Our View: 100 years of income taxes

Hmm, that’s funny. No one is celebrating.

As the annual Day of Tyranny approaches, the dreaded April 15 Tax Day, on this 100th year anniversary of the personal income tax, it’s fitting to remind ourselves of its heritage — who did it, how it came about and why.

And perhaps when you have finished digesting this sorry tale of misguided political and legislative populism, you may become a convert to the flat tax if you haven’t already — or even more so if you already are.

Let’s start with the Founding Fathers. They barred the income tax in the Constitution of 1789. The Americans of that time would not have stood for anything of the kind. After all, they had beaten all the king’s horses and all the king’s men in the previous decade over a measly tax on tea.

And when you read the Constitution, the third item in Article I, Section 2 says: “Representatives and direct taxes (emphasis added) shall be apportioned among the several States … according to their respective Numbers …”

That is, Congress was saying that when it comes to taxes, they could be levied on the basis of population — everyone should be taxed equally, i.e. “all men are created equal.”

There was nothing in the Constitution about levying taxes on anyone’s property or on the basis of how much you owned or earned.

In those days and up to the Civil War, the Founders satisfied themselves with funding the government through tariffs on imports and excise taxes, the latter being levies on such things that are consumed — whiskey, tobacco and sugar, to name a few. But even excise taxes were eliminated from 1817 to the Civil War.

But when the war persisted, President Abraham Lincoln needed money. To skirt the Constitution, Lincoln and a few congressmen justified an income tax as an excise tax. Lincoln signed the first income tax into law in 1862.

It called for a flat 3% tax on net income greater than $600 a year, which few citizens could claim. The government collected the tax by asking for honesty, asking citizens to declare their income and publish it in newspapers, with the idea public opinion would compel honesty.

It didn’t work so swell. Two years later, Lincoln instituted the discriminating concept of the graduated income tax — the more you earn the more you are punished and pay — thus casting off the Founders’ doctrine that all men are created equal and, if taxed, should be taxed equally.

Miraculously, to the credit of Congress after the Civil War, they lived up to their promise that the income tax was temporary and instituted only to help pay for the war. In 1872, Congress abolished the personal income tax.

Rise of class warfare
In the 25 years after the Civil War, the U.S. economy went through booms and busts, brought on by inflationary printing of money, federal government subsidies for the railroads and land grants and high tariffs that protected Eastern manufacturers.

These policies helped fuel the rise of poor Westerners versus wealthy Easterners — the rich railroad owners, oil-company owners and domestic manufacturers who benefited from high tariffs that limited competition, resulting in rising prices on consumer goods. You could predict what followed: the rise of class warfare.

In 1893, the United States sank into its worst depression in its history. President Grover Cleveland, a Democrat, faced 18% unemployment. To help struggling Americans, Cleveland campaigned for lower tariffs and a corporate income tax.

Congress complied. And in the process and amid controversy, Congress also adopted a 2% personal income tax. Opponents immediately challenged the tax, and the Supreme Court in 1893 ruled it unconstitutional.

Congress came back again with the tax in 1894, and again a year later the Supreme Court ruled it unconstitutional.

By this time, however, class warfare gained increasing momentum. William Jennings Bryan, three-time Democratic Party presidential candidate and well-known 1890s and early 1900s populist, was the most outspoken advocate for Midwest farmers versus the moneyed Eastern elite. Said Bryan in one speech:

“Gentlemen have denounced the income tax as class legislation because it will affect more people in one section of the country than in another … If New York and Massachusetts pay more tax under this law than other states, it will be because they have more taxable incomes within their borders. And why should not those sections pay most which enjoy most?”

Through the administrations of Republican Presidents William McKinley (1897-1901) and Teddy Roosevelt (1901-1909), especially through Roosevelt, the American tenor continued to shift toward an increasingly intervening federal government and rising populism.

Democrats tried to bring back the income tax, fueling public sentiment that Republicans were the party of the rich. Roosevelt would not embrace their efforts, but he acknowledged the federal government should be used to regulate business (i.e. bust trusts) to insure social justice and economic opportunity. He said this was necessary to stave off socialism; if he didn’t intervene, he believed, citizens would turn to more extreme measures.

