Who's the "Tax Man," and Where Does the Money Go?

Happy birthday, IRS? Yes, July means more than the USA's birthday. It's also the month the Internal Revenue Service was born, sort of. Have you ever wondered how the IRS came about? If not, you've certainly wondered about where the money it collects goes, right?

It's Born

No matter what you've heard, the first casualty of war is the wallet. Wars cost money, and a lot of it. And it's that simple fact that gave birth to income taxes and, eventually, the IRS.

In 1861, not long after the Civil War began, Congress passed the Revenue Act of 1861. This Act included the first personal income tax. It was 3% on all incomes over $800 per year. The tax was eliminated in 1871, and the government ran on taxes or tariffs on goods and services.

In 1894, a flat rate federal income tax was enacted. However, under the US Constitution as it was written at the time, any tax imposed by Congress had to be proportional to the population od each state. So, the tax was struck down by the US Supreme Court.

In July 1909, Congress passed the 16th Amendment to the Constitution, and it was finally ratified or approved by the states in 1913. It gave Congress the power to impose taxes without regard to each state's population. In that same year, Congress passed a new personal income tax, and the "Bureau of Internal Revenue" came out with the first Form 1040. In 1953, the Bureau was reorganized and renamed the IRS.

Follow the Money

Millions of us pay federal income taxes. Where does all the money go? You might be amazed to find out how many things your tax dollars pay for, such as:

Staggering, isn't it? And this just scratches the surface. You money goes to many, many more programs and services, all designed to make our society better and safer. If you'd like to know more, a nifty tool helps you figure out how much you're taxed and where exactly the money goes.

Questions for Your Attorney

  • I read somewhere federal income taxes are illegal and we don't have to pay them. Is there any truth to this?
  • Who exactly decides how our tax dollars are spent?
  • What are pros and cons of a flat tax? What about a value based tax?
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