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The history of income tax’s standard deduction is more interesting than you think

Aaron Schrank May 9, 2017
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In 1944, the income tax system was getting pretty complex, so Congress created the standard deduction. Above, piles of tax forms are on display at a public library.
Tim Boyle/Getty Images

The Trump administration’s one-page tax plan released last month doesn’t say much, but it does propose doubling the standard deduction for income tax filers. That would make about $25,000 of a couple’s income tax free. About 70 percent of taxpayers take the standard deduction rather than itemizing their deductions.

Over the years, the standard deduction has been raised to provide tax relief to the middle class. But it came about for another purpose: to make paying taxes simpler.

For the first few decades after federal income tax was established in 1913, it was only paid by a small percentage of wealthy Americans.

“That changed in World War II,” said Georgetown law professor John Brooks. “They needed a ton of money to pay for the war.”

More than 70 percent of the population now had to pay up to Uncle Sam.

“All of the sudden, what had been a class tax is now a mass tax,” Brooks said. “Most people are now paying the income tax, many of them for the first time.”

Gathering taxes from millions more people was a challenge. The tax system was already pretty complex, with things like itemized deductions for medical and investment expenses. So, in 1944, Congress created what it called the standard deduction.

Instead of keeping shoe boxes full of receipts, taxpayers could just deduct 10 percent from their taxable income. Brooks said that’s how Congress left the standard deduction for 20 years: percentage, rather than a flat amount like today.

“Then, in 1964, they said, ‘You know what? We explicitly want to get some people off the tax rolls, ‘” Brooks said. “ ‘If we created a minimum amount, no matter how low your income was, the standard deduction was always going to be a flat amount, then we know anybody with income below that amount would not be a taxpayer anymore.’ ”

Congress even renamed that minimum standard deduction the low-income allowance for a bit. Then, in the ’70s, a new issue came into view: inflation. It was high, eating into incomes of the middle class. People wanted to protect what remained of their hard-earned money from taxation.

“Every lawyer, doctor, dentist, accountant was involved in some type of tax shelter — movie tax shelters, alpacas, you name it,” said UCLA tax law professor Steven Bank. “And that was not something the average person could participate in.”

So Congress began increasing the standard deduction to try to give the middle class a tax shelter of its own.

Then came Ronald Reagan’s 1986 Tax Reform Act. Speaking to the American people before signing the legislation, Reagan described the evolution of the tax code over his lifetime.

“As tax rates escalated, the tax code grew ever more tangled and complex,” Reagan said. “A haven for special interests and tax manipulators, but an impossible frustration for everybody else.”

Reagan’s reforms increased the standard deduction from about $3,600 to $5,000 for joint filers. It was a big jump. Now Trump is proposing another increase, but the details are too sparse to know how things will shake out for the middle class.

“It looks like what we’re seeing from Trump, even on the standard deduction front, is a sleight of hand. It’s not a meaningful move,” said Ed McCaffery, a tax law expert at the University of Southern California.

McCaffery said that’s because the current proposal doesn’t mention what’s going to happen to personal exemptions. That’s the other deduction non-itemizers can take — essentially $4,000 for each of their family members. If the standard deduction is increased but those exemptions are cut, many middle class Americans with large families would likely see their tax bills go up.

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