Taxes have been around since the beginning of recorded history. The earliest known tax was implemented in the ancient city-state of Lagash in what is now Iraq about 6000 BC. In ancient Egypt residents paid their taxes with grain and livestock.
Taxes have always been controversial because of our tendency to believe that we are paying too much and that our leaders squander our tax dollars on things we don’t want or need.
Surviving hieroglyphic tablets from Egypt tell us that their citizens felt the same way, and the ancient Sumerians had a saying, “you can have a lord, you can have a king, but the man to fear is the tax collector!“
The 16th Amendment: How the U.S. Federal Income Tax Became D.C.’s Favorite Political Weapon
Written by
The American Revolution was sparked in part by unjust taxation. After all, the colonists in Boston rebelled against Britain for imposing “taxation without representation,” and summarily tossed English tea into the harbor in protest in 1773.
Nowadays Americans collectively spend more than 6 billion hours each year filling out tax forms, keeping records, and learning new tax rules according to the Office of Management and Budget.
Complying with the U.S. tax code is estimated to cost the American economy hundreds of billions of dollars annually – time and money that could otherwise be used for more productive activities like entrepreneurship and investment, or just more family and leisure time.
Most of these six billion hours sacrificed by Americans to Washington each year goes to complying with a tax that didn’t even exist until 100 years ago – the federal income tax.
Worse still, this tax has become a political weapon.
It’s a tax that follows Americans wherever they go in the world, and it’s one that was originally sold to the American people by President Woodrow Wilson as a means of “soaking the rich” during the so-called Gilded Age.
Sound familiar?
How did a country that was founded on the concept of limited government come to embrace such a draconian policy? And what does it say about Washington that tax reform has become synonymous with class warfare and corporate lobbyists?
Could you imagine a time in the U.S. when roads were being paved, there was zero national debt, and the federal government was completely operational – all without income taxes?
This may sound like a Libertarian fantasy, but it’s actually an image of the America of yesteryear. Before the advent of the income tax, the U.S. government relied exclusively on tariffs and user fees to finance operations.
Unsurprisingly, operations were much smaller compared with today’s extravagant government programs like welfare, social security, and subsidies.
But even though spending was more conservative during the Republic’s early years, certain political events motivated the government to consider more direct ways of reaching into the pockets of its citizens.
One of these political events was the War of 1812. This war may have inspired Francis Scott Key to write “The Star-Spangled Banner” as he famously watched the rockets red glare over Fort McHenry, but it was also straining our fiscal resources and the war effort needed to be financed.
Enter the idea of a progressive income tax – based on the British Tax Act of 1798 (which should have been our first warning).
Fortunately, the War of 1812 came to a close in 1815, and the discussion of enacting an income tax was tabled for the next few decades.
Ever so stubborn, progressive individuals were hell-bent on enacting income taxes, and they eventually found a way to do this at a local and state level. In time, they would reignite a new movement for the adoption of the federal income tax.
With state governments increasingly building public infrastructure projects and introducing compulsory public education, the money for these programs had to come from somewhere.
For the income tax advocates whose hopes were dashed during the War of 1812, state income taxes served as a consolation prize. In turn, income tax supporters immediately got to work and started to chip away at state legislatures.
In the mid-19th century, the fruits of the income tax crowd’s labor began to pay off as several states got the ball rolling.
Slow but sure, income taxes started to make their way from one state legislature to the next. But once the Civil War arrived, income taxes got a tremendous push.
Ripped apart at the seams by the Civil War (1861-1865), the Union government was desperate for funds to finance its ambitious quest to restore order to the nation.
Like the War of 1812, proposals for income tax were on the menu. Unlike the preceding war period, however, the U.S. was able to successfully enact an income tax.
Abraham Lincoln signed the Revenue Act of 1861 as a means to finance the expensive war effort.
This was followed up with other measures like the Revenue Act of 1862 and Revenue Act of 1864, which created the nation’s first progressive income tax system and the precursor to the Internal Revenue Service (IRS).
What seemed like a monumental victory for income tax supporters who hoped for a long-lasting income tax system would vanish once the Civil War ended.
