From Whence Came Income Tax?
By William J. Federer
"It is time for a complete overhaul of our tax system. It is a disgrace
to the human race." - Jimmy Carter, 1976, Democratic acceptance speech,
Madison Square Garden, New York.1
"The American family is already overtaxed. Right now the average family
spends about half of every dollar they earn in some type of government tax or
government fee. Consider a 5-year-old child today. If things continue as they
are, by the time they're 25 they'll pay about 84 cents of every dollar they make
in some government tax or government fee. Friends, that's more than a shame,
it's a scandal." U.S. Representative J.C. Watts, 1997, responding to
President Clinton's State of the Union Address.2
Where did our income tax system come from? How did we get to where we are today?
The Internal Revenue Code has grown from 14 pages in 1913 to 2 volumes (six
inches thick) needing 8 volumes of Federal Tax Regulations to explain them. In
1913, only the top 1 percent wealthiest people were required to file, now over 8
billion pages of forms are sent out each year (using 300,000 trees!) requiring
5.4 billion man-hours to complete and file, which if fully compensated would
cost taxpayers $159 billion, equivalent to nearly 25 percent of what the IRS
receives from those taxes. Did our founders really intend to set up a government
that would have to match up a billion 1099's with over a hundred million Form
1040's each year?3
From whence came income tax? The history may amaze you.
Our founding fathers hated taxes. The Boston Tea Party, 1773, precipitated by
the British imposing taxes to pay for the debts of the French & Indian War,
culminated in the Colonists disguising as Indians and throwing 342 chests of tea
from a British East India Co. ship into the Boston Harbor. In 1775, Isaac Backus
spoke to the Massachusetts Assembly: "Is not all America now appealing to
Heaven against the injustice of being taxed...We are persuaded that an entire
freedom from being taxed by civil rulers...is not mere favor from any men in the
world but a right and property granted us by God, who commands us to stand fast
in it."4
The Declaration of Independence, 1776, condemned King George III "For
imposing taxes on us without our consent."5 The
Articles of Confederation, 1777, which was the government in the United States
prior to the Constitution, intentionally did not grant the federal government
the power to tax, leaving it of under "the authority and direction of the
legislatures of the several states."6
In 1787, Congress understood the FIRST REASON FOR TAXATION - namely THE NEED TO
PAY FOR LEGITIMATE GOVERNMENT EXPENDITURES. The U.S. Constitution (Article I,
Section 8.1) made provision: "To lay and collect taxes, duties, imposts,
and excises to pay the debts and provide for the common defense and general
welfare of the United States"7 but it specifically
prohibited the federal government from instituting a federal income tax (Section
9.4) "No capitation or other direct tax shall be laid, unless in proportion
to the census or enumeration hereinbefore directed to be taken."8
From 1789 until World War I, Congress raised the majority of its revenue through
tariffs (taxing everything imported into the country) and excises (taxing the
purchase of certain items such as carriages, distilled spirits, sugar, salt,
etc.) In the 1790's, the Federalist party added taxes on houses, lands, stamps,
voting at polls, etc., but this slowed economic growth and reduced tax revenue.
Resistance to these taxes led to the Whiskey Rebellion of 1794.
In 1802, Thomas Jefferson repealed all excises taxes, except on salt. This,
along with revenue from the sale of western lands, resulted in a significant
surplus. Jefferson saw an inverse relationship between tax rates and tax
revenues. (That is, higher taxes slowed the economy resulting in reduced tax
revenue; lower taxes expanded the economy resulting in increased tax revenue.)
In his Second Annual Message, 1802, Thomas Jefferson stated: "We are able,
without a direct tax, without internal taxes, and without borrowing, to make
large and effectual payments toward the discharge of our public debt and the
emancipation of our posterity from that mortal canker. It is an encouragement,
fellow-citizens, of the highest order to proceed as we have begun in
substituting economy for taxation."9
During the War of 1812, most taxes were re-imposed to pay for the war.
Afterwards they were repealed, resulting in the economy growing and tax revenues
increasing.
Gradually, Congress saw a SECOND REASON FOR TAXATION -namely ECONOMIC
ENGINEERING. Taxation could encourage some industries and discourage others (ie:
tariffs on European imports encouraged American industries to compete
profitably; whereas excises taxes on liquor, tobacco, slaves, etc., discouraged
these industries, making them less profitable.) Chief Justice John Marshall
noted in McCulloch v. Maryland (1819): "The power to tax involves the power
to destroy."10 Unfortunately, the taxes that helped
the North, hurt the South, contributing to the animosity leading up to the Civil
War.
