable.

  • In 1944, the current system of deduction-at-source (Pay As You Earn, or PAYE) was introduced, as well as the system of "tax codes" that told employers how much to deduct, without revealing (too much) about an individuals finances.

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I believe that in Australia it was a "temporary wartime measure".

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