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This image claims that "Up until 1913 Americans kept all of their earnings".

Tax

Up until 1913 Americans kept all of their earnings
Despite this, America still had schools, roads, colleges, vast railroads, subways and an army & navy
(Tell me again why taxes are necessary?)

Is this claim true?

  • 1
    The claim does not seem particularly notable. Where does this come from? It's also ill-defined; witness the arguing about whether only income tax is at issue, when the text itself only mentions "tax" as a bait-and-switch at the very end. – Josh Caswell Nov 6 '16 at 18:34
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    @JoshCaswell: The question shows the claim appeared on the given Facebook page with 44,000 likes and reactions. It is notable. Yes, there are arguments over what is implied. Hopefully, that will be resolved by having an answer that considers those arguments and gives an evidence-based answer, rather than opinion. – Oddthinking Nov 6 '16 at 22:12
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    @user5341: I've already taken this to chat – Oddthinking Nov 7 '16 at 12:56
15

As originally adopted, the constitution of the United States, Article I, section 2 read (in part):

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.

Article I, section 8 read (in part):

The Congress shall have Power To lay and collect Taxes

and Article I, section 9, read (in part):

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

In other words, taxation of earnings by the federal government was permitted, but for direct taxes (a disputed term eventually held by court to mean taxes on property or assets, see below) applying a single tax policy to each person in the country was not permitted; instead, the amount collected from each state must be proportional to the population (regardless of whether it was a generally poor or rich state). This proportionality aspect of the constitution was changed by the 16th amendment in 1913.

The statement in the OP is false historically for two sets of reasons.

  1. States could and in some cases did tax earnings before 1913.

  2. Though perhaps done in an unconstitional manner, there was also at some times federal taxation of earnings prior to 1913.

State income tax before 1913

in 1835, Pennsylvania instituted a tax on bank dividends, paid by withholding, which by about 1900 produced half its total revenue (source)

Virginia:

It is interesting to note that the 1843 income tax was enacted without express sanction from any portion of the Virginia Constitution of that time. The Constitutions of 1851 and 1869, however, expressly provided for income taxation [reference 6] and the provision of the latter Constitution was carried over into § 170 of the Constitution of 1902. Pursuant to that Constitution, the General Assembly in 1903 enacted a comprehensive tax bill, taxing incomes in excess of $600 per year.[reference 7] The 1903 statute related, however, only to the income of individuals and contained no provisions for taxing corporate income. After several amendments of the Virginia income tax, [reference 8] in 1916 the income of corporations was specifically subjected to the same 1 per cent tax as applied to individuals.[reference 9] Finally, in 1926, the Virginia income tax statutes were extensively rewritten, and a number of the basic provisions relating to corporations in the present-day tax statutes were introduced.

North Carolina :

continuously had income tax starting 1849 and extending beyond 1913

Wisconsin income tax starting in 1911

(these are just examples, not at all a complete list)

Federal income tax before 1913

Revenue Act of 1861

3% tax on all individuals whose annual incomes were above $800 per year

Revenue Act of 1862

For U.S. residents whose annual incomes were less than $600, no tax was collected.

For U.S. residents whose annual incomes were greater than $600 and less than $10,000, a percentage of 3% of total income was demanded in tax.

For U.S. residents whose annual incomes were greater than $10,000, a percentage of 5% of total income was demanded in tax. The 5% tax rate also applied to the entire U.S.-source income over $600 of U.S. citizens who resided abroad, regardless of their income, unless they worked for the United States government.

Revenue Act of 1864

0% if income under $600
5% if from $600 to 5,000
7.5% if from $5,000 to $10,000
10% if $10,000 and above

The Revenue Act of 1864 income tax was upheld in Springer v. United States, where the court quoted Alexander Hamilton as saying "direct tax" was only "capitation or poll taxes, and taxes on lands and buildings, and general assessments, whether on the whole property of individuals or on their whole real or personal estate. All else must, of necessity, be considered as indirect taxes"; and therefore the court held that income tax was not a direct tax and was permitted by the constitution without apportionment.

Revenue Act of 1894 which was found unconstitutional in Pollock v. Farmers' Loan & Trust Co.

82

The plain meaning is false: there was taxation before 1913. However if you want to play games with words then you can define "earnings" as "income after all expenses and taxes other than income tax". The parenthetical bit at the bottom invites the reader to take the broader interpretation, but allows the writer to retreat to the more technical definition if challenged.