President Andrew Jackson opposed taxation, as he stated in a Veto Message, 1830:
"Through the favor of an overruling and indulgent Providence our country is
blessed with general prosperity and our citizens exempted from the pressure of
taxation, which other less favored portions of the human family are obliged to
bear."11
In Eighth Annual Message to Congress, December 5, 1836, President Andrew Jackson
stated: "No people can hope to perpetuate their liberties who long
acquiesce in a policy which taxes them for objects not necessary to the
legitimate and real wants of their Government.... The practical effect of such
an attempt must ever be to burden the people with taxes, not for the purposes
beneficial to them, but to swell the profits of deposit banks and support a band
of useless public officers.... It is not probable that such an idea ever
occurred to the States when they adopted the Constitution.... There would soon
be but one taxing power, and that vested in a body of men far removed from the
people.... The States... would not dare to murmur at the proceedings of the
General Government, lest they should lose their supplies; all would be merged in
a practical consolidation, cemented by widespread corruption, which could only
be eradicated by one of those bloody revolutions which occasionally overthrow
the despotic systems of the Old World."12
In his 1837 Farewell Address, President Jackson stated: "There is, perhaps,
no one power conferred on the Federal Government so liable to abuse as the
taxing power.... Plain as these principles appear to be, you will yet find there
is a constant effort to induce the General Government to go beyond the limits of
its taxing power and to impose unnecessary burdens upon the people."13
But still, there was no income tax, as President Franklin Pierce stated in his
First Annual Message to Congress, December 5, 1853: "Happily, I have no
occasion to suggest any radical changes in the financial policy of the
Government. Ours is almost, if not absolutely, the solitary power of Christendom
having a surplus revenue drawn immediately from imposts on commerce."14
In 1861, the Civil War brought the first income tax to the United States. To
finance the war the North borrowed nearly $3 billion, raised $450 million by
printing greenbacks and raised $750 million through taxation. The Bureau of
Internal Revenue, established 1862, collected a tax on all incomes "whether
derived from any kind of property, rents, interest, dividends, salaries, or from
any trade, employment or vocation carried on in the United States or elsewhere,
or from any source whatever."15 Incomes under $600
were not taxed, incomes from $600 to $10,000 (equivalent to $12,000 to $200,000
today) were taxed at 3 percent, and incomes over $10,000 were taxed at 5
percent. According to John Steele Gordon, in his article "American
Taxation" (American Heritage, May/June 1996), a key principle of taxation
was learned during this time, that "people will willingly pay very high
taxes during wartime."16
In 1873, with the war over, the government responded to the cry of the people by
completely repealing the income tax. This, along with protective tariffs, caused
the economy to grow at an unprecedented rate. For the next three decades rapid
industrialization took place in the North creating wealthy industrialists, such
as the Carnegies, Vanderbilts, Rockefellers, etc. They were labeled Robber
Barons because they built their tremendous fortunes through the labor of low and
middle-class workers. Unsafe working facilities, child-labor, low wages, etc.,
in some cases produced near slave-labor conditions in factories. Indeed John D.
Rockefeller, espousing Darwin's theory of evolution, defended this as survival
of the fittest.
This gave birth to a THIRD EXCUSE FOR TAXATION - namely SOCIAL ENGINEERING. This
was a redistribution of wealth based on Karl Marx's philosophy of a "class-
struggle" between the bourgeoisie (who owned property) and the proletariat
(who did not own property). His Communist Manifesto (1847) advocated the
overthrow of the capitalist class by a world-wide working-class revolution. This
philosophy (which incidentally has resulted in over 100 million deaths worldwide
since 1917), fueled the Labor and Union movements in the East and the Populist
and Granger movements in the West and South. The proposed method of resolution
was for the government simply to take from the rich "exploiters" and
give to the poor "exploited," in a sort of government sanctioned theft
program, thus matching the greed of the industrialists with the greed of the
masses. Senator John Sherman defended this saying: "Here we have in New
York Mr. Astor with an income of millions... and we have alongside of him a poor
man receiving $1,000 a year.... and yet we are afraid to tax the income of Mr.
Astor. Is there any justice in it? Why, sir, the income tax is the only one that
tends to equalize these burdens between the rich and the poor."17
Felix Adler, founder of the Ethical Culture movement, suggested a 100 percent
tax on income above the amount required "to supply all the comforts and
true refinements of life."18
The Democratic Congress responded by passing the first peacetime income tax in
1894. It placed a 2 percent tax on all incomes over $4000 ($80,000 today), thus
taxing the top 1 percent wealthiest individuals in the country, as only eighty-
five thousand out of twelve million people had incomes over $4000 in 1894.
