Seventy-five years ago, President Franklin Delano Roosevelt put his signature on what he heralded as “a realistic tax law—which will tax all unreasonable profits, both individual and corporate.” Officially known as the Individual Income Act of 1944, and soon dubbed the “Painless Extraction Tax Bill” in the press, modern readers might recognize it more simply as the birth of the standard deduction.
Few Americans qualified to pay income taxes in the decades before the standard deduction. At the turn of the 20th century, less than one in 10 Americans paid the 2% rate levied on income over $2,000.
Those who did qualify faced a daunting task to comply with the cumbersome filing requirements. The tax code of the day had a bewildering set of 32 different income brackets. Adding up one’s deductions could involve many shoe boxes full of receipts, with the arithmetic all to be completed and double checked manually. The super wealthy hired platoons of accountants to analyze their finances and tabulate the amounts owed each year.
Even distinguished figures such as the president of the United States occasionally struggled to determine their income tax liability. “I am wholly unable to figure out the amount,” Roosevelt would write to Commissioner of Internal Revenue Guy T. Helvering in 1938, along with an incomplete copy of his personal tax return, and a banker’s check for $15,000. “As this is a problem of higher mathematics, may I ask that the Bureau let me know the amount of the balance due?”
The income tax was gradually expanded in scope from a levy on millionaires to an everyman tax in order to raise money for national emergencies such as the first World War and the New Deal. By the start of the 1940s the bar had been dropped to such a degree that 50 million Americans were subject to the income tax and its cumbersome calculations.
With so many people subjected to the complicated income tax, Treasury Secretary Henry Morgenthau Jr. made an effort to streamline the computation process. Morgenthau brought his idea to the House Ways and Means, where they studied the complicated income brackets and lengthy lists of exemptions. The most time-consuming part of the tax filing process was clearly the adding up of individual deductions. To maximize write offs, many people compiled voluminous quantities of receipts for large expenses, small expenses and even those representing a fraction of a dollar. Adding all that up took time. It was also nearly impossible for the government to verify the sums were legally in compliance.
The solution was an innovative “standard deduction.” Families earning $5,000 would now have the option of claiming a $500 exemption without having to produce the receipts to justify the claim. The nation cheered in excitement at the idea of abolishing the government’s annual mathematics exercise, and 83% of taxpayers took the standard deduction the first year it was available.
Combined with the introduction of payroll withholding in 1943, Congress had lifted much of the administrative burden of taxation in just a few years. For most Americans, taxes are now automatically deducted from paychecks, and every April the federal government sends a refund for the amount collected in error.
As convenient as this approach may be, the improvements have come with certain tradeoffs. Like a long-forgotten subscription that continues to hit your credit card each month, it’s easy to forget about the true cost of government when taxes automatically come out of paychecks. And since payroll and income taxes now comprise 63% of the federal government’s overall revenue each year, this laissez faire approach to taxation touches a not-insignificant amount of your money. Indeed, the vast expansion of federal spending over the last 75 years suggests that the streamlining of tax collection has made it that much more palatable to run up the bills. While the practice of filing ones taxes no longer requires the “higher mathematics” of Roosevelt’s era, the financial outcome can scarcely be described as “painless.”
Sheila Weinberg, CPA, is the founder and chief executive officer of Truth in Accounting, a 501(c)(3) nonprofit organization based in Chicago that researches government financial data and promotes transparency.