By D. Eric Schansberg, Ph.D.

Despite establishing a blue ribbon commission, Gov. Beshear’s administration failed to make any progress in reforming Kentucky’s antiquated and burdensome tax code during this year’s General Assembly.

But Kentucky is not the only place where tax reform is needed. It’s badly needed on the federal level, as well.

This year marks the 100th anniversary of the federal income tax, which was implemented as the 16th Amendment to the Constitution in February 1913 during the final days of William Howard Taft’s administration.

It granted Congress “the power to lay and collect taxes on incomes, from whatever sources derived.” It was unprecedented and marked the first change to the U.S. Constitution since 1870.At its inception, only 15 percent of households paid any income taxes at all, and they were grouped into one of only seven tax brackets; the highest marginal rate was 7 percent for incomes exceeding $500,000 (about $10 million in today’s dollars).

The number of brackets increased dramatically during World War I. Though the threshold to reach the top rates rose to $1 million (about $16 million today), the top marginal tax rate rose dramatically to 77 percent. By the 1920s, marginal tax rates decreased four times – bottoming out at 24 percent – but with a much lower threshold of $100,000.The Great Depression saw government increase income taxes four times with a rate of 79 percent for the top bracket.

It doesn’t take a Ph.D. in economics to see this as one of the many boneheaded policies that lengthened the Depression. On top of that, 1937 saw the debut of the infamous payroll tax on income – a key reason for the jump to 19 percent unemployment in the sixth year of the “New Deal.” Top tax rates further increased to as high as 94 percent during World War II.

In the 1960s, John F. Kennedy’s supply side tax policy dropped the top rate from 91 percent to 70 percent; under Reagan, the top rate fell to 28 percent with only two tax brackets.

Since then, our elected officials have added a few more brackets, with the top rate bouncing up and down in a relatively narrow range – up a few percentage points under Bush I, Clinton and Obama, and down a few percentage points under Bush II. Today, the top rate stands at 35 percent with proposals to increase it to 39.6 percent.

Over time, taxes have become immensely more complicated. The tax code debuted at 400 pages in 1913; today’s version weighs in at more than 70,000 pages. The first tax form and instructions were only four pages long; today, many segments of today’s 1040 form are longer than that. In its first year, relatively few people filled out simple forms efficiently; today, we spend billions of hours doing tax preparation – another “tax” on our well-being.

A connection between wartime and dramatic increases in government spending and tax rates is not particularly surprising. Debt, inflation, lotteries and excise taxes financed the Revolutionary War. The first income tax was suggested during the War of 1812 with the first such levy actually imposed during the Civil War.

There are three options to pay for more government spending: higher tax revenues, higher debt (and thus, future taxes) or higher inflation taxes (printing money to pay for spending). Some or all of these typically increase during times of war, but most of it disappears afterwards. The new, permanent peacetime income tax changed this.

Before the 16th Amendment, the first peacetime income tax was passed in 1894 but sacked by the Supreme Court the next year. Before then, the federal government was financed by tariffs on international goods, excise taxes on domestic goods and the sale of land in the West.

Good news: moving from taxes on consumption to taxes on income is progressive rather than regressive. Bad news: this new and largely open-ended pot of money allowed a fundamentally different approach to government spending and revenues. As a result, despite rapidly increasing standards of living, we’ve seen massive growth in government over the last 100 years.

As a result, despite rapidly increasing standards of living, we’ve seen massive growth in government over the last 100 years.

For all of the excitement about income taxes, most wage earners lose far more to the 15.3 percent payroll (FICA) taxes – subtly withheld from our paychecks – on all income earned up to a cap of $110,100.Someday, the complicated, progressive income tax and the simple, regressive payroll taxes on income may be replaced by a “flat tax” on income or a “fair tax” on consumption. Until then, take a closer look at what you pay – through both types of income taxes – and imagine a simpler, less taxing world.

Eric Schansberg, Ph.D., is professor of economics at Indiana University Southeast in New Albany, Ind., author of “Turn Neither to the Right nor to the Left” and a member of the Bluegrass Institute Board of Scholars. Reach him at DSchansb@ius.edu