The Real History Of The American Income Tax | Zero Hedge

https://www.zerohedge.com/news/2019-02-14/real-history-american-income-tax

Authored by Phillip Magness via The American Institute for Economic Research,

The 70 percent income tax scheme of Rep. Alexandria Ocasio-Cortez and the closely related wealth tax proposal of Sen. Elizabeth Warren would take federal taxation into historically unprecedented territory. You would not know that though from listening to the academic supporters of this newly fashionable cause of progressive taxation.

To advocates of these policies such as economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, they simply seek to restore an allegedly lost progressive legacy of high income taxation from the early and middle twentieth century.

Piketty made this argument in the Boston Globe earlier this week, suggesting that the Ocasio-Cortez and Warren proposals simply correct a “historical amnesia” in place since 1980 when a succession of Republican presidents allegedly “turned their backs” on the true origins of income taxation.

Part of Piketty’s narrative rests on misleading statistics. He points to the high statutory tax rates of the mid-20th century, averaging 81 percent on the top income bracket between 1930 and 1980. Yet as we’ve discussed before, nobody actually paid those rates or anywhere close to them. The effective tax rate — that is, the portion of total income earnings that individuals actually pay to the government — was much lower in this same period. Using the early 1960s as a benchmark, it hovered just over 40 percent for $1 million earners despite an average statutory rate, absent deductions, of nearly twice that and a top marginal rate in excess of 90 percent.

But Piketty’s history is faulty on another count. According to his telling, income taxation itself was the original answer to spiraling inequality in the late 19th century:

Between 1880 and 1910, while the concentration of industrial and financial wealth was gaining momentum in the United States and the country was threatening to become almost as unequal as old Europe, a powerful political movement in favor of an improved distribution in wealth was developing. This led to the creation of a federal tax on income in 1913 and on inheritances in 1916.

Even Piketty’s basic historical narrative, however, does not hold up to scrutiny.

The Forgotten Origins of the Federal Income Tax

The federal income tax came into being after the ratification of the 16th Amendment in 1913, but its purpose had little to do with “correcting” income inequality. Rather, the income tax’s origins trace to an obscure debate over another issue that’s seen a resurgence of attention in recent years, the protective tariff.

The story of the 16th Amendment begins in early 1909 after President William Howard Taft called upon Congress to revise the existing tariff schedule of the United States. Tariffs at the time were technically a revenue generator. Before the income tax, import taxes actually provided the largest share of the federal government’s revenue stream. Because of the complexities of international trade however, a “revenue” tariff also provided ample opportunity to extend heavy protectionism to politically connected industries by selectively imposing high rates on their foreign competitors. Tariff schedule revisions in the 19th century accordingly became a political free-for-all of bribes, backroom deals, and favor trading.

This particular approach to lawmaking heavily advantaged the philosophy of protectionism, both by offering it political cover under the auspices of raising revenue and by advantaging legislative logrolling — the practice of bundling hundreds or even thousands of political favors together in the same bill in order to secure enough support to pass Congress. As a result, the period between the Civil War and the early 1900s produced a nearly uninterrupted succession of highly protective “revenue” tariffs.

When President Taft issued his call in 1909, he actually hinted at a desire to see the existing tariff rates reduced and the schedule revised to improve its stated revenue objectives. In the hands of Congress however, the tariff-schedule revision became a personal project of Sen. Nelson Aldrich of Rhode Island, an arch-protectionist and master of legislative procedure. Under his watchful eye, the Payne-Aldrich tariff bill bearing his name quickly devolved into an even more protectionist rate schedule than the older statute it was replacing.

Aldrich’s scheming presented a political conundrum for free traders, most of them clustered in the Senate’s Democratic minority. Free trade had lost almost every major tariff fight in the previous five decades. Even when the Democrats enjoyed a congressional majority and the White House in 1894, their attempt to lower the tariff schedule’s rates across the board quickly succumbed to the same forces of logrolling and favor trading. Cronyism whittled away most of the proposed cuts in the legislative process, as even nominally free trade Democrats discovered they could use the tariff to secure favors for their home districts. By 1909, battling Aldrich directly over tariffs meant certain failure.

Shortly after Aldrich brought his bill to the Senate floor in April 1909, Democratic Sen. Joseph Weldon Bailey of Texas decided on a bold alternative strategy. Rather than attack the tariff head-on and ensuring their defeat, Bailey executed a flanking move to try to drain the Payne-Aldrich bill of its political support. He proposed a parallel federal income tax, aiming to partially “swap” this new source of tax intake for the revenue stream that came from tariff assessments. If tariffs were no longer the primary source of federal tax revenue, Bailey reasoned, the protectionists would lose the cover that the tariff schedule provided for higher discriminatory rates against foreign competitor industries.

