American Taxation

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The Democrats continued to advocate an income tax, but the Republicans remained the dominant party through the post-Civil War era. It was only a split within the Republican party that finally allowed the modern tax system to come into being. The party had long been firmly in the hands of the Eastern industrialists, but a progressive wing began building as political consciousness spread down the social scale. In the first years of the twentieth century, the Republican President Theodore Roosevelt moved sharply in the direction of these progressives.

In 1906 he even advocated a tax on inheritances, with the social-engineering purpose of preventing the “transmission in their entirety of those fortunes swollen beyond all healthy limits.” Mainstream Republicans were, to put it mildly, aghast. But there was no real threat to the taxation status quo until the panic of 1907 and the short-lived depression that followed it caused government revenues from the tariff to decline sharply.

DURING DEBATE ON THE TARIFF bill of 1909, Rep. Cordell Hull—later Franklin Roosevelt’s Secretary of State—proposed re-enacting the income tax of 1894, in effect daring the Supreme Court to nullify it a second time. Hull’s amendment did not pass the House, but then, ironically, politics conspired to change matters in the Senate, despite the fact that fully one-quarter of the body’s members were millionaires.

Democratic Sen. Joseph W. Bailey of Texas introduced an income tax amendment and gained support from some influential Western Republican senators, including William E. Borah of Idaho. Leading the forces against change was Sen. Nelson W. Aldrich of Rhode Island, a self-made multimillionaire whose daughter was married to John D. Rockefeller, Jr.

Aldrich managed to salvage the principle of a high tariff, but the Republicans were now hopelessly fractured on the income tax issue. Aldrich looked to the new President, William Howard Taft, to save the day. Taft was far more conservative than Roosevelt, and he revered the Supreme Court (he would be Chief Justice of the United States for most of the 1920s). The idea of legislation’s directly defying a constitutional ruling of the Court horrified Taft. If the Court yielded, he thought, its position as arbiter of the Constitution would be gravely compromised. If it did not, it would be setting itself against the two popularly elected branches of government, and a messy showdown would likely ensue.

Taft came up with an elegant solution to the immediate political problem. He suggested avoiding a confrontation with the Court by proposing a constitutional amendment to permit a personal income tax. Then, to satisfy the mounting political demand for an immediate tax on the incomes of the rich, Taft called for a 2 percent tax on the profits of corporations. Since at that time stockholding was almost entirely confined to the very affluent, a tax on corporate profits was for all intents and purposes a tax on the income of the rich.

Needless to say, the corporate tax was challenged, but in 1911 the Supreme Court ruled unanimously that it was not a direct tax upon income that would have to be proportioned among the states, but an indirect tax, measured by income, on the privilege of doing business as a corporation. In other words, it was an excise tax, not an income tax at all. One can hardly help admiring the legal artistry of Taft’s deft end run around an inconvenient phrase in the Constitution, but his corporate income tax would prove as persistent and pernicious as Hamilton’s protective tariff.

Meanwhile the proposed Sixteenth Amendment to the Constitution passed the Senate by a vote of 77 to O and the House by 318 to 14, with 55 abstentions, a remarkably high number on so grave a matter as a constitutional amendment. Doubtless many who had voted for it or abstained counted on the difficulty of gaining the agreement of the needed threefourths of the state legislatures. They were severely disappointed, however, and the amendment was declared adopted on February 3, 1913.

By that time the split within the Republican ranks had torn the party completely apart, with Roosevelt and the Progressives forming their own party, under the banner of the bull moose. As a result the White House fell into the hands of a Democrat for the first time in twenty years, and the split gave Woodrow Wilson solid majorities in both houses of Congress.

THERE WAS NO DOUBT THAT A PERSONAL INCOME TAX was coming soon; the only question was the details, where the devil, in politics, is usually found. That’s why the great German chancellor Otto von Bismarck said that the two things you don’t want to see being made are laws and sausages. And the personal income tax law signed by President Wilson on October 3, 1913, was classic legislative sausage.