Tuesday, August 16, 2016

About That Income Tax. . . .

Everybody (okay, a lot of people) in the United States think that the Sixteenth Amendment to the Constitution made an income tax constitutional.  If we could just get rid of that, everything would be perfect for everybody, just as it was in 1912 before anybody had even thought of an income tax . . . wouldn’t it?
Well . . . no.  First of all, things back in 1912 weren’t quite as happy and carefree as people today like to think.  We won’t go into reasons, but you can surely think of a few yourself.
TR's platform included the income tax.
The one that concerns us today, however, is the income tax.  It wasn’t exactly a new kid on the block in 1912.  Populists and progressives (back when being a progressive was a good thing) had been demanding one for decades.  There had been one in the Civil War, but had been allowed to lapse, partly because there were some unresolved constitutional issues, but mostly because the government didn’t need the money, not when it didn’t have to worry about taking care of everybody.
Then came the Panic of 1893 and the Great Depression of 1893-1898.  The tax base of the U.S. was seriously eroded, and the worst part was that the rich were hardly paying any taxes at all.  Poor people paid a significant percentage of their income in taxes of one form or another, mostly consumption taxes passed through to the consumer, while the rich pretty much escaped taxation as a much smaller proportion of their income was spent on such things as food, clothing, and shelter: the vast bulk of their wealth was tied up in industrial and commercial capital, with a sizable dollop of financial assets as well.
Then Congress passed an income tax, and it was immediately challenged in the Pollack Case in 1895.  The plaintiffs argued that the income tax was unconstitutional not because it was an income tax, but because it was a direct tax, and was not being levied accordingly.
First income tax was under Lincoln.
The specific issue was whether an income tax was a direct tax (and therefore unconstitutional unless apportioned among the various states by population) or an indirect tax (and therefore constitutional without apportionment).  During the Civil War, the Congress needed the money and avoided the question, while afterwards with deflation hardly anyone paid the tax, and it was allowed to lapse in the late 1870s without being renewed.
From the 1870s the socialists and the populists demanded a reinstatement of the income tax as a more democratic way of paying for government.  Revenue from land sales plummeted with the Homestead Act, and the Panic of 1893 and the subsequent Great Depression of 1893-1898 caused tax revenues to fall even further and demands for an income tax to increase.  A new income tax was passed in 1895 and immediately challenged.  In the Pollack case, the Supreme Court decided an income tax is a direct tax, and unconstitutional without apportionment among the states.  If the income tax was apportioned, it would obviously be unjust, as populous poor states would pay more in taxes than thinly populated rich states.
Bryan was in favor of an income tax.
Following the Panic of 1907, demands for fiscal and monetary reform reached a fever pitch, with two issues paramount: a central bank and an income tax.  Woodrow Wilson was elected in part because of the promises William Jennings Bryan made on his behalf . . . and which he immediately tried to get out of, preferring to leave all financial and economic power in the hands of his Wall Street friends instead of ordinary people.
After a long struggle, with the populists, socialists, progressives (in the old sense of the term of moderate conservative), and Democrats in favor of the income tax and the central bank and the reactionary Republicans against it, the U.S. got the Federal Reserve and the Sixteenth Amendment.  It is important to note that an income tax is not unconstitutional per se.  To argue that is to deny Congress the right to tax at all.  The issue was is an income tax direct or indirect.  If direct, it had to be apportioned among the states on the basis of population or the Constitution had to be amended in order to permit a direct tax without apportionment.
Even after the imposition of the income tax, however, very few people paid it until the New Deal, and the need to use the tax system to engage in “social engineering” to try and make Keynesian economics work.  The requirements of Keynesian economics changed the income tax from a straightforward percentage of income after an exemption to the complex monster we enjoy today.  Plus, in an accident of history, tax evasion was changed from a tort to a crime in order to bring down Al Capone.  They couldn’t prove he had made his income from illegal activities, but they could prove he hadn’t paid taxes on it.  So, instead of back taxes and a fine, he spent a year in prison.
Ultimately, of course, all taxes are “income taxes” — how else are you going to pay them?  The question is whether you pay it directly or indirectly.  You pay for tariffs and government-induced inflation through higher prices, and with the decrease in economic activity that always comes from decreasing consumption.

1 comment:

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