The trick on Republicans
After Roosevelt decided not to run for a third term in 1908, he essentially annointed Republican William Howard Taft as his successor.

Taft opposed the personal income tax, but he played to populism in speeches, saying income taxes may be acceptable “in principle.” What he preferred were two other populist proposals: a corporate income tax and lowering tariffs. By this time, more and more middle-class consumers had realized that high tariffs were enriching a few at the expense of the middle class.

In April 1909, congressional Democrats decided to force the Republicans publicly to oppose an income tax. They introduced yet another income-tax bill, expecting the usual Republican opposition. But much to their surprise, an increasingly liberal Roosevelt and a growing group of liberal Republicans announced their support of the bill. Suddenly, it looked as if the bill had the votes to pass.

Taft and influential Sens. Nelson W. Alrich of Rhode Island and Henry Cabot Lodge of Massachusetts thought they could outmaneuver the Democrats and Republicans. They said they would support an income tax but only if it were adopted as a constitutional amendment. They believed the states would never ratify it.

On June 16, 1909, Taft sent a message to Congress recommending passage of a constitutional amendment to legalize a federal income tax. He would rue the day.

The votes in the Senate and House to adopt the 16th Amendment were overwhelmingly in support: 77-0 in the Senate, 318-14 in the House.

Soak the rich?
On to the states for ratification. The income tax was sold as a measure to soak the rich. Only the rich were to pay it, and the rates were nominal — 1% for married couples earning up $20,000, 7% for those earning up to $500,000. Adjusted for inflation, in 2012 dollars that would be 1% on incomes up to $463,826 and 7% up to incomes greater than $11.59 million — clearly for the 1%-ers.

Over the next three years, 42 state legislatures ratified the amendment. On Feb. 12, 1913, it became embedded in law as the 16th Amendment to the U.S. Constitution — just as Taft finished as president.
Many Americans at the time thought the ratification of the income tax was tax reform. In fact, it was a revolution — one for which they, no doubt, did not realize the consequences to come.

Look at the table above. No longer does the tax soak only the rich. It soaks everyone. What’s more, the income tax has put at the government’s disposal the ability to confiscate more money and wealth than a feudal king could ever have dreamed.
Is it any wonder no one is celebrating?

The man to thank for the income tax
William Howard Taft not only holds the distinction as the president who let the income tax become law. He also was the largest president: more than 6 feet tall and more than 300 pounds (a special bathtub had to be made in the White House to accommodate him).

Regarded as warm-hearted and kind, Taft, like many politicians, wanted to be liked. He enjoyed baseball, starting the tradition of presidents throwing out the first pitch in the first game of the World Series. He is also credited with initiating the seventh-inning stretch.

For good reason. He wasn’t physically active. He typically ate a dozen eggs, a pound of bacon and mounds of pancakes for breakfast, leaving him sluggish for most of the morning.

Taft seldom took initiative in legislative matters and wasn’t regarded as a strong leader or decisive. When he took steps to lower tariff rates, he let fellow Republicans in Congress manhandle him, adding 847 amendments to his legislation.

WHAT A DIFFERENCE A CENTURY MAKES
The following show the personal income-tax rates adjusted for inflation. As you can see, originally, the tax was meant to “soak the rich.”
1913
Married Filing Jointly
Marginal
Tax Rate | Over | But Not Over
1% | $0 | $463,826
2% | $463,826 | $1,159,566
3% | $1,159,566 | $1,739,348
4% | $1,739,348 | $2,319,131
5% | $2,319,131 | $5,797,828
6% | $5,797,828 | $11,595,657
7% | $11,595,657 | -

2013
10% | $0 | $17,488
15% | $17,488 | $71,030
25% | $71,030 | $143,432
28% | $143,432 | $218,528
33% | $218,528 | $390,273
35% | $390,273 | $440,876
39.6% | $440,876 -
Source: Tax Foundation