Finding the Minimum Income to Pay Income Tax

Income taxes are one of many ways to collect taxes, but they're among the most controversial. Income taxes were first instituted in 1862, to help pay for the Civil War. At the time, the minimum income to pay income tax was $600 per year. That miminum income to pay income tax is equivalent to around $13,000 in today's dollars, but represents a much higher standard of living.

In other words, the original income taxes were meant mostly for the well-off or the super-rich, and had a minimal effect on their lifestyles. With such a high minimum income to pay tax on income, the issue of income taxes was a minor political issue. Few people paid it, and those who paid it paid very little. Instead, most money was raised through tariffs and excise - people paid for the govenrment by paying extra for the goods they consumed, while rich people (the ones who paid taxes) earned extra money from these protective rules.

Interestingly engouh, the same argument is being replayed now that carbon taxes are becoming significant. The minimum income to pay income taxes may keep creeping up thanks to middle-class tax deductions, but an increase in energy costs hits nearly everyone. Superficially, the minimum income to pay income tax hasn't changed, but below the surface, it's clear that the minimum just keeps dropping.

The last time this debate was resolved, it happened through the Supreme Court. They ruled that a direct tax on income was unconstitutional, so Congress amended the constitution to make it viable. During the 1930's, increases in government spending and decreases in other revenue forced income tax rates higher, to the point that taxes reached a high of 91%.

This number was deceptive, however. Extensive tax loopholes and credits allowed the rich to avoid paying taxes in much of their income. For example, wealthy cattle owners and oil barrons could get hefty deductions for their assets, even if they were making a profit from them. The minimum income to pay income tax dropped with the introduction of FICA in the 1930's. Now, workers owed some taxes on almost all the money they earned, regardless of how little it was.

Now, we've reached a compromise between sky-high taxes combined with easy loopholes. Top income tax rates are under 40%, and more than half of the country doesn't pay taxes, even though they technically earn more than the minimum income to pay income tax. What happens now is that, as anyone who uses tax preparation software knows, you can find deductions and credits that cause you to pay zero, or get money back, even if you have more than the minimum income. Income tax is something you have to calculate, but for more and more Americans, it's not something you have to pay.

Byrne Hobart is a New Yorker with widely, perhaps even bizarrely varied interests. He's interested in financial history, particularly how things like the minimum income to pay tax change over time.

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