In 1895, the United States Supreme Court declared income tax unconstitutional in
Pollock v. Farmers' Loan and Trust Co. Chief Justice Melville W. Fuller
understood income tax to exist only during wartime: "The original
expectation was that the power of direct taxation would be exercised only in
extraordinary exigencies, and down to August 15, 1894, this expectation has been
realized."19 Justice Stephen J. Field concurred:
"The income tax law under consideration.... discriminates between those who
receive an income of four thousand dollars and those who do not.... The
legislation, in the discrimination it makes, is class legislation. Whenever a
distinction is made in the burdens a law imposes or in the benefits it confers
on any citizens by reason of their birth, or wealth, or religion, it is class
legislation, and leads inevitably to oppression and abuses, and to general
unrest and disturbance in society. It was hoped and believed that the great
amendments to the Constitution which followed the late civil war had rendered
such legislation impossible for all future time. But the objectional legislation
reappears in the act under consideration. It is the same in essential character
as that of the English income statute of 1691, which taxed Protestants at a
certain rate, Catholics, as a class, at double the rate of Protestants, and Jews
at another and separate rate."20
Theodore Roosevelt responded to the mounting demand to tax the rich by
advocating an inheritance tax on the wealthy to prevent the "transmission
in their entirety of those fortunes swollen beyond all healthy limits."21
President Taft temporarily appeased the masses by placing a 2 percent tax on all
corporate profits, realizing that only the very affluent owned corporate stock.
Convinced that public opinion would eventually prevail in demanding some kind of
tax on the wealthy, and realizing that the Marxist system of a
"centralized- controlled economy" allowed for a small group to be in
the position of control, a change of direction took place. In 1913, the Senate,
of which a full one- quarter were millionaires, switched from being adamantly
against an income tax to voting 77-0 in favor of one in the 16th Amendment. This
was followed by the wealthy immediately sheltering their fortunes in personal
holding companies, non-profit corporations, tax-exempt state and local bonds,
etc., and creating exclusions for gifts, inheritances, life insurance proceeds,
etc.
The 16th Amendment, which simply states "Congress shall have the power to
lay and collect taxes on incomes, from whatever sources derived, without
apportionment among the several States, and without regard to any census or
enumeration," laid a 1 percent tax on incomes over $3000, with a $1000
marital deduction ($80,000 today), and a top rate of 7 percent tax on incomes
over $500,000. At these rates 99 percent of 1913 Americans were exempt from
income tax.
The satisfaction the low and middle-class enjoyed in getting the wealthy to pay
"their fair share" was short-lived, as less than a year later World
War I began and the income tax was extended to embrace nearly the entire
population. The precedent of an income tax during wartime caused the masses to
readily accepted an income tax during World War I. It was a 4% tax on incomes
over $1000 ($20,000 today), with a $1000 marital deduction ($40,000 today), with
up to a 13 percent tax on high incomes.
After the war, income taxes were reduced, the economy grew and tax revenues
increased from $690 million to $711 million. In 1920, only 13 percent of the
labor force paid income taxes, filing 5.5 million returns. In his Memorial Day
Address at Arlington Cemetery, May 31, 1926, President Calvin Coolidge stated:
"While many other nations... are struggling with a burden of increased
debts and rising taxes, which makes them seek for new sources from which by
further taxation they can secure new revenues, we have made large progress
toward paying off our national debt, have greatly reduced our national taxes,
and been able to relieve the people by abandoning altogether many sources of
national revenue."22
In the mid-1930's, Franklin D. Roosevelt's "Wealth Tax" drove enormous
amounts of money out of productive investments and into shelters, many of which
were overseas. When World War II began, the precedent of wartime taxes allowed
for the adoption of the Revenue Act of 1942, which raised income taxes rates to
6 percent. In 1943, Congress passed the "pay-as-you-go" tax where
employers were required to withhold taxes from their employees' paychecks as an
emergency way to get money into the war effort to fight Hitler. Part of the
patriotic "Uncle Sam Needs You" and "Buy War Bonds"
enthusiasm, this idea came from Beardsley Ruml, treasurer of R.H. Macy &
Co., and Chairman of the board of directors of the Federal Reserve Bank of New
York. After the war, income tax rates were reduced to 3 percent, the economy
grew and tax revenues increased.
