The Income Tax And How It Grew

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Sixty years ago the permanent individual income tax, with escalation built into its table of rates, came on gently and quietly, by no means ignored, yet not the object of any great furor, either.

There were a number of reasons why the majority of American people reacted with composure. First of all, the new statute was signed by President Wilson in October, 1913, but the taxpayers were not required to get up the money until March 1, 1914. This lag in time diffused the impact. Furthermore, the exaction fell upon a very small proportion of the population, estimated to be about one per cent including dependents. Actually the number turned out to be even smaller. The fortunate or unfortunate few, depending upon one’s point of view, were required to pay a modest one per cent on taxable income above three thousand dollars and up to a top of 7 per cent on incomes above $500,000. Certain deductions were allowed: business expenses, interest on indebtedness, other taxes, casualty losses not compensated for by insurance, bad debts, depreciation, dividends of corporations that had paid the corporation tax, and income upon which the tax had already been collected at the source.

Most Americans may have viewed the pangs and labors of those who were sweating over their first Form 1040 with a certain relish. No one dreamed in 1913 that the personal income tax would in a not distant day become a mass tax, the most golden of all the golden eggs, the major support of the federal government, and the biggest business in the United States. “Never since then,” as the New York Times observed forty-three years later, “has the taxpayer had it so good.”

This is not to say that dissidents were lacking. Or that they were silent. Those who took an apocalyptic view of the graduated feature of the tax reacted with cold hostility. In 1894 Ward McAllister, social leader of the four hundred, had threatened to leave the country if an income tax became law. (He was spared, dying early in 1895.) In 1913, with such a law actually in force, the idea of British citizenship became suddenly popular. Dr. Anna Howard Shaw, the women’srights advocate, raised the historic issue of taxation without representation, while Dr. Charles W. Eliot, president of Harvard University, publicly expressed the fear that the fiber of the American people would be weakened by the income tax and that they would “surely lose those sturdy, independent, honest and just qualities which alone befit free men.” He was right to a degree, since the first of many arrests and convictions for tax evasion came soon after he spoke.

Vigorous objections were registered by proponents of an economic theory highly regarded in Wall Street, in the great money-center banks, and in the executive suites of the country’s largest corporate enterprises, that the general welfare was best promoted when the possessors of large fortunes were lightly taxed. On the happiness of the few, ran the argument, hinged the happiness of all. The rich must be encouraged to save and invest or initiative would dry up and the economy wither. This durable ideology has often been eloquently articulated in the reports of the House Ways and Means Committee, where revenue bills originate, and printed at government expense.

It had taken twenty-five years of argument and debate, a bitter defeat in the Supreme Court during the second Cleveland administration, and an amendment to the United States Constitution to clear the way for the income-tax statute. When it finally came, the feeling about it was generally positive. It was contended and widely believed that the new law would put some restraint upon the concentration of wealth in the hands of the richest 1.6 per cent of families in the United States, who between 1890 and 1910 had nearly doubled their share of the national income, from 10.8 per cent to 19 per cent, chiefly at the expense of the middle class. And it was further believed, as a matter of equity or fairness, that the personal income tax would place the burden of supporting the federal government in some reasonable relationship to benefits received and the ability to pay. The Committee on Ways and Means did not think the task of filling out the income-tax blanks would prove to be onerous. In recommending the bill to the House the committee declared that “those citizens required to do so can well afford to devote a brief time during some one day in each year to the making out of a personal return … willingly and cheerfully.”