Tax Law and Accounting
The first individual federal income tax was enacted nearly 150 years ago; however, modern-day federal income tax did not begin until 1913 with the ratification of the 16th amendment. Over the years, amendments to the tax law have been passed and provisions have been added, changed, and deleted. The main objective of federal income tax is to raise revenue for government operations. Other objectives have expanded to accomplish various economic and social policies. Since the federal income tax law was enacted, people have been avoiding paying taxes some legally and some illegally. Tax accounting is different from accounting using the GAAP but there is one similarity.
Prior to the Civil War, there were excise taxes, tariffs, and customs duties, which raised revenue for government operations. During the Civil War, Congress passed the Revenue Act of 1861 to help pay for the war efforts. The Revenue Act of 1861 was the first tax law where individuals were taxed on their income. After the Civil War, the need for government revenue decreased and most taxes were repealed. In 1894, federal income tax was reinstated but according to the U.S. Constitution, the tax had to be levied in proportion to each State's population. The flat rate federal income tax was ruled unconstitutional by the Supreme Court in 1895, because it was a direct tax and was not levied in proportion to each State's population. A flat tax is where the rate of tax is the same for all taxpayers regardless of the level of their tax base (Pope, et.al., 2007). It was not until 1913 that the 16th amendment of the U.S. Constitution was ratified allowing Congress to pass the new federal income tax law.
The rate for federal income tax, according to the Revenue Act of 1913, began at 1% and went up to 7% for individuals depending on the individual’s income level. A personal exemption was allowed to offset taxable income, which was higher than most individual’s income so very few...