A Brief History of Tax Credits
As one of the most important tools of the tax policy, tax credits have been used by the governments worldwide to incentivize certain behaviors or to subsidize certain costs. The history of tax credits is long and complicated, from their use in feudal societies to the modern tax credits of today.
This article will provide a brief history of tax credits, including how they have been used throughout history, their evolution, and their current role in the modern tax system.
Feudal Times and Early Taxes
Tax credits can be traced back to very early times. One example of the use of tax credits was in feudal times when monarchs and other feudal lords would exempt their subjects from paying taxes in exchange for their service as soldiers or laborers. This arrangement allowed people to avoid paying taxes if they fulfilled a specific obligation, such as serving as a soldier or tilling the lord’s land.
During the early years of the United States, taxes were imposed based on wealth. The government was still in the early stages of its development, and tax laws were difficult to enforce. In response, the government attempted to motivate taxpayers by offering tax credits. These early examples of tax credits were intended to reward taxpayers who paid taxes on time or who paid more than they were required.
Evolution of Tax Credits
In the nineteenth century, US states began to use tax credits to encourage specific behaviors. For example, in 1862, the US Congress passed legislation that created a “”Homestead Exemption”” allowing homesteaders to get a tax credit for the value of their land. This was designed to encourage people to move west and settle the land.
As the United States grew and changed, so too did its tax system. The introduction of income tax allowed for more specific and targeted tax credits. For example, the United States implemented tax credits for charitable donations as early as 1917. These incentives encouraged individuals to give more money to charity, knowing that a portion of their donation would be returned as a tax credit.
The New Deal Era of the 1930s saw a significant increase in the use of tax credits by the US government. Many of the tax policies created at the time were intended to stimulate economic growth during the Great Depression. The Civilian Conservation Corps (CCC), for example, incentivized employers to hire workers by offering a tax credit in exchange for workers’ wages and employment.
Recent Developments in Tax Credits
Over the years, tax credits have become more specific and targeted. They have been used to subsidize education costs, reduce energy consumption, and invest in research and development. The Earned Income Tax Credit (EITC) is a tax credit that provides a subsidy for working families with low incomes. This program was established by the IRS in 1975, and it has since been expanded several times, with the most recent expansion taking place in 2009 as part of the American Recovery and Reinvestment Act.
The American Opportunity Tax Credit (AOTC) was established in 2009 and provides tax credits and refunds for higher education expenses, including tuition, fees, and course materials. This program has helped to make higher education more affordable for students and families across the country.
As we look toward the future, we can expect to see more targeted tax credits that incentivize specific actions and behaviors. For example, recent tax credits encourage the use of electric vehicles, research in renewable energy, and investment in low-income housing.
Conclusion
In conclusion, tax credits have a long and storied history, from their use in feudal societies to their current role in modern tax systems. They have evolved significantly over the years, becoming more specific and targeted in their use. Tax credits have been used to incentivize specific behaviors and actions, including investment in research and development, energy savings, and even higher education. These credits have become an essential tool of the tax policy, and we can expect to see new and innovative uses for them in the future.
Update: In response to the COVID-19 pandemic, the US government has implemented new tax credits, including Economic Impact Payments (EIPs) and the Employee Retention Credit (ERC). EIPs are direct cash payments to individuals, while the ERC is designed to incentivize businesses to retain their employees during the pandemic. These new credits have provided much-needed financial assistance to individuals and businesses struggling during these difficult times.
The United States Federal tax credit system is maintained to provide leniency to taxpayers who are determined to merit such treatment by the government. Within the U.S., Federal tax credits are considered a means for the government to acknowledge that taxpayers have satisfied some though not every aspect of their financial obligation to the government.
Under the same name, Federal tax credits are also observed in Canada and Australia, and under the term “Avoir fiscal” in France. The concept operates somewhat differently in other taxation systems, such as that of the United Kingdom, where a tax credit is created by considering a deduction to have been made when such is not the case in reality. In United States practice, the legislative and executive branches have used the Federal tax credit option as a stimulus for economic activity and an incentive for political support.
In 1981 Congress passed the Economic Recovery Tax Act, which was intended to remedy the overall financial decline and assorted resultant hardships experienced in the late 1970s, when the industrial sector of the United States experienced a decisive blow.
To this end, the legislation shifted away overall tax policy from the overall model of the post-World War II era to an emphasis on reducing costs to business and thereby increasing economic activity across the board. These reforms were made in the spirit of the more conservative tenor of the Reagan Administration. As a part of these overall reforms, the legislation included a Federal tax credit of ten percent for investments.
A later significant achievement in the Federal tax credit area can be found in the form the Taxpayer Relief Act of 1997. In addition to the specific benefits of the Federal tax credits provided through this legislation, the overall significance of this legislation can be found in the way it introduced the concept as a viable and much-used aspect of the American tax policy of the late 20th and early 21st century.
Under this state of affairs, Federal tax credits have been offered in an increasing number of forms, many of which can be refunded by the taxpayer if certain conditions are found to be present. At the time of the Taxpayer Relief Act’s passage, however, the most publicized and noted aspect of the legislation was its provision for a Per Child Federal Tax Credit, which allowed families falling beneath a certain income bracket to receive a credit greater than their previous financial liability for paying taxes. Initially placed at a level of $500 per child, this amount was later doubled in a Bush-era tax package passed in 2001.
Another significant and related portion of American Federal tax credit policy can be found in the provision made for a “Dependent Child.” This measure was also supplemented in 2001 by the Bush tax cuts, and later in 2004 by the Working Families Relief Act, the latter of which newly established the qualifications for children whose care could be covered by Federal tax credits.
