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Historical Perspectives on the Federal Income Tax

1935: Social Security (Old-Age Pensions)

"Mr. Speaker, the social-security program which has been presented to this legislative body for enactment into law has received more attention from our citizenry than any other legislation presented to this Congress, mainly because it "reaches home" to almost every wage earner. Its passage will stamp the Democratic Congress as one of the most important historically in the period of our existence as a sovereign entity." [Congressman Dorsey, April 19, 1935, Congressional Record, page 6080]

That is a true statement for even today that legislation "reaches home", in fact, it comprises the larger majority of taxes paid by the employed laborer. I say that because the National Debt contains about 2 trillion dollars of Social Security obligations, all of which must be repaid out of taxes levied upon the same people who contributed to the system. Congressman Ditter cautioned his fellow legislators about what could happen if such legislation turned sour. He said:

"Let us be mindful of the fact the security for the individual, whether worker or aged, will be a mockery and a sham if in the attainment thereof we barter away our constitutional rights or evade our constitutional duties and allot to our people the role of puppets of a socialistic state."

The program was originally intended to be an annuity, in which the employer and employee contributed equal amounts, and the government invested those amounts at 3% interest with the view returning both the contribution and the interest to the participant at a future date. Senator Hastings, in his address to the Senate on June 17, 1935, also provided some insight into what was about to take place:

"It must be borne in mind that in order to create this fund there must be annual appropriation by Congress. It is contemplated that those annual appropriations shall be the amount of money collected from the employer and the employee; but does anyone doubt that when Congress comes to these appropriations there would be manipulations so that the fund would not accumulate but would be used for current expenses of the Government? Mr. President, we have a fine example of that-very slight, indeed, because of the amount involved in the case of the civil-service retirement fund. I wonder if Senators realize that, while there is suppose to be something like a billion dollars accumulated in it, there has been practically nothing accumulated in that fund. I blame no particular person for it; I know when the Government needs money for other purposes the question may readily be asked why should not the Government, when it needs money for other purposes, take out of its till and put in some other place a certain sum of money that is necessary for some retirement fund? There is nothing in the civil-service fund except an IOU. Of course, the IOU is perfectly good; nobody questions that; but I call attention to the seriousness of the situation when it reaches the sum of $47,000,000,000."

The second "problem" presented by the Social Security legislation, and apparently overlooked by Congress, is the impact it placed upon the "wages" of the common law employee. Prior to 1935, Congress had never levied any tax upon the "wages" of the common law employee; to do so could not be justified under the definition of an excise tax, and the income tax exempted those wages by its operation upon "net income", not gross income. In truth, the legislation was not levied upon the employee as a tax per-se, but as a voluntary contribution to an annuity program in which there was an expectancy of receiving the contribution back with interest. The "problem" was, according to some members of Congress, they did not have the authority to issue such an annuity or collect such a tax. Thus goes the debates, but in the end party politics won out, or should I say drowned out, the opposition.

The Social Security provisions were implemented under Title 42 of the United States Code, not under Title 26, which is the revenue code. However, because the legislation provided for the collection of revenue, those sections providing for the revenue were incorporated into the Internal Revenue Code when it was revised in 1939.

Title 42 levied two separate "taxes" based upon "wages", one based upon the employee’s wages, the other based upon the employer’s total payroll. Title VIII is termed "Taxes with respect to employment", section 801 set forth the employee’s portion and reads:

"Section 801. In addition to other taxes, there shall be levied, collected, and paid upon the income of every individual a tax equal to the following percentage of the wages (as defined in section 811) received by him after December 31, 1936, with respect to employment (as defined in section 811) after such date:"

Section 804 set forth the employer’s portions and it reads:

"Section 804. In addition to other taxes, every employer shall pay an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 811) paid by him after December 31, 1936, with respect to employment (as defined in section 811) after such date:"

It is well to keep in mind Congressman Hull’s definition of what an income tax is, so as to avoid confusion as to what Congress is saying in the above sections. An "income tax" is a tax measured by "income", but levied upon something else. Note in the above sections that the tax is levied "with respect to employment" and measured by "wages", yet the latter is specifically termed an excise tax, while the former is simply termed "a tax". Why did Congress use the term "a tax", instead of calling it either an income or excise tax?

This is where the entire tax structure begins to change from a tax upon wealth to a tax upon the ability to earn a living and support a family. It is the first time in American history that the term "income" is taken to mean annual receipts, or all that comes in. It was not the Social Security program that created the system we have today, it was the change in terminology with respect to the word "income" that opened the door. In 1935, the average employed laborer earned $996 per year, as reported under the Social Security program. The personal exemption, however, for a single person was $1,000 and for a married person $2,500. At the time there were 41,673,000 employed in the total labor force of the country, 32,770,000 of them averaged less than $1,000 per year, and only 4,575,012 of the total filed a tax return. Of the 4.6 million tax returns filed only 2.1 million actually paid any tax. In comparison the total employed labor force of 1954 was 60,110,000 of which 56,747,008 filed tax returns and 42,633,060 actually paid the tax. The personal exemption was $600 single, $1,200 married and the average reported "wage" was $2,890. In other words, in 1935 the "personal exemption" exceeded the average wage paid to employed labor, by 1954 the person exemption equaled less than one-half the amount of those "wages", and today it equals less ten-percent.



Social Security Administration

Congressional Record, Volume 78, Part 10 (1934): Letter from President Roosevelt on the purpose for Social Security

Congressional Record, Volume 79:

Part 14, INDEX: House Bills, 7346-7291, H.R. 7260

Part 14, INDEX: Old-Age Pensions/Social Security

Part 4, pgs. 3874-75

Part 5, pgs. 5454-62 Part 6, pgs. 5948-95, 6037-93, 6000-01

Part 8, pgs. 8334

Part 9, pgs. 9267-97, 9351-54, 9418-42, 9510-43, 9624-50, 9733-36,

Part 10, pgs. 11320-43

Part 12, pgs. 12793-94

House Report Number 615, Serial Set 9887

Senate Report Number 628, Serial Set 9879

Statutes at Large, 74th Congress, Sess. 1, Chapter 531, August 14, 1935

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