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Income Tax: Historical Perspectives

their discretionary income on consumption. Some con- Government policies and programs, such as benefit
sumers spend even more than their current discretionary programs and the progressive income tax, reduce
income on consumption by borrowing. Consumption income inequality. The minimum wage may also
consists of almost everything that consumers purchase, increase income inequality.
from durable to nondurable goods as well as all types of
Luck plays a role in determining the distribution of
services. The only exception to this rule is the purchase of
income, but choices are perhaps the most impor-
a new home: It is counted as an investment because homes
tant factor.
tend to appreciate in value.
Households (individuals) cannot spend all their earn-
BIBLIOGRAPHY
ings on consumer goods and services. Part of the income
Mings, Turley (2000). The Study of Economics: Principles, Con-
each household receives must be used to pay different cepts, and Applications (6th ed.). Guilford, CT: Dushkin Pub-
kinds of taxes, such as income taxes to federal, state, and lishing Group.
local governments. Most state and local governments also
impose sales taxes. In addition to paying income and sales
taxes, households may also have to pay property taxes to Gregory P. Valentine
local governments. After paying taxes and spending
income on consumables, some households put aside
money as savings to be used for consumption at a later
time. INCOME TAX:
Earnings differ among individuals and households HISTORICAL
because of several factors: (1) inborn differences, (2) PERSPECTIVES
human-capital differences, (3) work and job performance,
A tax consists of a rate and a base. Because income is the
(4) discrimination, (5) age, (6) labor mobility, (7) govern- base for the income tax, a central question is: What con-
ment programs and policies, and (8) luck.
stitutes income? Different theoretical concepts of income
Inborn differences are those characteristics that one is exist in economics, accounting, and taxation. The base of
blessed with, such as strength, energy, stamina, income to which the federal income tax rate structure
mental capacity, natural ability, and motivation. applies is taxable income as constitutionally and statuto-
rily defined. Thus, the concept of taxable income is
Human-capital differences reflect how people invest
various amounts of both their physical and men- grounded in theory and modified by political dynamics
tal capacities toward the achievement of specific and administrative concerns.
goals. From its modern introduction in 1913, the rate
structure for the individual income tax has been progres-
Work and job performance indicates how individuals
sive, meaning that tax rates graduate upward as the base of
differ in their preferences regarding the trade-off
taxable income increases. Different tax rates apply to
between work and leisure. Those who wish to ranges of income, called brackets. Over time, the number
work more usually receive a higher income; oth- of brackets and tax rates that apply to them have varied
ers prefer more leisure at the cost of earning a
greatly. The tax rate applied to the last dollar of taxable
lower income. People also prefer different types income earned by a taxpayer is called the marginal tax
of jobs. These specific job choices will affect the rate. Total income tax as a percentage of total taxable
distribution of income.
income is the average tax rate, whereas total income tax as
Discrimination is treating people differently solely a percentage of total economic income is the effective tax
on the basis of factors unrelated to productivity. rate.
Age affects earnings significantly. Most individuals
earn little before the age of eighteen. Earnings ADOPTION AND EARLY
tend to increase as workers gain experience and IMPLEMENTATION OF FEDERAL
their productivity increases. INCOME TAX
Labor mobility, which is the willingness to go where Until the Civil War, federal revenues came from relatively
the jobs are or to move wherever the company low tariff rates imposed on a broad base of imported
has a need, enhances an individual’s income goods and from excise taxes. However, tariffs and excise
potential. Immobility limits workers’ response to taxes could not support escalations in government spend-
changes in wage rates and can contribute to an ing caused by the Civil War. Drawing on the example of
unequal distribution of income. the British Parliament’s adoption of an income tax in

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 375