Polls have shown time and again that Americans think the federal income tax system is “unfair.” It’s probably a safe bet that people in other countries which have income taxes are of the same opinion.
And of course, it is unfair. How could it possibly be otherwise? Politicians are constantly revising rates and deductions and creating loopholes as paybacks for friends. The tax-collecting bureaucracy snoops into people’s private lives and imposes exasperating paperwork on every citizen.
America’s experience with the federal income tax confirms the prophetic wisdom of Supreme Court Chief Justice John Marshall almost two centuries ago: “The power to tax involves the power to destroy.” Remember that when you fill out your next tax form, no matter what state or country you live in.
Americans were given fair warning more than a century ago that the income tax would become a monster. Guess who made these remarkably radical statements about the very idea of a federal income tax?
“…an abhorrent and calamitous monstrosity. . . . It punishes everyone who rises above the rank of mediocrity. The fewer additional yokes put around the necks of the people, the better.”
“…a vicious, inequitable, unpopular, impolitic, and socialistic act. . . . the most unreasoning and un-American movement in the politics of the last quarter-century.”
“[It] can only be collected by prying into the private affairs of the people by arbitrary methods hateful to the citizens of the republic.”
Those were the words of the Washington Post, The New York Times, and the Chicago Tribune respectively, commenting in 1894 on the first income tax since the Civil War to be passed by Congress. This vitriolic criticism was aimed at a proposal to levy a mere 2 percent tax on income in excess of $4,000—which would be at least $90,000 in today’s dollars. Because of that large $4,000 exemption, 98 percent of Americans were completely exempt from income taxation.
One year later the Supreme Court ruled this tax to be unconstitutional, and so ended America’s first peacetime experiment with an income tax. It would take a constitutional amendment—the 16th, passed in 1913—to give Congress the legal power to shackle us with another one.
In 1909, when the 16th Amendment was being debated, The New York Times criticized it, saying, “When men get in the habit of helping themselves to the property of others, they cannot be easily cured of it.” History has proven that prediction to be correct (and applicable to every part of the world) though I doubt that it bothers the “progressive” New York Times as much today as it did in 1909.
After the 16th Amendment was ratified, an income tax was imposed starting in 1913. Rates ranged from 1 percent to 7 percent. The top rate applied only to incomes of more than $500,000. Married couples were only taxed on income over $4,000. In his fascinating essay, The Progressive Income Tax in U.S. History, Burton Folsom revealed a cynical side of the pro-tax crowd: “During the tax debate, William Shelton, a Georgian, supported the income tax ‘because none of us here have $4,000 incomes, and somebody else will have to pay the tax.”
By 1916 that top rate had risen to 15 percent, on income of more than $2,000,000. Before Woodrow Wilson left office in 1921, it was more than 70 percent. Presidents Harding and Coolidge brought it back down to 24 percent but then Presidents Hoover and Roosevelt jacked it back up again. The top rate exceeded 90 percent at its peak in the early 1950s.
Franklin Roosevelt, by the way, had campaigned against Herbert Hoover in 1932 on a tax reduction platform, even calling for a 25 percent reduction in federal expenditures. He declared that Hoover had presided over “the greatest taxing and spending administration” in American history, before setting new records in both categories himself. He even imposed by executive order a 100% rate on all incomes over $25,000! (See Great Myths of the Great Depression).
The first 1040 (personal income tax) form—instructions and all—took up only four pages. Here’s what it looked like. Today, there are thousands of pages of tax forms and instructions. American workers and businesses are forced to spend billions of man-hours every year figuring out their taxes. The tax code is virtually incomprehensible, massively inefficient, hugely burdensome, and cynically corrupt.
In other words, it’s everything that the Washington Post, The New York Times, and the Chicago Tribune said a century ago that it would become.
It has been said that income taxes are the price we pay for civilization. To that, as I try to make sense of the tax code, I must ask, “This is civilization?”
For additional information, see:
War-Time Origins of Modern Income Tax Withholding by Robert Higgs
The Progressive Income Tax in U.S. History by Burton Folsom