Mises Daily Articles
A Taxing Life
April 17, 1999
The Trouble with the Income tax
As many of us have been filling out income tax forms over the past few weeks, it's been hard not to wonder: How did we get into this mess in the first place? Why did our ancestors ever agree to a complicated system with a morass of different rates, which means a bureaucracy waiting to happen?
The answer: As with so many expansions of governmental power, the income tax was first sold as a minor measure. Some politicians and journalists issued warnings, but only after enactment of the tax did the full consequences become apparent.
The warnings began in 1894, when Congress passed a bill imposing the first-ever peacetime income tax. Tied to a tariff-reduction measure, the bill required all citizens with incomes of more than $1,000 to pay a 1 percent tax. Since the dollar was worth much more then than it is now and incomes were lower, only about one out of every 100 Americans was affected.
Leading newspapers were nonetheless furious. The New York Times, then a conservative Republican publication, called the income tax law "a vicious, inequitable, unpopular, impolitic and Socialistic scheme ... the most unreasoning and most un-American movement in the politics of the last quarter century." The Washington Post, then a conservative Democratic newspaper, argued that record-keeping requirements would force an employee to be "catalogued by his employer, as though he were a beast of burden."
The Post called the graduated income tax an "abhorrent and calamitous monstrosity" that "represents a repudiation of the spirit as well as the letter of Democracy.... It punishes everyone who rises above the level of mediocrity.... The fewer additional yokes put about the necks of the people, the better for the commonwealth."
The Chicago Tribune also predicted that the income tax would lead to distrust: "The tax can only be collected by prying into the private affairs of the people by arbitrary means hateful to the citizens of the republic." The Dallas Morning News complained that the income tax "attacked constitutional guarantees for tenure of property, for freedom of industry, for freedom of contract and for personal security."
In 1895 the Supreme Court declared the income tax measure unconstitutional. It ruled that any such tax had to be levied in proportion to population, and not differentially by income level. The Washington Post lauded the court's decision: "This is still a land where honest men cannot be made to pay tribute." The New York Times predicted that "neither the Democratic nor the Republican party will ever attempt to revive the corpse that the Supreme Court buried yesterday."
But the corpse was soon walking. Progressive Era politics created pressure for more federal spending, and the politics of class warfare led to support for having the rich pay more. In July 1909, Congress sent an income tax amendment to the states for ratification.
Again The New York Times was in opposition: "When men get the habit of helping themselves to the property of others they are not easily cured of it." The Washington Post, however, was starting to become a house organ for the government bureaucracy: It changed sides and argued that an income tax was needed to "wipe out the deficit [then $89 million] without impairment of the public service or calling a halt upon needed public improvements."
The Post argued speciously that the income tax would place a check on spending habits: "Congress will have to go slow in making appropriations unless the President is to be put in an embarrassing position. He will not want to increase the income tax, and if he had to do it would not hesitate ... to put the blame where it belonged. The provision will be a whip in the hands of the president to keep Congress toeing the mark of economy."
The Dallas Morning News was even more optimistic, arguing the constitutional amendment would give Congress only authority to levy an income tax: "There would still be the question of whether the Congress would exercise the power thus given."
New York and Massachusetts both rejected the amendment, but smaller states supported it. In February 1913, the 16th Amendment, authorizing an income tax, was ratified. By October, Congress had passed implementing legislation. But no one simply looking at the present was upset: Taxes were only on the rich, and rates were low.
Only those who looked ahead were concerned. The New York Times soberly reported that the new income tax had established a "rock of credit from which abundant streams of revenue will flow whenever Congress chooses to smite it." The Times predicted, "We may be sure that it will be smitten hard and always harder, until the national conscience, if there is such a thing, revolts against the inequality and injustice of such a plan of taxation."