The taxation system in the United States of America is ever-evolving, with progressive, regressive, and flat taxes being the three key components of this system. This comprehensive study by The CEO Views, a reputed business publication of the USA, sheds light on all the relevant aspects of the TCJA with a brief discussion on the history of taxation in the country.
The history of taxation in the USA commenced with the colonials’ protest against British taxation policy in the 1760s, leading to the remarkable American Revolution. While discussing the historical evolution of the USA taxation system, Justice Cardozo once said about the Colonial forefathers, “who knew more about ways of taxing than some of their descendants seem to be willing to concede.” At the beginning of the USA’s taxation history, these forefathers employed a head tax, widely known as the ancestor of the modern income tax. A group of the ablest of the forefathers drafted a Constitution, which, with two amendments, served the tax needs of the country ever since.
Before moving ahead with the center of our discussion in this article, we would cast a glance at the evolving taxation history of the USA to understand the contribution that the TCJ Act has made in transforming the scenario of income tax in the country.
Evolution of Taxation in the USA Constitution
Prior to the ratification of the US Constitution in 1788, the federal government did not have the power to raise revenue directly. As highlighted by the Internal Revenue Service (IRS), even after its ratification, the majority of federal revenues were fundamentally generated from excise taxes and tariffs. Those were regressive taxes, as people with lower incomes had to pay a higher percentage of their income compared to the people who earned more.
Income Taxation in the USA
Talking about the history of taxation in the USA, we can see that it was during the Civil War that the federal government needed more revenue than the excise and tariff taxes could provide. In this regard, an income tax was deployed in 1862, but was later repealed after the Civil War. The Sixteenth Amendment of the Constitution in 1913 endowed Congress with the right to impose and collect income taxes. These income taxes were progressive in nature because they demanded a larger percentage of income as a tax from high-income populations than from low-income groups.
American lawmakers have always had the goal of balancing the need to raise revenue, the desire to influence taxpayers’ savings and expenditure of their money, and the aspiration to be fair to taxpayers.
The nineteenth century ended on a ground of confusion and turmoil. The Wilson Tariff bill, passed by Cleveland in 1894, imposed an income tax, which had a modest flat rate of 2%, but was enough to make financial leaders in the eastern industrial states anxious. In 1909, Congress passed an income tax on corporations sustained by the ingenious Supreme Court as an indirect excise tax. In 1935, President Roosevelt enforced a tax on inheritances, “which blesses neither those who bequeath nor those who receive.”
World War II brought new values and magnitudes to taxation. The home front issue was inflation with the potential of an evil war. A combination of direct controls on price, wage, allocations of scarce resources, regulation of consumer credit, and rationing entered into a partnership with taxation, an unprecedented way of saving to control inflation.
Moreover, the history of American taxation gives a paradoxical lesson. Theoretically speaking, high taxes must have an adverse impact on the economy. The historical record of the last 30 years should cultivate some distrust of robust logic in fiscal matters.
Moving forward, we will now talk about the Act that transformed the scenario of taxation in America. But, before that, let’s understand how income taxes work in the country.
More About USA Income Taxation
Since the ratification of the 16th Amendment of the USA Constitution, 42 US states have imposed state income taxes. Income taxes are levied on capital gains, the federal and state governments’ funds, and wages. Payroll taxes are imposed only on wages and not on gross incomes. However, they contribute to the reduction of the after-tax income of the American population. FICA taxes, which fund Medicare and Social Security, are the most common types of payroll taxes. Capital losses decrease taxable income to the extent that profits and capital gains are presently taxable at a rate lower than wages.
Taxpayers must determine the income tax they owe by filing tax returns. Advance tax payments are often required in the form of estimated tax payments or tax withholding. In the country, due dates and other procedures of income taxes differ by jurisdiction. However, Tax Day (April 15) is the deadline for people to file tax returns for federal, local, and several state returns. Taxing jurisdiction often adjusts the tax as determined by the taxpayer.
Unfolding the Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act (TCJA) of 2017 is a USA federal law that amended the Internal Revenue Code of 1986. It is also known as the Trump Tax Cuts unofficially. According to The New York Times, TCJA is “the most sweeping tax overhaul in decades.” The Act caused an 11% increase in corporate investment. However, it had a smaller impact on US economic growth and media wages.
Most of the transformations introduced by the bill came into effect from January 1, 2018, but did not affect 2017 taxes. Several tax cut provisions of the TCJA, including the individual income tax cuts, such as the changes to the standard deduction of the IRC in $63, were supposed to expire in 2025. Many of the business tax cuts were scheduled to expire in 2028. In 2025, Congress passed the One Big Beautiful Bill Act. It extends most of the TCJA’s provisions beyond their actual expiration dates.
The extension of the slashes has led to the worries of economists across the political landscape that it could fuel the pressure of inflation and harm America’s fiscal trajectory. The Congressional Budget Office estimated that extension of the expiring provisions would increase deficits by $4.6 trillion over 10 years.
Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Self-employed individuals and businesses must review tax reform changes for individuals under this Act and determine the alignment of these provisions with their business situation. Changes to depreciation, deductions, and expensing may influence a taxpayer’s business taxes. According to the 2017 law, a business can deduct up to 50% of entertainment expenses directly related to the active implementation of a business. However, with the new provision, known as Section 199A, deduction of up to 20% is allowed to qualified business income for small business owners. It limits the application depending on the type of business and income. Also, under the new law, the taxpayers are allowed to deduct 50% of the cost of business meals if the taxpayer is present and the food and beverages are not considered extravagant. There are multiple other changes made in the 2017 provision. The 2017 TCJA changed depreciation, tax credits, deductions, expensing, and other tax items that influence businesses.
