The Evolution of Federal Funding

How the U.S. government's power to tax citizens expanded, 1900-Present

Baseline (Pre-1910): A Limited Federal Government

Before 1910, the federal government's ability to raise funds was extremely limited by the Constitution. It could not directly tax individual incomes and relied on indirect taxes.

Citizen Tax Footprint

  • Tariffs: (Indirect tax) The primary source of revenue.
  • Excise Taxes: (e.g., on alcohol, tobacco).

Structural Power

  • NO direct Individual Income Tax.
  • NO central bank.
  • Limited borrowing capacity.

The Expansion of Federal Funding: A Timeline

1910-1919: The Great Transformation

New Taxes on Citizens:

  • Individual Income Tax (16th Amendment)
  • Federal Estate Tax

Major Structural Changes:

  • 16th Amendment (1913): Unlocked the ability to tax citizens' income directly.
  • Federal Reserve Act (1913): Created a central bank, expanding power to finance debt.
  • War Revenue Acts (1917, 1918): Scaled the new income tax (top rate to 77%) to fund WWI.

1920-1929: Consolidation & "Normalcy"

New Taxes on Citizens:

  • Capital Gains Tax
  • Gift Tax (to backstop the Estate Tax)

Major Structural Changes:

  • Budget and Accounting Act (1921): Centralized federal power by creating the Bureau of the Budget (OMB).
  • Revenue Acts (1920s): Normalized the income tax as the primary, flexible revenue source, while cutting rates (top rate to 25%).

1930-1939: The New Deal Revolution

New Taxes on Citizens:

  • Social Security Payroll Tax (FICA)

Major Structural Changes:

  • End of Gold Standard (1933-34): Unleashed federal financing power; government can now finance operations without gold constraints.
  • Social Security Act (1935): Created a permanent, mandatory new tax stream (FICA) for a new social entitlement.
  • Court Rulings (1936-37): The Supreme Court affirmed the federal power to tax for the "general welfare."

1940-1949: The Mass Tax & Global Power

New Taxes/Mechanisms on Citizens:

  • Paycheck Withholding (The *method* of collection)
  • The "Mass Tax" (Income tax expanded to 75% of workers)

Major Structural Changes:

  • Current Tax Payment Act (1943): Institutionalized federal power via automatic payroll withholding.
  • Bretton Woods Act (1945): Made the U.S. Dollar the world's reserve currency, providing unparalleled long-term borrowing ability.
  • Employment Act (1946): Committed the federal government to using fiscal power to manage the macro-economy.

1950-1959: The Cold War Tax State

New Taxes on Citizens:

  • FICA (Disability Insurance) - FICA expanded
  • Federal Gas Tax (New earmarked excise tax)

Major Structural Changes:

  • Internal Revenue Code of 1954: Codified all federal tax law into the permanent, efficient structure used today.
  • Highway Revenue Act (1956): Created a new "trust fund" model (Gas Tax -> Highway Trust Fund).

1960-1969: The Great Society

New Taxes on Citizens:

  • FICA (Medicare) - FICA expanded *again*
  • Income Tax Surcharge (Temporary war tax)
  • Alternative Minimum Tax (AMT) (Parallel tax system)

Major Structural Changes:

  • Social Security Amendments (1965): Created Medicare & Medicaid, locking in massive, permanent spending obligations.
  • Tax Reform Act (1969): Created the AMT to expand the taxable base.

1970-1979: Fiat Currency & Stagflation

New Taxes on Citizens:

  • Earned Income Tax Credit (EITC) ("Negative Tax")
  • "Bracket Creep" (An "invisible tax" from inflation)

Major Structural Changes:

  • End of Gold Standard (1971): The single most important fiscal event. The U.S. becomes a pure fiat currency, with a *structurally unlimited* ability to borrow.
  • Budget Act (1974): Centralized congressional power by creating the CBO and "reconciliation."

