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Friday, 21 August 2015

Income tax

On January 9, 1799, the British Prime Minister William Pitt the Younger introduced income tax as a temporary measure to finance the Napoleonic Wars. Under Pitt's new tax annual incomes over £200 were taxed at 10 per cent, whilst those earning between £60-£200 were taxed from under one per cent to 10 per cent. The expected return was £10 million in the first year but owing to widespread tax evasion, it actually realized less than £6 million.

Gilray's cartoon of William Pitt's 1798 income tax

Income tax was abolished by the British government in 1802 during the Peace of Amiens but reintroduced in 1803 when hostilities recommenced.

In 1816, a year after the Battle of Waterloo, income tax was abolished again but it was re-introduced in 1842 by Prime Minister Robert Peel as the only means of balancing the Exchequer's books.

When Robert Peel re-introduced Income tax on incomes over £150 in 1842, it was portrayed as a temporary measure but it has been with us ever since. It is still technically a temporary tax, which expires each year on April 5, so that Parliament has to reapply it with an annual Finance Act.

The first income tax in the US was introduced in 1861 taxing 3% of all income over $800. It was imposed to help pay for its war effort in the American Civil War.

In 1894, Democrats in Congress imposed the first peacetime income tax. The rate was 2% on income over $4000, which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions.

The following year, the United States Supreme Court, in its ruling in Pollock v. Farmers' Loan & Trust Co., ruled that a tax on income derived from property such as interest, dividends, or rent to be unconstitutional.

For eighteen years, the political difficulties of taxing individual wages without taxing income from property, made a federal income tax impractical. However, this changed when the Sixteenth Amendment to the United States Constitution allowed the Congress to levy an income tax without apportioning it among the states or basing it on the United States Census. On January 24, 1916 this was ratified by the Supreme Court, who declared in Brushaber v. Union Pacific Railroad that the federal income tax was constitutional.

Devised by Sir Paul Chambers, Director of Statistics and Intelligence in the Inland Revenue, a pay-as-you-earn income tax was introduced in Britain in 1944.

The top 1% of earners in the United Kingdom pay 27% of the income tax.


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