Economic Retrospect: The Income Tax

[EconomicNudity]

The majority of our nation’s years have been spent without an income tax. Why is that and why is the tax so widely accepted today? Death and taxes, right? Can you imagine an America without an income tax? Our Founders envisioned an America without an income tax. Our Supreme Court shot down the tax on multiple occasions. But that in and of itself doesn’t make the tax right or wrong. My objective is not to determine whether the income tax is right or wrong. The only objective of this post is to present a small piece of history and slice of perspective on perhaps the most influential policy instrument – the income tax.

So why do we pay taxes? Taxes provide a source of revenue for the government. This revenue is used to support our nations’ infrastructure, social programs, and national defense. Essentially, various entities and people are taxed to generate the cash flow to pay for the programs above. The makeup of the 2014 federal tax revenue is derived as follows:

• Individual Income Taxes (39.8%)
• Social Insurance Taxes/Payroll Taxes (29.2%)
• Corporate Income Taxes (9.2%)
• Other Taxes (8.1%)
• Deficit (13.8%)

It is hard to imagine there was actually a time when we as a nation did not pay income taxes. Even harder to grasp that the majority of our nations’ existence has been without an income tax. In 1861, Abraham Lincoln enacted the first income tax, a 3% tax on annual incomes over $800 in a state of emergency during the Civil War. Roger Sherman argued in favor of the measure:

“We tax the tea, the coffee, the sugar, the spices the poor man uses. Everything that he consumes we call a luxury and tax it; yet we are afraid to touch the money of Mr. Astor. Is there any justice in that? Is there any propriety in it? Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor.”

Opponents focused the tax’s inequality aspects. Thaddeus Stevens commented:

“It seems to me that it is a strange way to punish men because they are rich.”

Nevertheless, Congress abolished the tax in 1871. Our Founders had foresight on the subject. Our young nation has faced trials of both economic and combative natures. The founders were arguably in the most vulnerable position in our nation’s nascent beginnings to enact an income tax. Funds were initially needed to fight for our freedom; then they were needed to establish our nation. Yet, they established Article 1, Section 8, Clause 1:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”

They felt the uniformity clause important to maintain fairness between the states which conceptually flows into the rights of individuals. The Founders’ sentiment was perhaps echoed in the 1894 Supreme Court’s Pollock v. Farmers’ Loan & Trust Co. ruling striking down an income tax. The Court argued that “nothing can be clearer than what the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.”

Justice Stephen Field prophetically wrote in a concurring opinion against the tax, “The present assault on capital is but the beginning. It will be but the stepping-stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich; a war constantly growing in intensity and bitterness.”

The tax is crude and damned to unfairness. I appreciate how Jonathan Hughes and Louis Cain paraphrased in their textbook “American Economic History”. They stated, “[Taxation is] crude in that the monarch is seizing the of property from its own citizens. What the monarch does with the property is it’s own business, not that of its former owners…” They continue, “Unless the monarch’s subject have equal incomes and identical desires, unless they lose equal amounts of property, there is no way for taxation to be ‘equal’ or ‘fair’.”

Nevertheless, this was the late 19th century – the Gilded Age. A new century and the rise of progressivism was upon the nation. Opposition to big business and concentrations of wealth were at the political fore. Both parties acknowledged this movement and it appeared likely an income tax in some form would pass in the near future. The Revenue Act of 1913 was the bipartisan product reinstituting the American income tax. The tax imposed was a graduated tax on those individuals whose income was greater than $3000; $4000 for married couples. The average adult male income was $578. Only 1.5% of households paid federal income taxes.

One the time’s foremost tax experts, Dr. Thomas Sewall Adams, was not disillusioned by the politics surrounding the tax law. In “Ideals and Idealism in Taxation”, Adams concluded that “class politics is of the essence of taxation.”

Looking back, can we argue with the underpinning effects of an income tax suggested by the Founders’, the Supreme Court, or Dr. Adams?

 

[Freemason9]

Any change in tax policies will create winners and losers. In your perfect world, who would "win" and who would "lose?" Would you increase taxes on lower and middle income groups and decrease them even more for the wealthy 1%?

 

[EconomicNudity]

Any change in tax policies will create winners and losers. In your perfect world, who would "win" and who would "lose?" Would you increase taxes on lower and middle income groups and decrease them even more for the wealthy 1%?

I think there is room to do just the opposite. I think you can have an actual tax that lower income has to pay - even if extremely low. Middle class brackets could be brought down to 10-15% through $200k for married couples anyway. Tax on income greater than $500k can even face higher taxes - never to exceed 50%. Grow the middle class income. Make those earning little PAY little; NOT pay them to earn little. Give them incentive. Adults have to act like adults and take responsibility.

This allows the middle class to grow, the poor to contribute little (but at least something), and the "true" wealthy to pay the extra to reflect the benefit they have received from our system.

This is all hypothetical, but I do think this is more supportive of a a middle-out growth strategy...