In 1951 the Korean War started, and, with the precedent of income taxes during
wartime, the public readily accepted an income tax, this time with progressive
rates starting at 11 percent. John Maynard Keynes' experimental economic
theories were implemented, which used income tax as a vehicle to prevent
inflation by removing dollars from the money supply, thus preventing too many
dollars from chasing too few goods driving prices up. (He also gave us the
questionable legacy of a "debt-stimulated economy" - where the
government went in debt - to spend money in the private sector - to create jobs
- which would alleviate unemployment - which would increase national production
- which would increase tax revenue - which would pay off the government debt.
Unfortunately this has left us with a $5.5 trillion plus debt and an economy
kept from collapsing largely by the confidence factor of the public.)
The year 1951 was also the first time deductions were allowed for giving to
501(c)3 churches and charitable organizations. (Prior to this time churches did
not have to worry about "losing their tax-exempt status," as there was
none to speak of!)
In conclusion, a few suggestions are offered corresponding to the three purposes
of taxation:
1. THE NEED TO PAY FOR LEGITIMATE GOVERNMENT EXPENDITURES - We should follow Andrew Jackson's advice and get rid of taxes for federal expenditures which are not "legitimate.";
2. ECONOMIC ENGINEERING - More effort should be placed in strengthening American industries, rather than burdening them with increasingly more tax burdens and government regulations.;
3. SOCIAL ENGINEERING - Its time we admit with the rest of the world that Karl Marx's plan for redistributing 19th century European wealth is a failure. If anything, we should engineer to strengthen marriages and families, which are the social building blocks of society.
In the final analysis, maybe the government should abandon "social
engineering" altogether, and follow Jefferson in "substituting economy
for taxation,"23 as lower taxes would allow more
investment dollars to increase production, would expand the economy and increase
tax revenue.
Whatever plan is eventually adopted, the security of our Nation will never be in
"a plan." There will always be the need for "eternal
vigilance" by the citizens. As Noah Webster stated in his History of the
United States, 1832: "If the citizens neglect their duty and place
unprincipled men in office, the government will soon be corrupted; laws will be
made not for the public good so much as for the selfish or local purposes;
Corrupt or incompetent men will be appointed to execute the laws; the public
revenues will be squandered on unworthy men; and the rights of the citizens will
be violated or disregarded. If a republican government fails to secure public
prosperity and happiness, it must be because the citizens neglect the divine
commands, and elect bad men to make and administer the laws."24
In 1988, President Ronald Reagan stated: "I believe we really can, however,
say that God did give mankind virtually unlimited gifts to invent, produce and
create. And for that reason alone, it would be wrong for governments to devise a
tax structure that suppresses and denies those gifts."25
Maybe someday, if we Americans act on our responsibility, April 15 will be
remembered for something positive, instead of the date income taxes are due and
the date Abraham Lincoln was shot?
===========================
1 James Earl "Jimmy" Carter, Jr. July 15, 1976,
Thursday, in his Democratic acceptance speech, delivered in Madison Square
Garden, New York City. Vital Speeches, August 15, 1976. The Annals of America,
20 vols. (Chicago, IL: Encyclopedia Britannica, 1968, 1977), Vol. 20, pp.
348-351.
2 Congressman J.C. Watts (R-OK). Tuesday, February 5, 1997, Library of Congress, Washington, D.C., in the televised Republican response to President Clinton's State of the Union Address.
3 John Steele Gordon, "American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens" (American Heritage, May/June 1996, pp. 63-86.
4 Isaac Backus. September 1775, in addressing the Massachusetts Assembly, in behalf of the Warren Association, on the subject of taxing religious dissenters. A Church History of New-England (Providence, 1784), p. 305. The Annals of America, 20 vols. (Chicago, IL: Encyclopedia Britannica, 1968), Vol. 2, p. 366.
5 Declaration of Independence. July 4, 1776. American Historical Documents - Harvard Classics, 50 volumes (New York: P.F. Collier & Son Company, 1910), Vol. 43, p. 160.
6 Articles of Confederation. July 9, 1778; March 1, 1781, Article VIII, Section 2. Michael Farris, Constitutional Law - Original Documents and Decisions of the United States Supreme Court (Paeonian Springs, VA: Home School Legal Defense Association, 1991), Chap. 3, p. 25.
7 United States Constitution. September 17, 1787, Article I, Section 8.1. American Historical Documents - Harvard Classics, 50 vol. (New York: P.F. Collier & Son Co. 1910), Vol. 43, p. 196.
8 United States Constitution. September 17, 1787, Article I, Section 8.1. American Historical Documents - Harvard Classics, 50 vol. (New York: P.F. Collier & Son Co., 1910), Vol. 43, p. 196.
