Recently blogger Paul Caron, a professor of law at Cincinnati College of Law, shared an IRS tax form from 1864. The form was two pages, and 10 questions. As our country considers ways to simplify our current tax laws, it may make sense to look at where and how our tax laws began nearly 150 years ago.
Due date: The first tax returns were due the first Monday in May. This meant the return deadline was variable, and about three weeks later than the deadline used today.
High late filing penalty: If taxpayers were one day late in filing, they faced a penalty of 50 percent of the tax owed. Today, taxpayers who file a day late will face a 5 percent penalty, which stacks the longer the tax liability is delinquent.
Fraud penalty: In 1984, a taxpayer who filed a fraudulent return would face a $500 fine. The figure, adjusted for today’s economy, equals approximately $7,160. Today’s penalty of 75 percent of the tax liability due to fraud has made filing a fraudulent return much more costly.
Incentive to loan the government money: In 1984, taxpayers paid 3 percent tax on all income other than interest on government debt. If they loaned the government money, they enjoyed a 1.5 percent tax on their investment. Today, taxpayers have been given even greater incentives to loan the government money with their investment being completely exempt from taxation.
Standard deduction: In 1864, the head of household enjoyed a $600 standard deduction. However, the married taxpayer who had a wife and children did not receive any additional deduction versus a single male taxpayer. A woman who was head of household would not have filed a tax return unless her income reached a certain threshold and she was not filing as the child or wife of a man. Today, the IRS has developed a deduction system that recognizes the additional expenses of households with spouses and children, as well as eliminating differences based on the sex of the taxpayer.
Social Incentives: The 1864 tax return did not incentivize much behavior other than loaning the US government money. Today, the code includes deductions, credits, and incentive rates for many types of activities. These include: enhanced deductions and credits for having a spouse and/or children; almost 50 percent taxation of capital gains and from dividends for securities you hold for a year or more; 0 percent capital gains tax on investing in certain small businesses; deductions for charitable contributions, for owning your own home, for saving for your retirement, for being a grade school teacher, for attending college; there is even a credit for buying environmentally friendly home improvements.
Expenses were broader: Taxpayers could deduct big expenses in ways similar to today, but had fewer restrictions. Taxpayers could deduct repair costs, interest on property, and could even deduct the cost of rent if they didn’t own their residence. Today, taxpayers face significantly more restrictions to their deductions, including that (most) expenses have to be for a business, and restrictions on automotive expenses, meals, entertainment and depreciation.
For all the additions, incentives and restrictions, the iconic tax return remains surprisingly true to its foundation. Although it may never again be as simplified as it was in the beginning, we may be able to learn a lot from the past as we shape the future of our country’s tax structure.