The Income Tax And How It Grew


There were side effects over the years to come—unexpected, ironic, comic, tragic, or merely spectacular. A Detroit man earned one cent too much to escape the levy and found himself in debt to the revenue. His liability: one cent. A Georgia farmer, subject to a four-cent assessment, paid in one-cent installments to uphold his legal right to make a quarterly remittance. A retired banker who also composed music found that the instructions to taxpayers began to arrange themselves for him in the melodic pattern of a five-part choral work beginning with the portentous phrase “Who must file,” followed by the incantation “Why you must file a return,” with a consolatory conclusion in madrigal form. At Buffalo, New York, a woman overcome with worry that the government would confiscate her grocery store because of reporting errors went out of her mind and was committed to the state hospital for the insane. A happier story came from nearby Dunkirk, New York, where a Navy seaman, eighteen, who expected a twenty-three-dollar tax refund received a check for $555,555.

Bogus tax agents added a new page to the world’s encyclopedia of confidence games. A native of Scotland on his way home to Glasgow, approaching Pier 64 in New York, carrying his grip and humming ” ‘Twas Your Voice, My Gentle Mary,” was stopped by a well-dressed youth who said crisply, “Your ticket and incometax receipt, please,” and relieved the Scot of ninety dollars. Within the bureau itself problems connected with human depravity surfaced, such as the case of the precocious tax trainee who learned to pad his expense account even before completing the course, and the enterprising first deputy collector at Newark, New Jersey, who went into business for himself selling the names of Jersey taxpayers for three cents each to a New York concern dealing in mailing lists.


The 1913 act defined income as including proceeds from “any lawful business carried on for gain or profit.” But three years later, with “Preparedness” in the air and a sense of impending fiscal crisis, Congress passed a new revenue law that dropped the limiting word “lawful.” Thus for the first time the Treasury skimmed the crock for the cream arising from commercial extortion, bribery, the rackets, referrals to abortionists, gambling, moonshining, and housebreaking. Several burglars, indeed, inquired anxiously about the confidentiality of their tax reports. They need not have worried. The income-tax statute explicitly barred revealing such information, however attractive it might have been to other agencies of government. Shunning the domain of morals, the tax law required of the ordinary man only that he pay his tax on his taxable income. “The law,” declared Senator John Sharp Williams of Mississippi, a ranking member of the Senate Finance Committee, “does not care where he got it from.”

After the passage of the National Prohibition Act bootleggers and “alky” cookers learned in an opinion delivered by Supreme Court Justice Oliver Wendell Holmes that even the Fifth Amendment does not save the recipient of unlawful income from the necessity of making a return. But with exquisite tact the Bureau of Internal Revenue permitted the wages of sin to be reported as “other income,” without disclosure of the source.

A vast accumulation of administrative and tax-court decisions comes down to us through the years, adding more than a touch of whimsy to contemporary life. Nobel Prize money, for example, is exempt from taxation. Guggenheim scholarships are not. A policeman can take the cost of his uniform out of his adjusted gross income, but a fireman is taxed for meals eaten at the firehouse because the tax court has ruled that it is his “home.” We are all subject to the ambiguities and caprices of the income-tax laws in one way or another—actors who take dancing lessons to increase their skills, farmers, ex-husbands, ex-wives, widows of Presidents of the United States, rentiers, railroad commuters, pets (medical expenses not deductible), and Ute Indians owning oil royalties.

The income tax as we know it is a modern fiscal device associated with the industrial age, a money economy, and the formation of large private fortunes. But the germ of the idea can be found in Europe reaching back as far as the Middle Ages. The chief reliance for centuries was the tax on land, such as the French taille réelle . The concept of the income tax is recognizable, however, in the taille personnelle levied upon artisans, laborers, state officials, and others whose earnings came from services and skills rather than property.