Taxes After World War II

Eye On Dollar Bill

After World War II and a number of tax cuts, the Federal tax burden as a percentage of GDP went from a wartime high in 1944 of 20.9% back down to 14.4% in 1950.

However, with the Korean War and the extension of Social Security, requiring even more revenues, by 1952, the tax burden returned back up to 19% of GDP.

IRS

The Internal Revenue Service

A year later, in 1953, the IRS (the Internal Revenue Service we have all come to know and love) was born after they changed the name of the Bureau of Internal Revenue as a result of a reorganization. The new name stressed a service aspect of its function.


Within 6 years, by 1959, the IRS had become the biggest accounting, form processing and collection organization in the world. They started using computers for automation that helped simplify work and make better services provided to taxpayers.

IRS Magnified As a means of identifying individual taxpayers, Congress enacted a law that required people to use their Social Security number on their tax forms.

By 1967, all returns were processed by computers and before the 60’s were over, there were computerized methods to select certain tax returns for examination.

With a computerized process now in place to make audits more fair to taxpayers, the IRS could now focus it’s resources more appropriately.

U.S. Capitol
More and more throughout the 1950s, not only was tax policy looked at as a means to change incentives in the economy and raise revenues, it was also viewed as an instrument to calm macroeconomic movement.

Over the years, there were a number of boom and bust cycles in the economy and many in Congress used the ability to lower or raise taxes and spending to fiddle with cumulative demand and level the business cycle.


Albeit, in 1954 the top tax rate for taxable income was still at a whopping 87%. Whereas the income tax had undergone some sort of change almost every year since then, there were some years where changes were especially momentous. One example is the Tax Reform Act of 1969, which lowered income tax rates for private foundations and individuals.

Inflation


Starting in the 1960s and all the way through the 70s, inflation rates in the U.S. had persistently risen - and by 1979, the rate was 13.3 %.

While inflation can have a toxic effect in many areas of an economy, if suitable measures aren’t taken, it can also wreak mayhem on an income tax system.

What happens is that if tax brackets, as well as fixed tax deductions, credits and exemptions aren’t indexed for inflation, taxpayers can be shifted in to higher tax brackets by rising prices ultimately lowering the value of these tax system parameters.


Reagan Tax Cuts Well, because the U.S. income tax system was “not” indexed for inflation during this period - in spite of repeated tax cuts from Congress – with rising inflation, the tax burden went from 19.4 to 20.8% as a percentage of GDP.


This high tax burden, combined with rising inflation, high marginal tax rates, and a heavy regulatory load led to an economy that performed poorly.


This basically made the case for what was called the "Economic Recovery Tax Act of 1981," which is now also famously known as “The Reagan Tax Cuts.”





Back To "The Social Security Tax And Taxes During World War II"
On August 14, 1935, the Social Security Act was signed into law by President Franklin D. Roosevelt. The Social Security Act was passed basically as the result of difficult economic times during the Great Depression. Under the new law, workers who lost their jobs received payments called “unemployment compensation.”...


NEXT -- "The Reagan Tax Cuts"
In discussing the Reagan Tax Cuts, after Ronald Reagan became President in 1980, there was a basic change in federal income tax policy when the Economic Recovery Tax Act of 1981 was signed in to law - with strong bi-partisan Congressional support...


Source: U.S. Department of Treasury





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