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Asked at a recent Republican presidential debate to specify what the highest federal income tax rate should be, the candidates offered various figures: 15 percent from Newt Gingrich, 20 percent from Rick Perry, 25 percent from Mitt Romney, and 28 percent from Rick Santorum.
When it was Ron Paul’s turn to respond, the Texas congressman undercut the previous answers, saying: "We should have the lowest tax that we’ve ever had, and up until 1913, it was 0 percent. What’s so bad about that?"
It’s no secret that Paul favors smaller government and less taxation. His campaign website says that as president, he would support a constitutional amendment to abolish the income tax. If that can’t be done, however, the web page says, another way to bring the income tax rate to 0 percent would be to restrain federal spending "by enforcing the Constitution’s strict limits on the federal government’s power."
PolitiFact has delved into the history of the federal income tax for previous fact-checks, and PolitiFact Texas explored its origins in December 2010 after Perry linked Woodrow Wilson, the Progressive movement and the income tax while promoting his book Fed Up! That look noted Americans first paid an income tax 50 years before Wilson’s presidency, after Congress approved one in 1861 to help cover the expenses of the Civil War; it expired in 1872.
So, is it accurate to say Americans paid a zero income tax rate until 1913?
Let’s review the history.
First of all, Paul had a reason for mentioning 1913; the 16th Amendment to the Constitution was ratified that year, legalizing a federal income tax, and Congress approved legislation enacting one. The 1913 law imposed a tax of 1 percent on income up to $20,000, for both individual and joint filers. However, exemptions from the tax — the first $3,000 of income for individuals and the first $4,000 for joint filers — meant "virtually all middle-class Americans" were excused from paying, according to W. Elliot Brownlee’s book, Federal Taxation in America. The law also put in place a graduated surtax on incomes above $20,000; the highest rate paid, 7 percent, applied to Americans making more than $500,000 (about $11.4 million in 2011 dollars).
The amendment’s ratification came nearly two decades after the U.S. Supreme Court in 1895 voided an income tax that Congress had approved a year earlier. That tax never took effect. The court declared the tax unconstitutional because it was not apportioned according to the population of each state, as the Constitution then required. That meant, for example, that if 5 percent of the U.S. population lived in Virginia, no more than 5 percent of the tax’s total revenue could come from Virginia.
To gauge how the income tax worked in its first incarnation, we consulted sources detailing the Civil War-era levy — including two history books and the Tax History Museum website, a project of the nonprofit group Tax Analysts, based in Falls Church, Va. The sources don’t concur on every detail, but how the tax came to be comes clear.
Congress enacted the nation’s first federal income tax in 1861, setting a flat rate of 3 percent on incomes higher than $800.
Over the next four years, Congress expanded the tax as members cut the amount of income that could be exempted and introduced higher, graduated rates. By 1865, the last year of the Civil War, the highest income tax rate, 10 percent, was applied to income in excess of $5,000, according to Roy and Gladys Blakey’s 1940 book, The Federal Income Tax. According to Brownlee’s book, more than 10 percent of Union households were paying the income tax at the end of the war.
With hostilities over, however, Congress was eager to reduce the tax burden, so it began raising the tax’s income exemption level and lowering the rate. By 1870, the exemption level had been increased to $2,000 and the rate reduced to 2.5 percent.
According to the Blakeys’ book, the lawmakers of the Civil War era intended the income tax to be a temporary wartime tool. At least four of the income tax measures enacted during the war and soon after contained a provision saying that the law was to be in force until 1870 and "no longer," the Blakeys wrote. Ultimately, Congress voted to let the income tax expire in 1872.
We checked in with Joseph Thorndike, director of Tax Analysts’ Tax History Project, who told us that he thought Paul’s statement at the debate was fair. Pointing to the temporary nature of the wartime tax and the four decades that the United States went without an income tax before 1913, Thorndike said his view is that the Civil War-era tax should be a "relatively small caveat" to the statement that there was no federal income tax until 1913.
Paul’s statement that the federal income tax rate was zero until 1913 reflects the timing of the constitutional change enabling the current tax. But his claim disregards two pre-1913 efforts to impose an income tax — one of which was in place for a decade. This debate claim rates Half True.
Fox News Channel and Wall Street Journal presidential debate in South Carolina, transcript, Jan. 16, 2012
Fox News Channel and Wall Street Journal presidential debate in South Carolina, video excerpt, "Highest possible federal tax rate?" Jan. 16, 2012
Ron Paul presidential campaign website, issues page on taxes, accessed Jan. 27, 2012
PolitiFact, Truth-O-Meter item, "Gingrich says that only millionaires paid first U.S. income tax," April 14, 2010
PolitiFact, Truth-O-Meter item, "Michele Bachmann says top tax rate rose from 7 percent in 1913 to 70 percent in 1980," Oct. 18, 2011
PolitiFact Texas, article, "Following Perry, we dive into income tax history," Dec. 20, 2010
Tax Foundation, "U.S. Federal Individual Income Tax Rates History, 1913-2010," accessed Jan. 20, 2012
W. Elliott Brownlee, Federal Taxation in America: A Short History, 2004
U.S. Bureau of Labor Statistics, historical inflation calculator, accessed Jan. 27, 2012
Internal Revenue Service website, "Historical highlights of the IRS," accessed Jan. 27, 2012
Library of Congress website, "History of the U.S. Income Tax," 2009
Tax Analysts, website, Tax History Museum, accessed Jan. 20, 2012
Roy and Gladys Blakey, The Federal Income Tax, 1940
Interview with Joseph Thorndike, director of Tax History Project for Tax Analysts, Jan. 19, 2012
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