Kara Sears
In the United States, proposed tax laws are introduced as a bill in the House of Representatives, where they are referred to the Ways and Means Committee. This committee holds hearings to understand the bill's potential impact on the economy and specific interest groups. Once the hearings are concluded, the committee revises the proposal and turns it into draft legislation, which is then introduced to the full House for debate, amendment, and approval. If passed by a simple majority, the bill moves to the Senate, where it is reviewed by the Finance Committee, which may rewrite the proposal before presenting it to the full Senate. Following Senate approval, the bill is sent to a joint committee of House and Senate members who work to create a compromise version. Once Congress passes the bill, it is sent to the President for approval. The President can either sign it into law or veto the bill.
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What You'll Learn
The 16th Amendment
The journey towards the 16th Amendment began in 1894 with the Wilson-Gorman Tariff Act, which included a provision for a 2% federal income tax on incomes over $4,000 (equivalent to $135,951.63 in 2022). However, this tax was repealed in 1872, and the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co. further complicated efforts by declaring certain income taxes, such as those on property, as unconstitutionally unapportioned direct taxes.
In 1909, during debates over the Payne-Aldrich Tariff Act, Congress proposed the 16th Amendment to the states. Despite initial opposition from conservative Republican leaders, a coalition of Democrats, progressive Republicans, and other groups ensured the amendment's ratification by the required number of states. The resolution proposing the 16th Amendment was passed by Congress on July 2, 1909, and it was formally ratified on February 3, 1913, just one month before President Woodrow Wilson's inauguration.
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Income tax laws
In 1894, the Wilson-Gorman Tariff Act, also known as the Wilson Tariff Act, reintroduced a peacetime income tax with a 2% rate on incomes over $4,000. However, this tax was short-lived as it was struck down by the Supreme Court in 1895, which ruled it unconstitutional in the Pollock v. Farmers' Loan and Trust Company case. The Court held that taxes on rents, dividends, and interest were "direct taxes" and had to be apportioned among the states based on population.
The demand for income tax reform persisted, and in 1909, President William H. Taft proposed a new income tax amendment to Congress. This proposal culminated in the passage of the 16th Amendment in 1913, which established Congress's right to impose a federal income tax without apportionment based on state population. The 16th Amendment was ratified by the required number of states, and it granted Congress the authority to lay and collect taxes on incomes from all sources without regard to population.
Following the ratification of the 16th Amendment, Congress enacted the Revenue Act of 1913, which levied a 1% tax on net personal incomes above $3,000 and a 6% surtax on incomes above $500,000. Over time, the top marginal tax rates have fluctuated significantly, reaching a high of 94% during World War II and decreasing to 24% in the late 1920s. Subsequent legislation, such as the Tax Reform Act of 1986 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, have further refined and adjusted income tax laws in the United States.
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Excise taxes
An example of an excise tax is the 1791 Excise Whiskey Tax in the United States, which levied a federal tax on domestic and imported alcohol. This tax was extremely unpopular with farmers, particularly those in the south and west whose grain crops were a chief ingredient in whiskey. In 1794, farmers in western Pennsylvania attacked federal officials seeking to collect tax on the grain they had distilled into whiskey, leading to what became known as the "Whisky Rebellion".
Another example of excise taxes is the set of tax laws passed by the British Parliament in 1767, known as the Townshend Revenue Act. Proposed by Charles Townshend, Chancellor of the Exchequer, these laws placed a tax on common products imported into the American Colonies, such as lead, paper, paint, glass, and tea. These taxes were collected from ship captains when they unloaded their cargo.
More recently, in Washington, a bill was passed in 2025 that creates a new excise tax on the sale or banking of surplus ZEV credits, effective May 20, 2025. This bill also modifies existing B&O tax surcharges and clarifies the B&O tax deduction for certain investments.
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Payroll tax
In the United States, the history of payroll tax can be traced back to the Social Security Act of 1935, which established a payroll tax system to fund Social Security benefits. This act was amended in 1939, creating the Social Security Trust Fund to manage these taxes. During World War II, Congress introduced payroll withholding and quarterly tax payments, further shaping the payroll tax system.
The Current Tax Payment Act of 1943 played a pivotal role in payroll tax withholding. This legislation required employers to withhold employee income tax, similar to the existing practice for Social Security taxes. The rationale behind this act was to bolster national security during World War II and address rampant inflation caused by the influx of new dollars into the economy.
Over time, the payroll tax system has undergone refinements. For example, in 1983, President Reagan increased payroll taxes as part of his broader tax reform agenda. Additionally, the taxation of Social Security annuities commenced in 1984 following the passage of amendments in 1983. These amendments, signed into law by President Reagan, established that up to 50% of Social Security benefits could be added to taxable income if certain income thresholds were exceeded.
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Tax credits
In the United States, tax credits are a benefit that lowers the amount of tax owed by the taxpayer by a dollar-for-dollar amount. They are offered on both the federal and state levels to incentivize certain actions, such as purchasing an electric vehicle, or to offset the cost of certain expenses, such as raising a child. Tax credits can be non-refundable, refundable, or partially refundable.
There are a wide range of tax credits available, and the amount and types vary by tax year. Taxpayers should carefully review the current tax credits when preparing their federal tax returns. Some common tax credits include the Earned Income Tax Credit, Child Tax Credit, and clean energy credits. The American Opportunity Tax Credit is another example of a tax credit for qualified education expenses paid by or on behalf of an eligible student for the first four years of higher education.
To claim tax credits, taxpayers must meet a strict set of criteria relevant to the specific credit. For example, to qualify for the Child Tax Credit, the child must be a US citizen under 17 years old with a Social Security number and be claimed as a dependent on the taxpayer's tax return. Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to determine their eligibility for various tax credits and get answers to common tax law questions based on their specific circumstances.
The concept of tax credits is closely related to the broader history of taxation in the United States. The power to impose federal income tax was established by the 16th Amendment, which was passed by Congress on July 2, 1909, and ratified on February 3, 1913. This amendment granted Congress the authority to lay and collect taxes on incomes without apportionment among the states or regard to any census or enumeration.
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Frequently asked questions
The 16th Amendment, which gave Congress the right to impose a federal income tax, was first proposed by Senator Norris Brown of Nebraska. The proposal that was eventually accepted was introduced by Senator Nelson W. Aldrich of Rhode Island.
Income taxes were first introduced during the Civil War. President Lincoln signed the Revenue Act of 1861 into law, imposing a flat tax of 3% on annual incomes above $800.
In 1894, President William H. Taft proposed a 2% income tax on corporations.
Former President George Bush introduced the 2001 tax cut, which reduced the top marginal rate to 35%.
