Keith Mack
The US imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Since then, several presidents have imposed tax laws that have impacted companies in various ways. Some presidents, such as Donald Trump, Barack Obama, and George W. Bush, have implemented tax cuts that reduced corporate tax rates and provided tax breaks for corporations and high-income households. On the other hand, presidents like Abraham Lincoln, William H. Taft, and Franklin D. Roosevelt introduced the nation's first federal income tax, corporate income taxes, and payroll taxes, respectively. The impact of these tax laws on companies can vary, and it is essential to consider factors such as revenue generation, economic growth, and the distribution of tax burdens across different income groups.
| Characteristics | Values |
|---|---|
| Presidents who imposed the first federal income tax | Abraham Lincoln (Revenue Act of 1861) |
| Presidents who imposed corporate income tax | William H. Taft (16th Amendment in 1909) |
| Presidents who imposed individual income tax | Woodrow Wilson (1913) |
| Presidents who imposed the largest tax increase in history | Truman (Revenue Act of 1951) |
| Presidents who imposed the largest tax reductions in history | Obama (2010 and 2012) |
| Presidents who imposed tax laws favoring corporations | Trump (Tax Cuts and Jobs Act in 2017), George W. Bush (Bush Tax Cuts), Clinton (Taxpayer Relief Act of 1997) |
| Presidents who imposed tax laws favoring middle-class and low-income households | Clinton (Taxpayer Relief Act of 1997) |
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What You'll Learn
Abraham Lincoln's Revenue Act of 1861
The Revenue Act of 1861 was the first attempt by the US government to raise funds for the war. The act levied the first income tax ever on American citizens, with a 3% tax on all individuals with annual incomes above $800. This income threshold meant that many citizens were exempt from paying income tax due to their lower average incomes. The act also granted President Lincoln the power to appoint one principal assessor and one principal collector per state or territory, who were responsible for enforcing income tax provisions.
However, the act faced challenges due to its ineffective enforcement mechanism, and it ultimately failed to generate the desired revenue. As a result, it was repealed in 1862 and replaced with the more expansive Revenue Act of 1862, which established the office of the Commissioner of Internal Revenue to oversee tax collection and levied excise taxes on most items consumed and traded in the country.
The Revenue Act of 1861 was a significant step in the history of taxation in the United States, marking the beginning of federal income taxation and reflecting the government's efforts to address the financial challenges posed by the Civil War.
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William H. Taft's 16th Amendment
In 1909, President William H. Taft proposed a new income tax of 2% on corporations, to be imposed by an excise tax on manufactured goods. This proposal was made to Congress in a message regarding income tax on June 16, 1909, and was accompanied by a recommendation for a constitutional amendment to sanction the federal income tax. This became known as the Sixteenth Amendment.
The proposal was a continuation of the progressive policies of former President Theodore Roosevelt, and it aimed to make up for lost revenue resulting from tariff reductions. Taft's message to Congress emphasised the need for a legitimate and effective taxation system that could provide transparency into the business transactions and profits of corporations. He also addressed the concerns of those who opposed the amendment, acknowledging the potential impact on major businesses and the increased centralisation of the federal government.
The Sixteenth Amendment was ratified on February 3, 1913, granting Congress the authority to impose an income tax without determining it based on population. This amendment shifted the way the federal government received funding and marked a significant development in the Progressive Era's focus on social and political reform. It empowered Congress 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."
The proposal and eventual ratification of the Sixteenth Amendment demonstrated President Taft's commitment to progressive policies and his recognition of the need for sustainable funding for the federal government. By addressing the shortcomings of the existing tariff-based revenue system, Taft's administration took a significant step towards fairer taxation and increased transparency in corporate finances.
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FDR's Social Security Act
Franklin D. Roosevelt's Social Security Act, signed into law on August 14, 1935, was a significant piece of legislation that transformed the nature of federal assistance in the United States. Before the 1930s, government benefits and pensions were primarily reserved for those who had served in the armed forces or performed government service. Roosevelt's Social Security Act expanded the social safety net to include a broader segment of the population.
The Social Security Act established a system of old-age benefits for workers, funded by payroll taxes on both employees and employers. This program aimed to address the growing concern of old-age poverty, particularly in the years leading up to the Great Depression. By creating this retirement program, Roosevelt sought to give "some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age." The act also contributed to a significant decline in poverty among older individuals over the ensuing decades.
In addition to retirement benefits, the Social Security Act provided aid to other vulnerable groups, including victims of industrial accidents, the unemployed, dependent mothers and children, persons with disabilities, and the blind. It established an unemployment insurance program administered by the states and the Aid to Dependent Children program, which offered assistance to families headed by single mothers. The act also authorized the Social Security Board to register citizens for benefits, manage contributions, and distribute payments.