1980-1989: The Tax Revolution

New Taxes on Citizens:

  • Tax on Social Security Benefits
  • Crude Oil Windfall Profit Tax (Temporary)
  • "Indexing" (Eliminated "Bracket Creep" tax)

Major Structural Changes:

  • ERTA (1981) & Tax Reform Act (1986): A philosophical shift. Slashed rates (top rate to 28%) but *broadened the tax base* by eliminating deductions.
  • SS Amendments (1983): Rescued Social Security with FICA hikes and *taxing benefits*, creating a massive revenue-generating surplus.

1990-1999: Deficit Control & Credits

New Taxes on Citizens:

  • Medicare Cap Removed (FICA applies to all wages)
  • Child Tax Credit ("Negative Tax")
  • Education Credits ("Negative Tax")

Major Structural Changes:

  • OBRA 1990 & 1993: Major tax increases (top rate to 39.6%) that led to a temporary budget surplus.
  • Taxpayer Relief Act (1997): Accelerated the use of the tax code for social policy via credits.

2000-2009: Tax Cuts, War, & Crisis

New Taxes on Citizens:

  • Lower Capital Gains/Dividends Rates (New 15% rate)
  • Medicare Part D (New entitlement funded by *deficits*, not a new tax)

Major Structural Changes:

  • EGTRRA (2001) & JGTRRA (2003): Major tax cuts that ended the surplus and returned the U.S. to permanent deficit spending.
  • EESA (TARP) (2008): The 2008 crisis confirmed the "New Intent": The government will use *unlimited borrowing* to prevent systemic collapse.

2010-2019: The "New Normal"

New Taxes on Citizens:

  • Net Investment Income Tax (NIIT) (ACA Surtax)
  • Additional Medicare Tax (ACA Surtax)
  • Individual Mandate Penalty (ACA Tax)
  • SALT Deduction Cap (Tax increase on high-tax states)

Major Structural Changes:

  • Affordable Care Act (ACA) (2010): Fused federal power with healthcare, creating new, permanent tax streams for a new social program.
  • Tax Cuts and Jobs Act (TCJA) (2017): Slashed corporate taxes and capped SALT, confirming deficits are a permanent policy tool.

2020-Present: The Stimulus Era

New Taxes on Citizens:

  • Endowment Tax (On large universities)
  • Remittance Tax (On international money transfers)

Major Structural Changes:

  • CARES Act (2020) & ARPA (2021): Deployed *trillions* in borrowed money for direct stimulus, fully realizing the "Post-2008 Intent."
  • IRA (2022) & OBBBA (2025): Confirmed the new, permanent model: simultaneous tax cuts and new spending, all financed by structural deficits.

Visualizing the Footprint: Growth of Federal Tax Types

This chart shows the *cumulative number* of distinct, major tax types and mechanisms added to the federal toolkit over time. It demonstrates how the "citizen tax footprint" has expanded from two simple taxes in 1900 to a complex web of over 25 distinct mechanisms today.

The Great Divide: The Two Eras of Federal Finance

The most significant structural change occurred in 1971, when the U.S. abandoned the gold standard. This fundamentally altered the government's ability to finance its operations, creating two distinct eras.

The "Old Model" (Pre-1971)

Funding was constrained by a link to gold. New spending (like Social Security and Medicare) *required* new, dedicated taxes (like FICA) to be politically and economically viable.

  • 💰
    Funding Source: Taxes (Tariffs, Income, FICA)
  • 🔗
    Key Constraint: Gold Standard (USD convertible to gold)
  • ⚖️
    Fiscal Policy: Deficits were temporary (mostly for wars) and seen as something to be "paid back."
  • 🏛️
    New Entitlements: Required new, dedicated taxes (e.g., FICA for Social Security & Medicare).

The "New Model" (Post-1971)

Funding is unconstrained. The U.S. operates on a pure "fiat currency," giving the federal government a structurally unlimited ability to borrow and finance its operations through deficits.

  • 💸
    Funding Source: Taxes + Unlimited Deficit Spending
  • 🚫
    Key Constraint: None (Fiat Currency)
  • 📈
    Fiscal Policy: Deficits are a permanent, structural tool for managing the economy, funding wars, cutting taxes, and responding to crises.
  • 🧾
    New Entitlements: Can be created *without* new taxes (e.g., Medicare Part D) and funded by general revenue and debt.