No longer needing a massive army to put down rebels and stitch the country back together, the U.S. government let Civil War era income taxes expire once Reconstruction was in full swing.
How did the U.S. government go from embracing massive government expansions during the Civil War to later reverting to its Constitutional roots of limited government during the next decade?
There is reason to believe that taxes in the 19th century tended to be temporary in nature given the American people’s ideological tendencies.
Most people were still skeptical of government overreach, especially during the Civil War – a time where habeas corpus was suspended, and the first income tax was implemented.
Shell-shocked from a horrific experience that laid waste to countless urban centers and left hundreds of thousands of Americans dead, the American populace wanted a return to normalcy. And that meant scaling back government as much as possible.
Even Henry Ward Beecher, the brother of the famous author Harriet Beecher Stowe, was skeptical of the Radical Republicans’ zealous plans to grow government during the Reconstruction period.
Historian Tom Woods in The Politically Incorrect Guide to American History exposed Beecher’s thoughts on the matter:
“The federal government is unfit to exercise minor police and local government and will inevitably blunder when it attempts it…To oblige the central authority to govern half the territory of the Union by federal civil officers and by the army, is a policy not only uncongenial to our ideas and principles, but pre-eminently dangerous to the spirit of our government.”
Many Americans would agree with Stowe’s assessment.
But with the arrival of the Progressive Era, the rules of the political game began to change. Soon, ideas of expansive government, which were routinely scoffed at by intellectuals, politicians, and the American population at large throughout the first half of the 19th century, made a fierce comeback during the latter half of the 19th century.
Decades of legislative pressure and constant hand-wringing finally began to pay off for income tax supporters. The arrival of the Progressive Era was like Christmas for political figures in favor of an activist state.
This was a time when reformers actively pushed for an energetic government to solve all of society’s ills, most notably poverty and income inequality.
Although they were shut out from the federal government throughout the Gilded Age, Progressives focused their attention on local and state races.
Additionally, academia became more receptive to the technocratic message of Progressivism, as numerous academics like John Dewey gained prominence during this period and made progressive ideas popular in the Ivory Tower circles.
Many will scoff and think that Ivory Tower ideas have no impact in changing, that these ideas are simply too dense and inaccessible to the masses.
However, free market economists like Nobel laureate F.A. Hayek understood the indispensable role ideas play in politics. In his work, The Intellectuals and Socialism, Hayek argued that when certain ideas promoting activist government become prominent among the academia and general culture, they eventually consume the political class whole.
The idea of an income tax would have been laughed out the venue in previous decades. But in the 1890s, it was all the rage at universities throughout the U.S.
Soon, political winds started to blow in a more favorable direction.
For a brief moment, Progressives got their wish when the Congress introduced an income tax during the mid-1890s.
The Wilson-Gorman Tariff Act, which had an income tax provision attached to it, gained the ire of then President Grover Cleveland for its last-minute amendments.
Nevertheless, the Wilson-Gorman Act became law without Cleveland’s signature. The Supreme Court would later strike down the income tax.
.provisions of the Wilson-Gorman Act in 1895’s Pollock v. Farmers’ Loan Trust Co. case.
Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895), affirmed on rehearing, 158 U.S. 601 (1895), was a landmark case of the Supreme Court of the United States. In a 5-to-4 decision, the Supreme Court struck down the income tax imposed by the Wilson–Gorman Tariff Act for being an unapportioned direct tax. The decision was superseded in 1913 by the Sixteenth Amendment to the United States Constitution, which allows Congress to levy income taxes without apportioning them among the states.
Congress had previously introduced an income tax during the American Civil War, but this tax had been repealed in 1872. In 1894, Congress passed the Wilson-Gorman Tariff Act, which lowered tariff rates and made up for some of the lost revenue by introducing taxes on income, corporate profits, gifts, and inheritances. Chief Justice Melville Fuller‘s majority opinion in Pollock held that a federal tax on income derived from property was unconstitutional when it was not apportioned among the states according to representation in the House of Representatives. Fuller also held that federal taxation of interest earned on certain state bonds violated the doctrine of intergovernmental tax immunity. In one dissent, Associate Justice Henry Billings Brown wrote that the majority opinion “involves nothing less than the surrender of the taxing power to the moneyed class.”
