American Taxation


Like taxation for purposes of economic engineering, taxation for social engineering is intellectually valid in theory. Indeed, there is little doubt that imposing an income tax and using the revenues to reduce excise taxes would have had both socially and economically beneficial results in the late nineteenth century. But taxation for social engineering suffers from exactly the same problem as that for economic engineering: Once in place it is very hard to remove, even when circumstances and political perceptions change.

The nineteenth century was the golden age of social engineers, as the left—a term that did not enter the American political vocabulary until the twentieth century—rose in importance with the development of the labor movement in the East and the Populist and Granger movements in the West and South. One of the world’s earliest and most influential leftists was, of course, Karl Marx, who was the first to advocate a steeply progressive income tax, in The Communist Manifesto , to break the power of the bourgeoisie.

Henry George, who would later be elected to Congress, advocated a single tax on the value of land. Felix Adler, the founder of the Ethical Culture movement, called for a 100 percent tax rate on incomes above the amount needed “to supply all the comforts and true refinements of life.” One can only wonder how that amount was supposed to be objectively determined. None of these schemes had the slightest chance of being put into practice in the nineteenth century. But many would come to haunt the twentieth, despite vastly changed social and economic circumstances.

Killed in the 1870s, the income tax did not make much headway in the prosperous 1880s, when the federal government was running up surpluses so large they bordered on the embarrassing. But the panic of 1893 revived the movement. With a Democrat, Grover Cleveland, in the White House and Democratic majorities in both the House and the Senate, the chances for a renewed income tax grew suddenly bright.

THE NEW INCOME TAX LEGISLATION CALLED FOR A 2 percent tax on all incomes over $4,000. This was a very different sort of levy from the one in place between 1862 and 1872. That tax exempted only the poor. This new tax exempted everyone except the very rich. Of the twelve million American households in 1894, only eighty-five thousand people—well under one percent of the population—had incomes of over $4,000. For the first time in American history a tax was seriously proposed on a particular class of citizens, one defined by economic success. This cost the new tax the support of Senator Sherman, among others.

In the House a classic debate ensued between Bourke Cochran, Democrat of New York, and William Jennings Bryan, Democrat of Nebraska. Cochran, whose home state would bear the biggest burden by far of this tax, argued that it wasn’t necessary. He thought that the tariff reductions contained in the same bill would result in higher revenues from that tax (a supply-side argument nearly a century before the term even entered the language). Furthermore he thought that by imposing a tax only on the rich, Congress would deprive the rest of the country of the privilege of supporting the cost of government.

Bryan, ever the soul of eloquence, if seldom of economic logic, pounced at once. “Why, sir,” he orated, “the gentleman from New York said that the poor are opposed to this because they do not want to be deprived of participation in it, and that taxation instead of being a sign of servitude is a badge of freedom. If taxation is a badge of freedom, let me assure my friend that the poor people of this country are covered all over with the insignia of freedom. . . . The gentleman says he opposed the tax in the interest of the poor! Oh, sirs, is it not enough to betray the cause of the poor—must it be done with a kiss? Would it not be fairer for the gentleman to fling his burnished lance full in the face of the toiler, and not plead for the great fortunes of this country under the cover of a poor man’s name?”

ROOSEVELT raised marginal rates back up to World War I levels. The rich began to shelter income again.

Much of Cochran’s argument was of course tendentious twaddle that richly deserved its fate at Bryan’s oratorical hands. But Bryan’s in turn was a pure form of the class-warfare rhetoric that would bedevil and cloud the politics of taxation right up to the present day. It worked then to achieve the immediate objective, as it has frequently since, and the tariff bill passed both houses. Cleveland, who was well to the right of his party in economic matters, could not bring himself to sign it, but he allowed the bill to become law without his signature.


The opponents of the income tax, however, were not finished yet. They quickly brought a suit alleging that it violated the constitutional ban that forbade direct taxes unless they were apportioned among the states on the basis of population, something obviously impossible with an income tax. The following year a deeply conservative Supreme Court agreed with this argument—by the barest possible majority—and the income tax was dead for nearly two decades.