The First 1040


The deal was struck. The Republicans got their tariff, but with prices soaring, the vast majority of Americans continued to blame the tariff for the high cost of living. The income tax amendment began to pass in state after state.


On February 3, 1913, the Sixteenth Amendment was approved by Wyoming, the thirty-sixth state to do so and the last required. Only Connecticut, Florida, Rhode Island, and Utah had voted no. The amendment gave Congress the power to “lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several States and without regard to any census or enumeration.” A permanent income tax was now possible.

Congress went to work. Cordell Hull got the job of drafting a law and took on the task with relish, poring through a mountain of statistics on the economy and making a detailed study of income tax laws around the world. According to Hull’s biographer, Harold B. Hinton, the congressman based the system on the government’s need for revenue and the individual’s ability to pay, with no thought of redistributing income. It soon became apparent, though, that the law’s effect was to use the income of the rich to pay for services for the disadvantaged.

Debate on the House floor lasted just two days. More than a few representatives—particularly those who wanted to see the provision fail—suggested changes. Several proposals for higher rates, including one with a top level of 68 percent, were defeated. President Wilson urged that the exemption be fixed at three thousand dollars, to “burden as small a number of persons with … what will at best be an unpopular law”; the House settled on a more generous four-thousand-dollar exemption because, according to one representative, that was the amount required to “maintain an American family according to the American standard and send the children through college.”

The measure passed the House on May 8, 1913, substantially unchanged. In the Senate the debate lasted through a steamy summer. A demand for an increase in the surtax on very large incomes led to a compromise that set the maximum surtax at 6 percent on incomes of more than five hundred thousand dollars. An exemption of five hundred dollars for each child of a married couple was rejected; the final bill lowered the personal exemption to three thousand dollars for individuals and kept it at four thousand dollars for married taxpayers. Since then Congress has never stopped struggling with the problem of equalizing the tax burden on people in different family circumstances.

The Underwood-Simmons Tariff Act, with the income tax amendment attached, was approved by the Senate on September 9, 1913. It went to the President for his signature less than a month later and became law on October 3, effective retroactively to March 1, 1913.

By far the most controversial aspect of the final bill turned out to be “collection at the source,” which had been tucked away in Hull’s original proposal. Based on a system then in use in England, this required that any entity paying anyone three thousand dollars or more in income withhold 1 percent of it and pay it directly to the Treasury. Withholding on salaries has since become a routine part of our lives, but the original version meant, for instance, that tenants would have to ensure the payment of taxes by their landlords. Corporations and banks were asked to collect taxes on interest earned, exempting only those who filed certificates declaring their income to be less than three thousand dollars a year. And the certificates weren’t immediately available, even though withholding was supposed to begin November 1, 1913.

The House set a basic exemption that would leave taxpayers enough to “maintain an American family … and send the children through college.”

Collection at the source proved unworkable and was repealed in 1916; simple salary withholding was not introduced until 1943. The penalties for late filing in 1913 ranged from twenty dollars to one thousand dollars, depending on the amount owed. A fraudulent return could cost two thousand dollars or a year in prison or both.

Despite the simplicity of the form, it perplexed thousands. Very few regulations had been issued, and no tax rulings had yet been made. As Leslie’s Illustrated Weekly predicted, the birth of Form 1040 had to mean “a rich harvest for lawyers.” Sen. Elihu Root reportedly warned a friend who couldn’t master the form: “I guess you will have to go to jail. If that is the result of not understanding the Income Tax law I shall meet you there. We will have a merry, merry time, for all of our friends will be there. It will be an intellectual center, for no one understands the Income Tax law except persons who have not sufficient intelligence to understand the questions that arise under it.”