The Supreme Court’s rejection of the income tax was no trivial failure. It was the first step in starting the conversation on the need for an income tax. Progressives now smelled blood in the water and would come back with a vengeance in less than two decades.
Not letting the temporary setback of the Pollock v. Farmers’ Loan Trust Co. deter their activism, Progressives continued plowing ahead and making their ideas more palatable to the political class and the masses.
Progressivism reached its high point during the administration of Woodrow Wilson, when Congress passed the 16th Amendment in 1909 and sent it on to the states for ratification.
https://www.illuminateourworld.org
by Don Lam
By 1913 it had been approved over the objections of conservatives like Richard Byrd who made an eloquent plea to defeat the amendment in the Virginia House of Delegates. His anti-tax speech has been repeated by conservatives in various forms ever since.
“A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of Federal inspectors, spies and detectives will descend upon the state.” – Delegate Richard Byrd
Obviously he could see the future.
After ratification of the 16th Amendment, Congress enacted the Revenue Act of 1913, levying a 1% tax on incomes over $3,000, with a 6% surtax on incomes above $500,000.
A few years later in 1918, after the United States entered World War I, the top tax bracket was increased to 77% on income over $1,000,000.
So, supporters of the income tax sold it as a tax that would only target the filthy rich.
Again folks, does this sound familiar?
In 1917, the lowest tax bracket paid two percent, although the highest income earners saw their taxes skyrocket to 67 percent.
At the time, politicians reassured their constituents that those rates would not be permanent, and they would eventually be scaled back. Little did taxpayers know what the 1930s and 1940s had in store for them.
By soaking the rich and redistributing their wealth, politicians claimed to be champions of the common man, all while consolidating their power in D.C.
However, economic realities and political backlash have constrained politicians’ abilities to indefinitely raise taxes.
Power-hungry politicians needed a little bit of outside help to make their wildest fantasies become reality. That help usually comes in the form of a political crisis, which politicians exploited in its fullest.
The New Deal was the first era that witnessed income taxes rise at astronomical rates.
On the eve of the 1929 stock market crash, the highest income earners paid a marginal tax rate of 25 percent. But once the Great Depression was well underway in the mid-1930s, the top tax bracket was paying 63 percent, and the United States’ entrance into World War II catapulted these rates toward 94 percent.
Certain political practices, such as the abandonment of the use of war bonds – debt securities the government issued to finance war efforts – changed certain political realities for the political class.
The discontinued use of war bonds made using the income tax and deficit spending a necessity. This was the result of the populace starting to grow skeptical of military action abroad.
With war bonds out of the picture, the U.S. relied more on income taxation and central banking to finance military actions and domestic programs after World War II.
As a result, the income tax soon became a part of the average American’s life, whether they liked it or not.
One of the sneakiest aspects of the income tax is the practice of withholding. Instead of paying a lump sum on April 15th, most taxpayers have their income taxes deducted from their paycheck.
Their employer essentially becomes an unpaid tax collector that gradually extracts their income in relative silence.
Come Tax Day, many Americans receive money back after paying excess taxes all year, so they’re left feeling like they’ve been given the gift of free money.
Sounds too good to be true, right? In reality, the government is actually forcing taxpayers to loan it money to finance lavish programs, with zero interest.
Ironically enough, withholding wasn’t an original feature of the income tax. It wasn’t until World War II that the practice of tax withholding was standardized through the Current Tax Payment Act of 1943.
Withholding would later become a permanent feature of the current tax code, despite its original intentions of being a temporary wartime measure.
So, there you have it folks. A little history of how the government was able to sell the idea of income taxes.
Wars and a huge bureaucratic federal government that seems to think its role is to solve all of society’s ills, most notably poverty and income inequality are the two biggest reasons I can come up with. I am sure there are more.
What do you think? Are taxes a necessary evil or have we lost sight of what the government role in society truly is?