The Income Tax And How It Grew

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In the American colonies ruled by the British Crown, government assumed limited responsibilities, consisting chiefly of defense and the protection of commerce: no social welfare and only minimal expenditures for public improvements. Taxes collected by the colonies themselves varied by regions, but their impact in any case was light. The South, for example, controlled politically by a class of large estate holders, was not hospitable to taxes on land. There the emphasis was placed upon export and import duties. The middle colonies employed at various times both the property tax and the poll or head tax, fixed at so much for each adult male regardless of his circumstances or income. Democratic New England used the general real-estate tax and in the eighteenth century collected excise taxes on such luxuries as wines, spirits, carriages and chaises, coffee, and snuff. To this was added a kind of income tax, or, in the language of the seventeenth century, a “faculty tax,” meaning a levy upon the “returns and gains” of the arts, trades, professions, and handicrafts. The payment was not assessed on actual earnings, however, but on assumed earnings set at an arbitrary figure according to the occupation—so much for a butcher, any butcher; so much for a baker, or a barber, or an artificer like a blacksmith.

The United States, functioning under the hastily improvised Articles of Confederation from 1781 to 1787, was not the federal nation we know, but rather a loosely drawn league of sovereign states that jealously withheld essential powers from the Congress, including the power to levy taxes. The central government, therefore, had to rely upon a voluntary contribution from the states, which “came finally,” according to the late dean of tax experts, Randolph E. Paul, “to be regarded as a romantically honorable act, or even as a sort of amiable and quixotic manifestation of eccentricity.”

The authority to tax is necessarily coupled with the power to coerce. A tax is not a contribution. It is an exaction. As our friends on the right never tire of reminding us, in Chief Justice Marshall’s words of doom, “The power to tax involves the power to destroy.” Yet a government lacking this power, which is essential to sovereignty, cannot long endure. This explains the sense of urgency that spurred the delegates to the Constitutional Convention to produce the framework for a genuine federal union in which the taxing power was central to all other powers. The Federalists, gentlemen of principle and property, could breathe easier after June 21, 1788, when the president of the Continental Congress, Cyrus Griffin, announced that the Constitution had been ratified by the requisite nine states, including the provision that direct taxes were to be proportional to population in each state, a figure arrived at by counting slaves as three-fifths of a person and not counting Indians at all. The precise meanings of “direct” and “proportional” were later fought out in two titanic battles over the graduated income tax. But the principles of justice, represented by uniformity and universality, were safely if somewhat ambiguously enshrined in the Constitution and with the clarification provided by the income-tax amendment (the sixteenth) made possible the successful financing of American participation in this century’s wars.

The War of 1812 a very nearly brought on an income tax, but the taxpayers were saved by the Treaty of Ghent. During the decades that followed, the national government was financed chiefly by tariff duties, sale of public lands, and various temporary excises and internal taxes. The situation regarding revenues was far from satisfactory. The state of the Treasury fluctuated wildly between windfall surpluses and politically embarrassing deficits; and sometimes Congress, being human, went on spending sprees because the money was there.

With the beginning of the Civil War there came a strong popular demand for adequate taxation. The tax package put together in Washington, after foot dragging by a reluctant Congress, included a stiff protective tariff hiked higher and higher with the war as an excuse, excise duties on practically all luxuries and articles of daily consumption, and a modestly escalating tax on individual incomes. The income-tax provision introduced the novel doctrine of ability to pay and had the effect of shifting a greater proportion of the war’s costs than would otherwise have been the case from the West and middle South to the eastern part of the United States. The first enactment, of August 5, 1861, levied a uniform tax of 3 per cent on all incomes above eight hundred dollars. But before any money was collected, a new measure was passed in 1862 that lowered the base to six hundred dollars and scaled the rate upward to 5 per cent above ten thousand dollars. The law granted the Secretary of the Treasury the power to hire employees to detect fraud and provided for the establishment of a permanent tax-collecting agency, the Bureau of Internal Revenue, since 1952 known as the Internal Revenue Service. The Civil War tax gatherers were paid a commission on the dollars they brought in, which assured their constructive interest in the figures that appeared on the bottom line.