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.
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| 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.
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| 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.
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| 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.
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