"1913" probably refers to the passage of the 16th amendment, which allowed Congress to levy taxes directly on people rather than apportioning them by states or according to population. There was a brief period when income tax was levied before that, but it was judged unconstitutional (hence the amendment). But that does not mean that there were no taxes before 1913. Up until then most federal revenue was obtained from tariffs on imports. There were also state taxes, including state income taxes. See DavePhD's answer below for details.

Some of the information contained in this post requires additional references. Please edit to add citations to reliable sources that support the assertions made here. Unsourced material may be disputed or deleted.

  • Comments are not for extended discussion; this conversation has been moved to chat. – Oddthinking Nov 6 '16 at 20:38
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    "The plain meaning is false: there was taxation before 1913" this definitely requires a citation as it's the central point of the answer and is completely unreferenced. – Sklivvz Nov 7 '16 at 23:00
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    I thought the reference to import tariffs in the second para was sufficient, but I've added a reference to the first para as well. – Paul Johnson Nov 8 '16 at 19:14
-5

The claim as phrased and intended is true.

The wording "Americans...kept all their earnings" clearly implies income tax, not other assorted taxes (which don't affect earnings).

  1. Federal income taxes were not collected and partly illegal before 1913 introduction of 16th Amendment, excepting targeted Civil War taxes.

    Src: https://en.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Constitution

    As other answers noted:

    • The only period when they were collected was 1861-1872, for Civil War
    • Part of them was found unconstitutional (taxes on income derived from investments/property).
  2. Federal revenue (and non-federal) largely consisted of public debt and customs/excise taxes only.

    As an example, let's randomly pick 1890 (I picked it because of ease of typing the year, not truly randomly).

    We have a full list of revenue as follows (major components only) for federal government (all #s in millions):

      Income Taxes               0
      Excise taxes               141.7
      Customs Duties and Fees    229.7
      Other                      30.8

      Total                      464

Their data sources are here.

Why are various word games invalid?

I've seen a couple of lines of though in the comments that try to justify why pre-1913 non-income taxes should be counted as "earnings".

  • "Import taxes (customs duties) for a trader mean trader doesn't take home all their their earnings"

    No. According to accounting principles, earnings (aka income) are calculated after applicable taxes are applied. Hence, there's a special accounting term for income before taxes are subtracted, EBIT (Earnings before interest and taxes)

    As extra credit, in accounting, customs duties are explicitly included in cost of goods sold (in case of resale), which is subtracted from either net or gross profits.

  • Sales or excise taxes should count

    No. As per GAAP, sales and excise taxes are "deducted as a cost of sales". That means they are part of "Cost of Sales and Services" (ASC 705 part of Expenses), not income.

Some of the information contained in this post requires additional references. Please edit to add citations to reliable sources that support the assertions made here. Unsourced material may be disputed or deleted.

  • 11
    "The wording "Americans...kept all their earnings" clearly implies income tax", this is your own speculation, it needs a reference (e.g. in many places you pay pension taxes before income tax). – Sklivvz Nov 7 '16 at 22:54
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    Earnings are income. There is nothing to infer. It's a correct definitional statement. I'm sorry this is a no-brainer correct answer. – K Dog Nov 8 '16 at 21:46
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    @DavePhD - unless telephone tax was levied on actual earnings, and not purchases of goods of service, that doesn't count into "do you keep your earnings or not". Just because something is called a "tax" in English doesn't mean it's before-earnings as far as accounting goes. – user5341 Nov 10 '16 at 13:48
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    @user5341 because the graphic says "America still had schools" and other things paid for at the state or local level, it is critical to consider state and local taxes. – DavePhD Nov 10 '16 at 14:01
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    @user5341 of course that's how schools always have been and still are paid for. "The first tax-supported public school was opened in Dedham, Massachusetts, in 1644"; "Tax-supported schooling for girls began as early as 1767 in New England."; "As the nation was majority Protestant in the 19th century, most states passed a constitutional amendment, called Blaine Amendments, forbidding tax money be used to fund parochial schools." It was only a question of whether taxes should go to religious schools too. en.wikipedia.org/wiki/History_of_education_in_the_United_States – DavePhD Nov 10 '16 at 14:38

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protected by Sklivvz Nov 6 '16 at 0:35

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