Bailey’s plan still faced substantial obstacles. For one, his income tax bill would face an almost-certain Supreme Court challenge if it ever became law. An 1895 case struck down a core provision from a previous iteration of the income tax as being subject to the Constitution’s restrictions on direct taxation. Bailey knew this however, and fully intended to force a new court ruling with the belief that a carefully worded bill could reverse the earlier 5-4 court decision.

The Sausage Being Made

Second, the Democrats were still in the minority with only 32 out of 92 Senate seats. In order for Bailey’s plan to work, they would need to peel away approximately 15 Republicans to back the income tax. This task was not unfeasible. The Republican ranks included about 10 to 12 progressive “insurgents” who favored more expansive taxation to finance other social aims, and who signaled an interest in supporting the income tax.

A handful of other Republicans were growing lukewarm on the party’s protectionist line, which primarily benefited industrial states in the Northeast at the expense of agricultural exporting states in the West. By early May 1909, Aldrich publicly admitted that Bailey might have the votes to pull off his proposed income-tax-for-tariffs revenue swap and temporarily suspended the consideration of the tariff bill on the Senate floor to buy himself time to regroup.

The parliamentary maneuver triggered almost two months of complex legislative jockeying as Aldrich and Bailey courted votes from senators on the fence. The stalemate finally broke on June 29, 1909, when Aldrich forced the withdrawal of Bailey’s measure by engineering a surprise vote on a parliamentary procedure when Bailey was absent from the floor. The Payne-Aldrich tariff became law a few weeks later and, true to expectations, imposed overtly protectionist rates upon the competitors of thousands of politically connected manufacturing firms.

Aldrich paid a steep price to preserve his tariff though. In order to peel enough votes away from Bailey’s competing income tax bill, he had to offer a consolation prize. In exchange for other senators’ abandoning the Bailey plan, he would permit a constitutional amendment to come to the floor in its place, thereby resolving the obstacles to income taxation caused by the 1896 Supreme Court ruling and avoiding the need for another future court challenge on the subject.

From these obscure origins in turn-of-the-century tariff politics, the 16th Amendment was born.

Trade, Not Inequality

The tariff origins of the federal income tax pose a serious complication to Piketty’s narrative, as they contradict the motive he assigns to the policy. Although some of the 10- to 12-member “insurgent” block of Republicans veered closer to Piketty’s narrative, the majority of the income tax’s backers in 1909 did so out of support for free trade and a belief that the proposed revenue swap would finally break the stranglehold of protectionism over the federal revenue system.

For a brief moment, the Democrats’ policy actually worked. Voters punished the Republican Congress in 1910, in part due to backlash against their overreach on the Payne-Aldrich tariff. The election placed the House into Democratic hands, and increased Democrat numbers in the Senate by seven seats. Riding on this wave along with a festering progressive rift in the Republican Party, Democrats won both chambers and the White House in 1912.

While these electoral outcomes heralded a progressive turn of their own in national politics under President Woodrow Wilson, it delivered exactly none of the characteristics that Piketty attributes to the motive and early history of the income tax. In 1913, using the newly ratified amendment, Congress adopted the Underwood Tariff Act - a sweeping rate reduction that successfully overturned the most egregiously protective rates of the Payne-Aldrich schedule and, as Bailey had promised four years earlier, swapped them for a new federal income tax to sustain the government’s revenue stream.

The Underwood Act’s income tax provision only applied to wealthy earners, but it did not enact the exorbitant rates of Piketty’s narrative. The graduated schedule of the original 1913 income tax topped out at only 7 percent, assessed against all income above $500,000.

Congress did turn to high marginal rates later in the decade - but strictly as a war finance measure to fund the United States’ entry into World War I. Income tax revisions in 1917 and 1918 raised the top rates to a peak of 77 percent on income above $1,000,000. But Congress quickly cut these rates once the war was over. After a series of smaller reductions from 1919 to 1924, they settled on a top marginal rate of only 25 percent on incomes above $100,000 in 1925.

The high mid-century income tax schedule that Piketty is so fond of traces its own origin not to progressive wealth redistribution, but to another badly misguided attempt at revenue collection. In the midst of the Great Depression and facing mounting annual budget deficits, President Herbert Hoover proposed and signed the Revenue Act of 1932 in a last-ditch attempt to close the gap before the election.

