The Income Tax And How It Grew

PrintPrintEmailEmail

Such warnings between the two great wars were apropos. War weariness, the subsidence of patriotic emotion, the disillusionment with allies that always follows a coalition, bonuses for soldiers—all had an unfavorable influence upon compliance and produced a mood of “tax phobia,” as did also some of the uses the money was put to. Those opposed to Prohibition, for example, mourned not only the loss of their legal chalice but also the disappearance of alcoholicbeverage taxes that the income tax had to make up for. And they were infuriated by the use of income-tax money to penalize behavior that the Anti-Saloon League and its entourage regarded as undesirable.

Yet among the public as a whole, opinion had moved slowly to accept and endure, if not embrace, the graduated income tax. This more lenient sentiment was encouraged by the trimming back of the tax rates and other meliorist gestures through successive revisions of the internal revenue laws between 1918 and 1929. But with the appearance of a huge Treasury deficit during the early Depression years the rates were again stepped up sharply. The Revenue Act of 1932 also broadened the tax base and lowered the exemptions. This reverse trend continued throughout the decade, pushed upward by radical political pressures such as Father Coughlin’s League for Social Justice, the Townsend old-age pension plan, the New Deal economic programs, and Huey Long’s “Share-the-Wealth” movement. When President Franklin D. Roosevelt sent a surprise tax message to Congress in June, 1935, recommending a drastic overhaul of the tax system “to prevent an unjust concentration of wealth and economic power,” Huey Long leered and almost waltzed as he crossed in front of the rostrum while the clerk droned through the President’s message. Next day Will Rogers wrote: “I would sure liked to have seen Huey’s face when he was woke up in the middle of the night by the President who said, ‘Lay over, Huey. I want to get in with you.’” Ultimately the costs of World War II forced the tax rates back up to about the level reached during the war of 1914–1918.

By the end of the war the general character of the income tax was pretty well fixed, its hoped-for elasticity fully demonstrated, its fiscal adequacy triumphantly confirmed in financing two gigantic war machines. Further changes in the code will not be pursued here in chronological detail. One gets a sense of déjà vu in noting that each new Congress tinkers with the tax statutes in the name of justice and reform, an elusive goal that is never attained but pursued with a delicate awareness of current feelings, attitudes, and beliefs among the electorate.

“The underlying human reluctance to pay what Mr. Justice Holmes called the price of civilized society,” the tax expert Randolph Paul wrote, “remained in 1937 substantially what it was in 1894.” There is always the question of whether a particular taxpayer considers that he is transferring too much from the private purse to the public purse or whether he feels he is getting back enough civilization for his money. More painful still is the thought that others are shouldering less than their proper share of the general sacrifice. Thus a numerous corps of volunteer tax-collectors has been active ever since 1913, often including in its ranks disillusioned ex-wives, jealous mistresses, and business competitors. “We get floods of anonymous letters tipping us off to tax frauds,” the chief of the intelligence unit of the Bureau of Internal Revenue said in a newspaper interview in 1937. “The authors point out they are paying their taxes and don’t see why their neighbors and competitors shouldn’t pay, too.” The motivation may be spite, a highly developed sense of justice, or a candid interest in the cash rewards available to successful claimants who have filed on Form 211, the form for informers. Some enterprising bounty seekers have even copied names at random out of telephone books, hoping to make a lucky strike. The tipster’s best chance, by the way, is to cite unreasonable affluence. By an odd quirk of human nature, tax cheaters sometimes tell on themselves. “If a tax evader’s cup runneth over,” Gerald Krefetz wrote in a newspaper feature article, “so usually does his mouth,” and the same writer mentioned one volunteer treasurehunter who got into trouble when he forgot to include his own honorarium on his tax report.

Tax avoidance and tax evasion reached a high in 1937. But the terms, often used interchangeably, differ widely in application. Avoidance was (and still is) legal. Evasion was and is fraud. Lady Godiva’s famous ride was an act of tax avoidance, undertaken on behalf of the people of Coventry. Tax-free “expense allowances” that members of Congress have conferred upon themselves are a modern example. J. P. Morgan the Younger undoubtedly gave aid and comfort to tax avoiders when, returning from Europe in June, 1937, he told ship news reporters that taxation was a legal question, not a moral one. While he admitted, for example, that he and his partners had paid no income taxes for 1931 or 1932, he insisted that this had been achieved by perfectly legal maneuvering and observed that “when a taxpayer has complied with … the law, he should not be held up to obloquy for not having paid more than he owed.”