The Social Security Act faced opposition from those who viewed it as governmental overreach and those who were reluctant to impose additional taxes on employers. However, after a series of congressional hearings and debates, a compromise bill was passed by both houses. Roosevelt's proposal was presented as a more practical alternative to the Townsend Plan, and it marked a shift in the relationship between citizens and the federal government.
While the Social Security Act of 1935 was considered conservative compared to similar programs in Western Europe, it represented a significant step forward in addressing economic security for the aged, the temporarily unemployed, dependent children, and the handicapped. This legislation had a lasting impact on the country's social safety net and continues to be a vital program for millions of Americans.
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Trump's Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) was the signature legislative achievement of President Donald Trump's first term. It amended the Internal Revenue Code of 1986, and while it has no official short title, it is also known as the Trump Tax Cuts.
The TCJA was described by the New York Times as "the most sweeping tax overhaul in decades". It cut the corporate tax rate from 35% to 21%, resulting in a massive revenue loss for the federal government. The Act also doubled the estate tax exemption to $11.2 million for single filers and $22.4 million for couples, with exemption levels indexed for inflation. It eliminated the individual mandate penalty tax of the Affordable Care Act, meaning that from 2019, individuals without qualifying health insurance would not face a penalty.
The TCJA also nearly doubled the standard deduction, reducing the number of taxpayers choosing to itemize their deductions. It changed the structure of several major itemized deductions, limiting the itemized deduction for total state and local taxes to $10,000 annually for both single and joint filers. Under the TCJA, deductions for mortgage interest payments were limited to interest on the first $750,000 of loan principal, and deductibility of interest for home equity debt was eliminated unless used to buy, build, or improve the taxpayer's home. Deductions for out-of-pocket medical expenses above 7.5% of adjusted gross income (AGI) were allowed for 2017 and 2018.
The Act's impact on the economy was judged to be relatively minor. It did not pay for itself through increased economic growth as initially claimed, and it widened public deficits. It increased the federal debt and after-tax incomes disproportionately for the most affluent. It led to an estimated 11% increase in corporate investment, but its effects on economic growth and median wages were smaller than expected. A 2024 study by Patrick J. Kennedy and the Joint Committee on Taxation found that in response to the corporate tax provisions of the TCJA, the top 10% of income earners experienced wage increases while the bottom 90% did not.
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Biden's FY 2025 Budget
President Biden's FY 2025 Budget proposes a significant shift in taxation, primarily targeting corporations and high-income earners. The budget outlines a gross tax hike of approximately $5 trillion from 2024 to 2034, with a focus on increasing taxes for businesses and individuals with incomes above $400,000. This includes a proposal to increase the corporate tax rate to 28%, up from the current 21%, and a 25% minimum tax on certain high-income individuals. These changes are expected to reduce deficits by about $1.5 trillion through 2034, although this estimate does not include the cost of extending TCJA tax cuts for those earning below $400,000.
The budget proposes to increase the recently enacted corporate alternative minimum tax rate from 15% to 21% and deny business deductions for employee compensation above $1 million. Additionally, it aims to increase the corporate stock repurchase excise tax from 1% to 4%. The budget also includes proposals to reform US international tax rules, such as raising the tax rate on the foreign earnings of US multinational corporations to 21% and adopting an undertaxed profits rule (UTPR).
The budget's impact on the economy is a point of contention. Some estimates suggest that it would reduce economic output by 1.6%, wages by 1.1%, and employment by 666,000 full-time equivalent jobs. However, others argue that the budget's focus on increasing taxes for corporations and high earners will slow economic growth. The budget assumes a 2.2% annual GDP growth rate over the last five years of the budget window, while the CBO projects a lower rate of 1.9%.
While Biden's FY 2025 Budget aims to address fiscal responsibilities and ensure that corporations and high-income earners pay their fair share of taxes, it has sparked concerns about its potential impact on the competitiveness of the US economy and the overall health of the business sector.
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Frequently asked questions
Abraham Lincoln, who served as president from 1861 to 1865, imposed the nation's first federal income tax when he signed the Revenue Act of 1861.
President Truman is responsible for the largest tax increase in history. His Revenue Act of 1951 raised America's tax contribution to the Gross Domestic Product (GDP) by just over 1.5 percent.
President Obama is responsible for the two most significant tax cuts in history, in 2010 and 2012, which together dropped federal revenues by a combined $531 billion.
The most recent major overhaul to the IRS tax code was the 2017 Tax Cuts and Jobs Act (TCJA), signed by then-President Trump.