 

[jwoodie]

The Payroll Tax is the elephant in the room that skews the other tax policies. Half hidden by the employer's share, it creates a huge decline in effective marginal income tax rates for people making over $110,000 per year. On the other hand, it can impose a combined marginal tax rate of over 50% on self-employed people making less than this amount.

This sleight-of-hand scheme to mischaracterize Social Security and Medicare as retirement investments, rather than government welfare programs, has beguiled voters into thinking there really is a free lunch waiting for them.

In order to avoid the looming financial crisis that these programs are creating, SS taxes should be integrated with income taxes along with a removal of the earnings cap. This would allow for a more rational discussion of individual income tax rates.

In addition, all earnings caps on employer-paid payroll taxes should be eliminated and replaced with (lower) rates applied to their entire payroll (including employee benefits). This would remove one the financial disincentives to hiring new, lower paid, employees.

Without these changes any talk about a "fair" income tax is premature.

 

[EdwardBaiamonte]

The majority of our nation’s years have been spent without an income tax. Why is that and why is the tax so widely accepted today? Death and taxes, right? Can you imagine an America without an income tax? Our Founders envisioned an America without an income tax. Our Supreme Court shot down the tax on multiple occasions. But that in and of itself doesn’t make the tax right or wrong. My objective is not to determine whether the income tax is right or wrong. The only objective of this post is to present a small piece of history and slice of perspective on perhaps the most influential policy instrument – the income tax.

So why do we pay taxes? Taxes provide a source of revenue for the government. This revenue is used to support our nations’ infrastructure, social programs, and national defense. Essentially, various entities and people are taxed to generate the cash flow to pay for the programs above. The makeup of the 2014 federal tax revenue is derived as follows:

• Individual Income Taxes (39.8%)
• Social Insurance Taxes/Payroll Taxes (29.2%)
• Corporate Income Taxes (9.2%)
• Other Taxes (8.1%)
• Deficit (13.8%)

It is hard to imagine there was actually a time when we as a nation did not pay income taxes. Even harder to grasp that the majority of our nations’ existence has been without an income tax. In 1861, Abraham Lincoln enacted the first income tax, a 3% tax on annual incomes over $800 in a state of emergency during the Civil War. Roger Sherman argued in favor of the measure:

“We tax the tea, the coffee, the sugar, the spices the poor man uses. Everything that he consumes we call a luxury and tax it; yet we are afraid to touch the money of Mr. Astor. Is there any justice in that? Is there any propriety in it? Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor.”

Opponents focused the tax’s inequality aspects. Thaddeus Stevens commented:

“It seems to me that it is a strange way to punish men because they are rich.”

Nevertheless, Congress abolished the tax in 1871. Our Founders had foresight on the subject. Our young nation has faced trials of both economic and combative natures. The founders were arguably in the most vulnerable position in our nation’s nascent beginnings to enact an income tax. Funds were initially needed to fight for our freedom; then they were needed to establish our nation. Yet, they established Article 1, Section 8, Clause 1:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”

They felt the uniformity clause important to maintain fairness between the states which conceptually flows into the rights of individuals. The Founders’ sentiment was perhaps echoed in the 1894 Supreme Court’s Pollock v. Farmers’ Loan & Trust Co. ruling striking down an income tax. The Court argued that “nothing can be clearer than what the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.”

Justice Stephen Field prophetically wrote in a concurring opinion against the tax, “The present assault on capital is but the beginning. It will be but the stepping-stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich; a war constantly growing in intensity and bitterness.”

The tax is crude and damned to unfairness. I appreciate how Jonathan Hughes and Louis Cain paraphrased in their textbook “American Economic History”. They stated, “[Taxation is] crude in that the monarch is seizing the of property from its own citizens. What the monarch does with the property is it’s own business, not that of its former owners…” They continue, “Unless the monarch’s subject have equal incomes and identical desires, unless they lose equal amounts of property, there is no way for taxation to be ‘equal’ or ‘fair’.”

Nevertheless, this was the late 19th century – the Gilded Age. A new century and the rise of progressivism was upon the nation. Opposition to big business and concentrations of wealth were at the political fore. Both parties acknowledged this movement and it appeared likely an income tax in some form would pass in the near future. The Revenue Act of 1913 was the bipartisan product reinstituting the American income tax. The tax imposed was a graduated tax on those individuals whose income was greater than $3000; $4000 for married couples. The average adult male income was $578. Only 1.5% of households paid federal income taxes.

One the time’s foremost tax experts, Dr. Thomas Sewall Adams, was not disillusioned by the politics surrounding the tax law. In “Ideals and Idealism in Taxation”, Adams concluded that “class politics is of the essence of taxation.”

Looking back, can we argue with the underpinning effects of an income tax suggested by the Founders’, the Supreme Court, or Dr. Adams?

yes, no federal income tax or BIll or Rights (extending to state govts) because the entire idea was to prevent a liberal central govt which was seen as the ultimate evil in human history by our Founders.