9 Thomas Jefferson. December 15, 1802, in his Second Annual Message to Congress. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, pub. by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of Nat. Lit. & Art, 1789-1902, 11 vols., 1907, 1910), Vol. I, pp. 342-345.
10 John Marshall. 1819, in the case of McCulloch v. Maryland, 4 Wheaton 316, 431. John Bartlett, Bartlett's Familiar Quotations (Boston: Little, Brown and Company, 1855, 1980), p. 402.
11 Andrew Jackson. May 27, 1830, in a Veto Message to Congress. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, published by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of National Literature and Art, 1789-1902, 11 vols., 1907, 1910), Vol. II, p. 489.
12 Andrew Jackson. December 5, 1836, in his Eighth Annual Message to Congress. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, published by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of National Literature and Art, 1789-1902, 11 vols., 1907, 1910), Vol. II, pp. 236, 240-241, 243-244, 260.
13 Andrew Jackson. March 4, 1837, in his Farewell Address. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, published by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of National Literature and Art, 1789-1902, 11 vols., 1907, 1910), Vol. II, pp. 292-308. The Annals of America, 20 vols. (Chicago, IL: Encyclopedia Britannica, 1968), Vol. VI, p. 310.
14 Franklin Pierce. December 5, 1853, in his First Annual Message to Congress. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, published by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of Nat. Lit.& Art, 1789-1902, 11 vols., 1907, 1910), Vol. 5, pp. 207, 213.
15 John Steele Gordon, ?American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens? (American Heritage, May/June 1996, pp. 72.
16 John Steele Gordon, American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens? (American Heritage, May/June 1996, pp. 72.
17 John Steele Gordon, American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens? (American Heritage, May/June 1996, pp. 74.
18 John Steele Gordon, American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens? (American Heritage, May/June 1996, pp. 74.
19 United States Supreme Court. 1895, Chief Justice Melville W. Fuller, in
the case of Pollock v. Farmers' Loan and Trust Co., 157, U.S. 429, 574 (1895),
declaring income tax unconstitutional. Harold M. Groves, University of
Wisconsin, Financing Government - Revised Edition (New York: Henry Holt and Co.
Inc., 1939, 1945), p. 156.
20 United States Supreme Court. 1895, Justice Stephen J. Field, in the case of Pollock v. Farmers' Loan and Trust Co., 157, U.S. 429, 574 (1895), declaring income tax unconstitutional. Harold M. Groves, University of Wisconsin, Financing Government - Revised Edition (New York: Henry Holt and Company, Inc., 1939, 1945), p. 156.
21 John Steele Gordon, American Taxation - How a Nation born out of a Tax Revolt has - and especially hasn't - solved the problems of taxing its citizens? (American Heritage, May/June 1996, pp. 74.
22 Calvin Coolidge. May 31, 1926, Memorial Day, at Arlington Cemetery. Calvin Coolidge, Foundations of the Republic - Speeches and Addresses (New York: Charles Scribner's Sons, 1926), pp. 429-437.
23 Thomas Jefferson. December 15, 1802, in his Second Annual Message to Congress. James D. Richardson (U.S. Representative from Tennessee), ed., A Compilation n of the Messages and Papers of the Presidents 1789-1897, 10 vols. (Washington, D.C.: U.S. Government Printing Office, published by Authority of Congress, 1897, 1899; Washington, D.C.: Bureau of Nat. Lit. & Art, 1789-1902, 11 vols., 1907, 1910), Vol. I, pp. 342-345.
24 Noah Webster. 1832. History of the United States (New Haven: Durrie & Peck, 1832), pp. 307-308, para. 49. Stephen McDowell & Mark Beliles, "The Providential Perspective" (Charlottesville, VA: The Providence Found., P.O. Box 6759, Charlottesville, Va. 22906, Jan.94), Vol. 9, No. 1, p. 6.
25 Ronald Wilson Reagan. December 1, 1988, at a dinner honoring Representative Jack F. Kemp of New York. Frederick J. Ryan, Jr., ed., Ronald Reagan - The Wisdom and Humor of the Great Communicator (San Francisco: Collins Publishers, A Div. of Harper Collins Publ., 1995), pp. 82, 107.
=======================
William J. Federer is a best-selling author and nationally known speaker on
America's noble heritage. He is a candidate for the U.S. Congress in Missouri's
3rd District. For his books or other materials contact: AmeriSearch,
Incorporated, Post Office Box 20163, Saint Louis, Missouri 63123, www.amerisearch.net,
toll free 1-888-USA-WORD, Permission granted to reproduce. 17 American Insights,
April 1998