Primary Source: Tax Day
Or, why the federal government takes your money with nary a thank-you.
“’Tis impossible to be sure of any thing but Death and Taxes.” — Christopher Bullock, The Cobbler of Preston (1716).
As we settle down this July 15th (normally April 15th; you can thank COVID for the later date this year) to write out those dreaded checks (or claim your refund! Or beg for an extension!), it’s difficult to believe the income tax once didn’t exist in the United States. Or more specifically, the federal income tax once didn’t exist. Most states have had income taxes since the beginning, but the federal income tax didn’t become a permanent reality until 1913, only about half our country’s history.
It’s not that the idea hadn’t been floated before, especially during times of great financial stress — such as the War of 1812 and the Civil War — but the reality was that the federal government was much smaller before the 1930s, and thus was able to survive simply on taxes on goods.
But just over one hundred years ago, a senator introduced what would become the Sixteenth Amendment to the Constitution, which would establish our beloved federal income tax.
Why did he do it? When had the tax been proposed before? What were the arguments for and against it, and do they apply to us today?
The War of 1812 demands revenue. (1814)
Raising and supporting a military takes considerable resources. During the War of 1812 against the British, officials found that their reliable stream of income from tariffs was quickly drying up. This was exacerbated by the war itself, as it caused foreign trade to decline.
George W. Campbell, the secretary of the treasury during the war, anxiously reported to Congress in December, 1814.
The present state of our country, growing out of the unjust policy of the enemy, as well as the unusual manner in which he prosecutes the war, calls for new and extraordinary exertions on the part of the nation; and the means requisite to meet the expenditures which these may occasion ought to be provided. . . .
The promptitude and cheerfulness with which the present taxes are paid, afford the best pledges of the spirit with which the people will meet such demands as the interest and safety of the country may require. A people who have not only tasted, but enjoyed in their full extent, the blessings of liberty and independence, for more than thirty years, cannot consider any sacrifices too great which are found indispensable to preserve them inviolate.
Campbell quit that same year, upset that he couldn’t secure more funding. His successor, Alexander J. Dallas, was just as nervous. In a budget proposition to Congress in January, 1815, he added a line item at the bottom. It was the first public proposal for a federal income tax in U.S. history. It didn’t come to fruition.
Civil War congressmen debate the first national income tax. (1861)
In 1861, when South Carolina seceded from the Union, many northerners anticipated a quick suppression of the insurrection. When that didn’t happen, congressional leaders realized they had to come up with money — quickly — to finance the war effort. But how to do it? The Committee of Ways and Means proposed raising taxes on land — called a “direct” tax — and on real and personal property — called an “ad valorem” tax. A debate erupted. Why lay the tax burden on only these things? several congressmen asked. Why not spread it out more equally? Several floated the idea of the income tax.
Thaddeus Stevens, the chair of the Committee of Ways and Means, broached the topic:
We have levied a tax upon the various articles which are mentioned; but we have not gone into the question of an income tax. That question is a large one; and in England that system has been practiced upon for some time. An income tax may be the most equitable that can be raised. . . . I do not see how you can very well get at any other kind of property without laying an income tax.
Alexander Diven didn’t like the idea, thinking it too abstract:
I know an income tax has been talked of. Sir, have the people considered what an income tax is? In England, where men are living upon their investments, upon their consols, upon their bonds and mortgages, and have a certain fixed income, an income tax is a tangible thing. But when you come to the imposition of an income tax here, I would like to have the assessor fix my income, which depends upon the result and success of my profession. I could not tell what it is. If I can support my family, I am content; but if called upon to tell what I receive, it would be a riddle to me, as much as it would be to the assessor.
So as to the merchant who one year is successful and makes $10,000, and the next year is unsuccessful and loses $10,000 — one year up and another down — how are you to fix his income? I have said, and I repeat, we require something tangible that we can place at the disposal of the creditor, to show that the security is sure and certain; and hence this direct tax should be levied upon something specific.
Schuyler Colfax, who would become Speaker of the House the following year, responded:
Now, sir, I am not much of a financier. I only say, that if you want the people to come up fairly and squarely to the support of this war, to give their money freely, as I have no doubt they are willing to give it to put down this unholy rebellion; if you want these fires of patriotism to continue to burn throughout the country, give them a tax bill which they can recognize as fair, and equitable, under which the wealthy man and the poor man will pay their share . . .
On August 5, 1861, President Abraham Lincoln signed the first national income tax law in American history, a 3% tax on income over $800.
The Supreme Court says “not so fast.” (1895)
The Civil War era Revenue Act of 1861 and its replacement 1862 act expired in 1872, and no new income tax laws were implemented. To pay for the government Congress relied on high tariffs, and that generally did the trick. However, a rising progressive movement demanded a funding system that shifted the burden away from working class consumers to high-earning businessmen. In 1894, Congress attached an amendment to the Wilson-Gorman Tariff Act, leveling a 2% tax on income over $4,000. Reaction around the country was mixed, and the controversial law was brought to the Supreme Court. A slim majority of 5–4 struck it down with Chief Justice Melville Fuller writing the opinion.
First. We adhere to the opinion already announced, that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.
Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.
