Unit 7. The history of the tax system in the united states

Exercise 1

Practise reading the following words and collocation:

a) economy; passage; significantly; excess; however; bureau; identification; amendment; periodically; economic; fair; efficiency; principle; among; through; liability; resumption;

b) Social Security Act; unemployment compensation; the aged, the needy, the handicapped; certain minors; employers and employees; exemption level; war effort; the lowest-paid workers; usual pattern; social security coverage; accounting, collection and forms-processing organization; individuals and private foundations; budget deficits; income tax liability; vast majority; personal exemption allowances; in excess of; projected future increases; Economic Growth and Tax Relief and Reconciliation Act; marginal tax rates;

c) to lead to; to be supported by; to lower; to withhold taxes from; to simplify; to be expanded; to simplify; to safeguard; to ensure; to be distributed equitably; to bear the tax burden; to be indexed for; to be refundable for; to regain.

The history of the tax system in the united states

(Part III)

The social security tax

The state of the economy during the Great Depression led to passage of the Social Security Act in 1935. This law provided payments known as ‘unemployment compensation’ to workers who lost their jobs. Other sections of the Act gave public aid to the aged, the needy, the handicapped, and to certain minors. At first, these programs were financed by a 1% tax, paid by both employers and employees, on the first $3,000 of the employee’s salary or wage. The tax rate and the wage base have been increased greatly since then, as have the social programs that are supported by this tax.

World War II

The Federal income tax system was significantly affected by World War II. The need for high defense spending led to passage in 1940 of two tax laws that increased individual and corporate taxes. The Revenue Act of 1941 lowered exemption levels and increased taxes on excess profits being made on the war effort. These law increased internal revenue.

Changes in tax laws did more than simply to increase revenue. They expanded the tax base to include all but the lowest-paid workers. Between 1939 and 1945 the number of taxpayers grew from 4 million to 43 million. Also during the war other changes were made to the tax system. In 1943, employers were required to withhold taxes from employees’ paychecks, as was done during the Civil War. A year later the standard deduction was created to simplify tax returns for those with yearly incomes under $5,000.

Recent developments

After World War II Congress followed the usual pattern of reducing taxes. However, the reductions were modest because of increased social programs. In 1950 social security coverage was expanded to include self-employed persons, which increased both the tax base and total revenue collected.

The Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS) in 1953, following a reorganization of its function. By 1959 the IRS became the world’s largest accounting, collection and form-processing organization. Computers were used to simplify its work and improve service to taxpayers. In 1961 Congress passed a law requiring individual taxpayers to use their social security number as tax form identification for the computer.

Since the Internal Revenue Code was reorganized in 1954 amendments have been passed periodically. One important set of changes was contained in the Tax Reforms Act of 1969, which reduced income tax rates both for individuals and private foundations. The Economic Recovery Tax Act of 1981 contained large reductions in income tax rates. The main objective of the Tax Reform Act of 1984 was to reduce the budget deficits in order to safeguard the economic recovery. Additional objectives were to ensure that all taxpayers pay a fair share of the tax burden, to reform the taxation of international income, and to improve the administration and efficiency of the tax system.

The Tax Reform Act of 1986 was designed to create a fairer tax system while reducing the overall level of the Federal individual income tax. The principle goal was to relieve families with the lowest incomes of Federal income tax liability and to provide tax reductions that would be distributed equitably among the vast majority of individuals who bear the tax burden.

Beginning in 1988 the number of tax brackets were reduced and both the standard deduction and personal exemption allowances were increased and are indexed for inflation.

The taxpayer Relief Act of 1997 made additional changes to the tax code and provided some significant benefits for families with children through the Per Child Tax credit. The significant feature of this tax relief was that the credit was refundable for many lower-income families. That is, in many cases the family paid a negative income tax, or received a credit in excess of their pre-credit tax liability.

The Bush Tax Cut

Under President George W.Bush’s leadership the Congress halted the projected future increases in the tax burden by passing the Economic Growth and Tax Relief and Reconciliation Act of 2001. The centerpiece of the 2001 tax cut was to regain some of the ground lost in the 1990s in terms of lower marginal tax rates (from 39.6% to 33%).

The 2001 tax cut represented a resumption of a number of other trends in tax policy. For example, it expanded the Per Child Tax credit from $500 to $1000 per child. It also increased the Dependent Child Tax credit.