Makin' Money

The taxman cometh

Chris Farrell Apr 14, 2011

Let’s stick with the theme of taxes with the looming April 18 deadline. America’s modern tax system was created in 1913. The income tax form was a mere 4 pages, including instructions. It was supposed to be filled out by anyone with a net income of $3,000. According to Visualizing Economics, 358,000 returns were filed or 2% of all households. The top tax rate was 7% on incomes above $500,000 ($10.9 million in 2010 dollars).

The Tax History Project has collected tax forms from 1913 to 2006.

The history of taxes in this chart created by Visualizing Economics is fascinating. It shows how rapidly the income system grew, especially with World War Two a major factor. The first time the number of income tax returns filed was greater than the number of households was in 1942. The modern tax system is now “built into the fabric of almost everything people and businesses do,” says William Gale, economist at the Brookings Institution.

Taxes impact everything from having a child to buying a home to starting a business.
The most striking aspect of the tax code today is its complexity. The 1040EZ form–it’s the easy, simple one–is only 2 pages long, but it comes with 40 pages of instructions.

The incredible complexity of the tax code is why major tax reform is needed. The deep reach of taxes into our lives is why tax reform is so difficult. The embrace of simplicity creates winners and losers. For instance, simplicity requires getting rid of most if not all deductions and credits, such as the mortgage interest deduction and the child care credit. It’s a change that won’t go over well with many people, but it’s the price of embracing a simple tax code.

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