It was this measure that inaugurated high rates, settling at 63 percent on income over $1,000,000. Although the measure only exacerbated existing strains on the economy, it handed Hoover’s successor Franklin D. Roosevelt an existing progressive tax rate structure that he further ratcheted upward to its midcentury peak.

Misplaced Causality

Piketty, of course, embraces this second wave of income tax increases as vindication of his theory that high progressive tax rates drive down inequality. But even a generous reading of income tax history suggests that this evolution came about not as a conscious inequality-alleviation policy, but rather haphazardly and through several successive steps motivated primarily by the desire for increased federal revenue to finance wartime and then Depression-era spending programs.

Yet as we’ve also seen, Piketty’s causal story is wrong. The high income tax rates at the midcentury mark did not cause wealthy people to disappear and did not reallocate their fortunes downward. They simply induced the wealthiest earners to engage in income shifting — to take advantage of the numerous deductions, credits, and legal income shelters that had been incorporated into the tax code. The result was the one mentioned at the opening of this article. The wealthiest earners paid effective tax rates at midcentury that sat well below their statutory obligations, and only slightly higher than where they are today.

Income tax history provides many lessons on both the effects and perils of high rates. Foremost among these is a tendency to incentivize tax avoidance behavior by the wealthiest earners. It does not however provide the self-evident argument for high income taxation or a completely novel wealth tax today that Piketty assumes. In addition to flubbing basic facts, his account of 20th-century tax history comes across as an attempt to retrofit historical events to his own modern policy agenda. Responsible historians and commentators should resist the temptation of this faulty message.

Comments

1 day ago

Historians have been bought and paid for. The real power works behind the scenes to further their interests. The puppet show that is presented on TV is programming. Not programming the television but programming the viewers. Having the talking heads argue over a few minor points, distracts the viewers from the changes that the power elite want. If you point out the con game, you will be called stupid, crazy, and a criminal. There's a game behind the game, a war behind the wars.
1 day ago

Taxes are Legal Plunder:

"Legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on."

- Frederic Bastiat

Cobra!
1 day ago

She swallowed my tax free load! USA has a few hots.
1 day ago

Tax is simply theft. Paying taxes should be voluntary.
1 day ago
(Edited)

"to take advantage of the numerous deductions, credits, and legal income shelters that had been incorporated into the tax code."

Capital gains tax comes to mind. Because capital gains is not income?
1 day ago

Federal taxation should be apportioned to the states. States would be responsible for Federal taxes. State representatives would vote Federal spending levels. The more money they vote into the Federal budget, the less they have at home for their voters. Getting re elected would entail being stingy with the federal purse strings.

Currently over 75% of all income tax is collected at the Federal level. Those being taxed have no say, and their representatives don't care....they already have their money! So, precious little trickles down to the state and local level. Upside down taxation.
1 day ago

We elect thieves to send to Washington and they steal our money back and launder it through their most prized donors. And we're shocked to discover they're crooks.

Taxes from county to state, state to feds. Make the feds beg states for money, make them OUR bitches instead of us being theirs, pleading for funding while praying they keep their regulations to themeslves.

Sadly, one of the few constitutional duties of the feds is the protection of our borders....The ONE thing they REFUSE to do.
1 day ago
(Edited)

Hmmm...how did I miss the part about the income tax on greenbacks in the Civil War? Oh right, the article fails to mention it!

https://www.battlefields.org/learn/articles/first-income-tax

The first Federal income tax was levied to help pay for the Union war effort. In the summer of 1861, Salmon P. Chase reported to the Congress that he would need $320 million over the next fiscal year to finance the war. He thought he could put his hands on $300 million by borrowing part of it and raising the rest through existing taxes and sale of public lands. He left it up to Congress to come up with a way to raise the remaining $20 million.

After weighing their options, the House Ways and Means Committee drew up a bill to tax personal and corporate incomes. This bill, the first income tax measure in the United States, called for a 3% tax on incomes over $800. Although the bill quickly passed in both the House and the Senate, it was never put into operation. Still, it paved the way for the next bill of its kind.

In 1862, Abraham Lincoln signed a bill that imposed a 3% tax on incomes between $600 and $10,000 and a 5% tax on higher incomes. The law was amended in 1864 to levy a tax of 5% on incomes between $600 and $5,000, a 7.5% tax on incomes in the $5,000-$10,000 range and a 10% tax on everything higher. The law was repealed in 1872 and declared to be unconstitutional.

The Confederacy also collected income taxes. It authorized its first national income tax measure in 1863. The Confederate bill that finally passed after great debate was a graduated income tax. It exempted wages up to $1,000, levied a 1% tax on the first $1,500 over the exemption, and 2% on all additional income.
1 day ago

As said earlier. Both the Federal Reserve and personal income tax was established in 1913.