Third. The tax imposed by sections twenty-seven to thirty-seven, inclusive, of the act of 1894, so far as it falls on the income of real estate and of personal property, being a direct tax within the meaning of the Constitution, and therefore unconstitutional and void because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid.
A president cautiously advocates for an income tax. (1907)
With the court invalidating the income tax portion of the Wilson-Gorman Tariff Act, calls began anew from the progressives. When Theodore Roosevelt assumed the presidency in the aftermath of President William McKinley’s assassination, he assured nervous Republicans that he would continue the conservative policies of his predecessor. Nonetheless, he heard the pleas of the progressives and grew bolder in his time as president. In his 1907 State of the Union address, he tested the waters by calling for an income tax.
When our tax laws are revised the question of an income tax and an inheritance tax should receive the careful attention of our legislators. In my judgment both of these taxes should be part of our system of Federal taxation. I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is to be hoped that one may be devised which the Supreme Court will declare constitutional.
An amendment strategy backfires. (1909)
The income tax amendment was first proposed in 1909 by Nebraska Senator Norris Brown, but the final version accepted was proposed by Rhode Island Senator Nelson Aldrich. Congress was debating the Payne-Aldrich Tariff Act, which controversially raised tariffs. Aldrich, who actually opposed the income tax amendment, included it as a means of placating the anti-tariff progressives. He never expected it to pass.
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
A New Yorker decries “unjust and discriminating tariff taxes.” (1910)
On July 12, 1909, the amendment passed Congress and was sent to the states. It was now up to the state legislatures to debate it. In 1910, New York Congressman William Sulzer wrote a letter to the New York World, extolling the amendment’s virtues. New York ultimately voted to ratify the amendment in 1911.
At the present time nearly all of the taxes raised for the support of the Government are levied on consumption, through the agency of unjust and discriminating tariff taxes — on what the people need to eat and to wear and to live — the necessaries of life — and the consequence is that the poor man, indirectly but surely in the end, pays practically as much to support the Government as the rich man, regardless of the difference of incomes. This system of levying all the taxes on consumption so that the consumers are saddled with all the burdens of government is an unjust system of taxation, and the only way to remedy the injustice and destroy the inequality is by a graduated system of income taxes that will make idle wealth as well as honest toil pay its just share of the money needed to administer the National Government.
A Virginian warns of the “hand from Washington.” (1910)
Virginia also took up the amendment in 1910. In a speech to the House of Delegates, Speaker Richard Byrd established the argument against governmental overreach that income tax opponents use to this day. Virginia ended up rejecting the amendment.
A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of Federal inspectors, spies and detectives will descend upon the state . . . Who of us who have had knowledge of the doings of the Federal officials in the Internal Revenue service can be blind to what will follow?
Confusion reigns, then as now. (1913)
The states ratified the Sixteenth Amendment in 1913, overturning the Supreme Court’s 1895 decision. Today’s income tax code is monstrously complex, much more so than when the amendment became law. Even so, senators a hundred years ago had just as devilish a time understanding the concept of taxable income as we do now. This 1913 exchange between senators might make the current-day taxpayer smile, smirk, or shake her head in exasperation.
MR. CUMMINS: If I understand this aright, if I have a farm and sell it for a thousand dollars, the money I would receive as the purchase price of the farm would be accounted as income; but if anyone were to give me a thousand dollars during the year, or if I were to receive it by bequest . . . , that would not be accounted as income . . . If the one is income, why is not the other? . . .
MR. SHIVELY: Mr. President, if I understand the Senator correctly, he is inquiring, for the purpose of illustrating what he has in mind, whether the price of a piece of land sold during the year would be regarded as income. My answer is that it would not be. The price of that land would be principal . . .
MR. CUMMINS: But suppose 10 years ago I had bought a horse for $900, and this year I had sold him for $1000, what would I do in the way of making a return? . . .
MR. WILLIAMS: That thousand dollars is a part of the Senator’s receipts for this year, and being a part of his receipts, that much will go in as part of his receipts, and from it would be deducted his disbursements and his exemptions and various other things.
MR. CUMMINS: Would the price I paid for the horse originally be deducted?
MR. WILLIAMS: No, because it was not a part of the transactions in that year; but if the Senator turned around and bought another horse that year, it would be deducted . . .
MR. BRISTOW: Mr. President, I desire to ask a question . . . As I understood the question of the Senator from Iowa, it was, if he bought a horse 10 years ago for $100.
MR. CUMMINS: Nine hundred dollars.
MR. BRISTOW: And sold it this year for a thousand dollars, whether or not that thousand dollars would be counted as a part of his income for this year, regardless of what he paid for the horse 10 years ago. Is that correct?
MR. WILLIAMS: No I did not say that. It would be part of his gross receipts for the year, of course, but it may not necessarily be a part of his net receipts, and therefore not a part of his income that is taxable.
MR. CUMMINS: But I asked the Senator from Mississippi specifically whether, in the case I put, the price that was originally paid for the horse could be deducted from the price received.
MR. WILLIAMS: The price paid 10 years ago? No; of course not. How could it? When a man puts in his return for his income of the previous year in order to be taxed he puts down everything he has received and everything he has paid out, subject to the exemptions and limitations otherwise provided in the bill . . .
Happy Tax Day!
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