Tax Avoidance is Nothing New

I don’t know anyone who doesn’t do what they can to pay less taxes. Yeah, I know, this statement is a double-negative, but its true. Everybody is looking for tax relief in some form or another. Some go to great lengths to avoid paying taxes, and some cross the line into the territory of illegal tax evasion. Although tax avoidance is common at all socioeconomic levels, the government has always been eager to make examples of the rich and famous.

I came across a very interesting memo written by Treasury Secretary Henry Morgenthau in 1936 addressed to President Franklin Roosevelt. Morgenthau names several prominent Americans that were found using questionable tax avoidance techniques, including Jacob Schick (the shaver guy), Charles Merrill & Edwin Lynch, George Westinghouse, Alfred Sloan (President of General Motors), Alfred du Pont, and William Crocker. He also describes 9 of the most popular techniques used at the time.

Roosevelt subsequently launched a full-scale federal investigation into tax avoidance activities, even though we know now from a look at his own taxes that FDR himself was no stranger to such techniques. Interestingly, as part of Morgenthau’s conclusion, he states that tax avoidance is isolated to the wealthiest citizens. I’m not sure what to make of this. It is either a testament to his naiveté, or one of the weaknesses of his report. Or perhaps things have really changed in this country since 1936.

First Income Tax Was Supposed to be Temporary

tax attorney didn’t have much to do before the Civil War. President Abraham Lincoln signed into law the first income tax – The Revenue Act of 1862 – appointing George S. Boutwell to the office of Commissioner of Internal Revenue. The Act was passed as an emergency and temporary measure to help fund the war, and it was supposed to terminate in 1866.

The first income taxes were also higher for wealthier Americans. In 1862 the rate was 3% on income between $600 and $10,000, and 5% on income over $10,000. In 1864 the rate increased to 5% on income of $600-$5,000; 7.5% on income of $5,000-$10,000; and 10% on income of $10,000+.

In 1872, seven years after the war, lawmakers finally did allow the temporary Revenue Act to expire. However, the government continued to raise revenue through income taxes until the Supreme Court declared the Income Tax of 1894 unconstitutional. Then along came the 16th Amendment in 1913 which granted power to Congress to “lay and collect taxes on incomes, from whatever source derived.”

The IRS’ reputation for being understaffed dates way back to the beginning of the agency. They were supposedly still processing 1917 returns in 1919!