And this Aldrich character was a prime figure behind the creation of the FED. A Jekyll Island conspirator. His participation in that should not be obscured by tariff issues, etc.
1 day ago

Another incomplete and wrong analysis of the so called income tax. The 16th amendment comments are off point irrelevant ********.

BEFORE the passage of the Social Security Act, INCOME was defined by the courts as PROFIT and GAIN. Moreover, the tax on income was classified by the courts as an EXCISE tax. Notice it was the COURTS and NOT the Congress that defined income.

Circa 1936, the States waived their police powers to the feds when they sought federal permission to join the other states via the COMPACT CLAUSE, in adopting the ACT. Then the feds had to con the people (unions, ect) to make VOLUNTARY APPLICATION to move into the new SYSTEM.

What this did was make the applicant ENTITLED to what the courts would classify as extraordinary protections paid for with money from the public treasury. YOU have no LIBERTY, PROPERTY, or CONTRACT RIGHTS in PUBLIC MONEY. The (statutory) right to receive those benefits is a LEGISLATIVELY CREATED PRIVILEGE.

Go back to the courts. They have repeatedly determined that the term EXCISE tax and PRIVILEGE TAX are SYNONYMOUS. The excise NOT directly on the Wage (PROPERTY) which is your labor, but now merely uses the Wage as a unit of measurement to calculate the indirect EXCISE.

Notice the apportionment requirement as to direct taxation was NULLIFIED by State action. Notice that both the state and federal governments can now universally interfere with the OBLIGATION OF CONTRACTS. Yes!!! Compensation for labor in the full amount of the contract is protected from State interference under Art.1, section 10. But not anymore. Those rights (property and contract) were waived by you when YOU volunteered (at the barrel of a gun) into the "system".

Can the States hand the feds the power to do what they themselves are constitutionally prohibited from doing? Can the States hand the feds the power to BYPASS the apportionment requirement as to direct taxes?

Got 20 million dollars and a world class legal team to nullify this unconstitutional ****? Yea well me neither. We are so fucked.

Keep your head down and prepare for the next horrible, bloody, senseless Civil War.

1 day ago

Time to move beyond history. Forget why something was done in the past if it is good for the present for any reason.
1 day ago
(Edited)

W
1 day ago

All taxation is theft and IRS thugs have lost in court because they couldn’t produce the law that allowed them to extort you. Watch the DVD. America freedom to fascism for the court cases.
1 day ago

+100 “Freedom to Fascism” by Aaron Russo; the “director’s cut"...
1 day ago

The 16th amendment had little to do with tariffs as the author tries to make it out to be.. It had more to do with apportionment.

The 16th amendment’s ratification came nearly 20 years after the U.S. Supreme Court in 1895 voided an income tax that Congress had approved in 1894. That tax never took effect. The court declared the tax unconstitutional because it was not apportioned according to the population of each state, as the Constitution then required. That meant, for example, if 5 percent of the U.S. population lived in Virginia, no more than 5 percent of the tax’s total revenue could come from Virginia.

The 16th amendment removed this barrier by authorizing Congress to collect taxes on incomes "without apportionment among the several states, and without regard to any census or enumeration."
1 day ago

https://www.thelawthatneverwas.com/
1 day ago

https://en.m.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Constitution
1 day ago

Yes I read it and even though Benson ultimately lost his case he was correct because our legal system is just as corrupt as the state.
1 day ago

Yep! You are right!. You bring to mind another good reason to have a periodic constitutional convention, like Thomas Jefferson recommended 200+ years ago, and abolish states while we are at it.
1 day ago

...except for the little problem of the 16th amendment NOT being ratified by the states. A fact well documented in “The Law That Never Was” (also covered in “Freedom to Fascism”).
1 day ago

Without the theft of the OG Constitution in 1871, the 16th amendment to the corporate bylaws never would have existed.
1 day ago

The income tax was declared unconstitutional in the late 1800s. Then it was made 'voluntary'. No liability is actually made until a source is named (w4). And even then, the liability is upon the source named, and the government tax collector. All fact, read the 1913 tariff act (YES, THE INCOME TAX IS A TARIFF!!!). All would be great, except the government doesn't even follow its own deceptive laws. Even when the people know what is happening, government just uses the people's courts against them!! THEY WANT AND WILL TAKE OUR MONEY BY FORCE!! The only entity that has ever extorted my money with threat of violence is my own government!!! Government is inherently evil!! It attracts every kind of self serving sociopath that walks this earth!!