Column

Setting the Record Straight

The history of the income tax

By Ben Chapman
From the April 2006 Print Edition

“No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.” (U.S. Constitution, Article I, Section 9)

From the founding of our nation, taxes have been few in number and often feared. One of the battle cries of the Revolution was “No taxation without representation”; to many early Americans, taxes represented oppressive government. Even Jefferson recognized democracy would cease to exist if we took from those who work to give to those who do not.

How, then, did we wind up with the 16th Amendment in 1913: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration”? And even after the 16th Amendment, how did a simple, one-page tax form evolve into the complicated mess we have today? And if the early Republic did not levy income taxes, how did it earn revenue? In celebration of April 15, these are indeed questions to revel in, so let’s venture an answer or two.

From the beginning, taxes were a divisive issue; Hamilton’s Federalists and Jefferson’s Republicans never did see eye to eye. Taxation was just one of many issues debated in terms of states’ versus federal rights, and as a consequence of intransigence on both sides, our nation’s taxes remained low. The only taxes levied were excise duties and tariffs, and even the excise duty was controversial enough to spark the Whiskey Rebellion under George Washington’s administration.

The tariff, then, was the chief avenue of income for the federal government until the Progressive Era and World War I. As a result, the major parties debated about the tariff amounts and the purposes they funded.

Hamilton recommended the tariff be used to protect the infant industries of the United States, and in 1816 the first purely protective tariff was imposed. Democrats, on the other hand, thought high tariffs strangled farmers, and the 1828 “Tariff of Abominations” nearly led to the secession of South Carolina.

Democrats such as Polk made lowering the tariff their chief political aim. During the Gilded Age, the only real difference between Democrats and Republicans was in their respective positions on tariffs: Republicans were in favor of higher tariffs (McKinley had the highest tariffs in our nation’s history) and Democrats favored lowering the tariffs (Cleveland did just that).

The first sniff of a new system was meted out during the Civil War; the first income tax was levied, but died before it could be challenged in the courts. The income tax then returned in 1894, just before the Progressive Era. It was a measly 2-percent tax on all incomes above $4,000. It was struck down by the Supreme Court on the basis of Article I, Section 9.

And then, it all came crumbling down. It became clear that the only way to levy an income tax would be to amend the Constitution, and thereby undo the original intent of the Founders.

The Populist Party platform in the 1890s included, besides nationalization of the railroad industry and free silver, the promotion of an income tax. The Populists, however, only garnered 8.5 percent of the popular vote in 1892, and their fire burnt out with the victory of 1896 Republican presidential candidate William McKinley. But Populist embers did not die, and a decade later, both major parties adopted the ideas of national banking reform, direct elections of senators, and a tax on income. With the support of President William Howard Taft in 1913, the United States instituted its first official income tax.

But, remember, the income tax was modest. The very first income tax form was merely one page long. Most Americans did not pay any tax at all. Only the extremely rich earning more than $500,000 paid the top rate of 7 percent. Those earning between $20,000 and $50,000 a year paid 2 percent. Couples earning less than $4,000 a year did not pay any taxes at all.

But the era of the small income tax was short-lived. WWI saw the top tax rate increase by a factor of 10. More money entering the treasuries meant more government programs. Although Republicans of the 1920s tried to keep taxes low, another crisis hit the United States: the Great Depression. And thus the great tradition of modern, out-of-control-government-spending national debt began in earnest, and it just spun more from that point forward.

World War II saw taxes deducted directly from a worker’s paycheck; the average American worker never even saw the money. Every crisis brought on more government growth and taxes. President Lyndon B. Johnson’s failed “War on Poverty” was the last great leap forward in increasing tax burdens, as taxes finally reached an absurd zenith of 70 percent to 90 percent. We can thank President Ronald Reagan that we’re no longer at that point.

I realize that the history of taxes is as long, boring, and complex as the tax code itself. But the next time you are slogging through your taxes, you can take consolation in the fact that your anger at income taxes would have been shared by our nation’s founders. After years of restraint and temperament in which the United States did pretty well for itself, the behemoth of the income tax took hold and hasn’t let go.

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