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Economic Retrospect: The Income Tax

The majority of our nation’s years have been spent without an income tax.  Why is that and why is the tax so widely accepted today?  Death and taxes, right?  Can you imagine an America without an income tax?  Our Founders envisioned an America without an income tax.  Our Supreme Court shot down the tax on multiple occasions.  But that in and of itself doesn’t make the tax right or wrong.  My objective is not to determine whether the income tax is right or wrong.  The only objective of this post is to present a small piece of history and slice of perspective on perhaps the most influential policy instrument – the income tax.

So why do we pay taxes?  Taxes provide a source of revenue for the government.  This revenue is used to support our nations’ infrastructure, social programs, and national defense.  Essentially, various entities and people are taxed to generate the cash flow to pay for the programs above.  The makeup of the 2014 federal tax revenue is derived as follows:

  • Individual Income Taxes (39.8%)
  • Social Insurance Taxes/Payroll Taxes (29.2%)
  • Corporate Income Taxes (9.2%)
  • Other Taxes (8.1%)
  • Deficit (13.8%)

It is hard to imagine there was actually a time when we as a nation did not pay income taxes.  Even harder to grasp that the majority of our nations’ existence has been without an income tax.  In 1861, Abraham Lincoln enacted the first income tax, a 3% tax on annual incomes over $800 in a state of emergency during the Civil War.  Roger Sherman argued in favor of the measure:

“We tax the tea, the coffee, the sugar, the spices the poor man uses.  Everything that he consumes we call a luxury and tax it; yet we are afraid to touch the money of Mr. Astor.  Is there any justice in that?  Is there any propriety in it?  Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor.”

Opponents focused the tax’s inequality aspects. Thaddeus Stevens commented:

“It seems to me that it is a strange way to punish men because they are rich.”

Nevertheless, Congress abolished the tax in 1871.  Our Founders had foresight on the subject.  Our young nation has faced trials of both economic and combative natures.  The founders were arguably in the most vulnerable position in our nation’s nascent beginnings to enact an income tax.  Funds were initially needed to fight for our freedom; then they were needed to establish our nation.  Yet, they established Article 1, Section 8, Clause 1:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”

They felt the uniformity clause important to maintain fairness between the states which conceptually flows into the rights of individuals.  The Founders’ sentiment was perhaps echoed in the 1894 Supreme Court’s Pollock v. Farmers’ Loan & Trust Co. ruling striking down an income tax.  The Court argued that “nothing can be clearer than what the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.”

Justice Stephen Field prophetically wrote in a concurring opinion against the tax, “The present assault on capital is but the beginning.  It will be but the stepping-stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich; a war constantly growing in intensity and bitterness.”

The tax is crude and damned to unfairness.  I appreciate how Jonathan Hughes and Louis Cain paraphrased in their textbook “American Economic History”.  They stated, “[Taxation is] crude in that the monarch is seizing the of property from its own citizens.  What the monarch does with the property is it’s own business, not that of its former owners…”  They continue, “Unless the monarch’s subject have equal incomes and identical desires, unless they lose equal amounts of property, there is no way for taxation to be ‘equal’ or ‘fair’.”

Nevertheless, this was the late 19th century – the Gilded Age.  A new century and the rise of progressivism was upon the nation.  Opposition to big business and concentrations of wealth were at the political fore.  Both parties acknowledged this movement and it appeared likely an income tax in some form would pass in the near future.  The Revenue Act of 1913 was the bipartisan product reinstituting the American income tax.  The tax imposed was a graduated tax on those individuals whose income was greater than $3000; $4000 for married couples.  The average adult male income was $578.  Only 1.5% of households paid federal income taxes.

One the time’s foremost tax experts, Dr. Thomas Sewall Adams, was not disillusioned by the politics surrounding the tax law.  In “Ideals and Idealism in Taxation”, Adams concluded that “class politics is of the essence of taxation.”

Looking back, can we argue with the underpinning effects of an income tax suggested by the Founders’, the Supreme Court, or Dr. Adams?

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