The Income Tax And How It Grew

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The same kind of pressure that persuaded the conservative Republicans to support the income-tax amendment in 1909 developed as a consequence of the outbreak of the European war in 1914. By 1916 Germany’s unrestricted submarine warfare and the fantastic Zimmermann telegram, in which the Berlin foreign office generously offered Texas, New Mexico, and Arizona to Mexico [see “Tales from the Black Chambers,” AMERICAN HERITAGE , April, 1973], clearly pointed toward American involvement. By 1916, too, the “Preparedness” campaign reflected the trend of sentiment and policy in this country, with President Wilson’s stubborn hope for peace tied to the idea of “adequate national defense.” Wilson won reelection in the 1916 canvass on the promise—well, the implied promise- that he could keep America out of the war. But by April, 1917, fast-breaking events forced the administration’s hand. Preparedness and loans to the Allies were financed through excise taxes at first, but with the Emergency Revenue Act of 1916 the income-tax schedules began to rise, scaling up after twenty thousand dollars to a surtax of 13 per cent on incomes of over two million dollars. There was also a further tightening up accomplished by various technical changes. At this time the first permanent inheritance tax was added to the federal revenue system.

The act of 1916 was quickly found to be inadequate and was followed by the War Revenue Act of 1917, a sweeping measure that lowered the exemptions and raised the rates in an almost vertical ascent to a top of 67 per cent. Under the Revenue Act of 1918 the total tax on income over one million reached 77 per cent. This law also contained a provision making a public record of the names and addresses of everyone who had filed a return. This publicity feature was enacted again in 1921, and a revision of 1924 added more fascinating information—the amount paid, which could be published in newspapers. The release of names and payments was an accomplishment especially dear to the hearts of Senator Robert La Follette and “country” Democrats, who believed that passing the information around would help to make men honest and were perfectly willing to run the risk of a kidnapper or a bond salesman combing the returns for his prospect list.

The publicity feature of the tax law was abolished in 1926, then tried again in 1934, when all taxpayers were required to file a special “pink slip,” disclosing much intriguing private information. But the resistance was so great that this section of the act was repealed before any public snooping occurred. Since that time personal tax returns continue to be defined as public records. But the right to inspect is restricted to those who have a legal rather than a dilettante interest in having a look. The trend away from exposing private affairs to the public gaze has presumably helped to maintain the kind of taxpayer morale that is essential to a self-assessment system.

Any reader searching for a handy rationale to explain the success of the income tax can conveniently find it in one word: war. The predominant reason for an income tax is just what Congress thought it was in 1913, the necessity of paying for wars past, present, or future. World War I built an acceptance for the income tax that would probably never have occurred otherwise, since paying soon became an act of patriotism. Speakers known as Four-Minute Men fanned out in churches, theatres, and lodges to explain how all persons liable should pay promptly, and movie houses threw “suggestive sentences” on their screens such as “Give till it hurts” and “No white feather in our family.”

Patriotic compliance was well publicized when John McCormack, the famous Irish lyric tenor, appeared at the office of the Collector of Internal Revenue for the Third District in New York City with a check for $75,000 and a broad smile as he paraphrased Scripture to say, “America gave and America taketh away. Blessed be the name of America”; and a few days later, from another level of society, a patriotic burglar surfaced, explaining that he worked hard and was a good family man. He wrote to the bureau: “I feel it my patriotic duty to make an honest income tax report so that the government can use the money to fight the biggest burglar in the world—the Kaiser.”

 

Meanwhile it became one of the established rites of spring for the Commissioner of Internal Revenue to issue dire warnings before the ides of March, citing the penalties available to the bureau. Tax slackers faced vigorous prosecution. Lawyers and accountants who helped their clients to fudge on their taxes would learn to their cost that the conspiracy laws applied handily to the situation. The bureau’s annual foray into psychological warfare made solemn reading, often heightened by the spectacular indictment and—or—conviction of some prominent citizen. Among those occupying an elevated station in American life who have been caught in the bureau’s net are a former dean of the Harvard Law School, a president of the National City Bank of New York, and the sometime chief of police of Providence, Rhode Island.