Americans will pay less in total taxes, as a proportion of the nation’s economy, this year than in any year since 1950. This is due in part to a growing list of personal and business deductions. How long have deductions been around?
Since we’ve had an income tax. The first federal income tax form—for income earned in 1913, the year of the 16th Amendment’s ratification—listed six general deductions. (It was called the “Form 1040” back then, too.) Broadly speaking, they allowed federal taxpayers to write off business expenses; business and personal interest; state and local taxes; catastrophic losses (those “arising from fires, storms, or shipwreck”) not covered by insurance; bad debts; and depreciation of business assets. Each category of deductions survives in some fashion in the current tax code, though we’ve been tweaking the specifics.
Business interest is still deductible, for instance, but the Tax Reform Act of 1986 junked the deductions for nearly all personal interest, such as credit card debt and car loans. One exception is interest on home mortgages, spared from the 1986 cuts: Today, the mortgage-interest write-off is among the most valuable deductions, accounting for an estimated $573 billion in foregone tax revenues between 2009 and 2013. Deductions for depreciation—write-offs based on property or assets losing value with wear-and-tear or general obsolescence—today are nearly identical in principle to those in 1913, though the method of calculating the deductions has become much more complicated.
In the meantime, Congress has added several new deductions to the federal tax code, including write-offs for charitable contributions (first included in 1917) and for medical expenses (enacted in 1942). In general, we add new deductions and extend old ones more often than we limit or remove them—in part to keep up with an increasingly complex economy.
Why have deductions in the first place? The income tax—as opposed to taxes on consumption or gross receipts—relies on the concept that the amount of tax a person pays should be based on that person’s ability to pay. But you need a way to measure “ability” beyond raw income or revenue, which fail to take into account business or medical expenses, for instance. Much of the debate over deductions therefore revolves around what actually affects a person’s ability to share his wealth with the government.
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The Explainer thanks Ben Harris of the Brookings Institution and Adam H. Rosenzweig of Washington University, currently visiting at the University of Texas.