Mises Daily

The Price of Envy

By now, you probably have filed your 2001 federal income tax return, noted how much you paid in federal income taxes for the year, and concluded that your taxes are too high.

Attorney Joseph H. Choate, if he were alive today, would agree with you. Choate thought federal income tax rates were too high back in 1894, when the income tax consisted of a single rate--2 percent--exacted on income in excess of what in today’s money would amount to roughly $80,000.

Choate came to argue the case against the income tax that came before the Supreme Court in 1895. He won the case.

In Choate’s day, a federal income tax was something new. The U.S. had no income tax until 1861, when the federal government imposed one to help finance the military conquest of the South in the War between the States. The tax remained in place after the war’s end until 1872, when Congress repealed it.

The idea of a federal income tax remained popular in some quarters, however, and soon those quarters were agitating to have the tax reinstated.

The government didn’t need the money. Back then, the government obtained the bulk of its revenue from import tariffs, and in the decades following the war, trade boomed, and the government found itself running persistent budget surpluses.

Financing the government was not the issue. Class consciousness was.

Income inequality has been a fact of economic life throughout human history. America in its first 100 years was no exception. But in the last decades of the 19th century, America’s premier capitalists accumulated gargantuan fortunes, and income inequality grew more pronounced.

By the 1890s, John D. Rockefeller was earning upward of $40 million a year in Standard Oil stock dividends. Andrew Carnegie’s income from his steel companies topped $20 million a year. (In 1901, Carnegie retired after selling his steel interests for $300 million--roughly $6.5 billion in today’s dollars.) Vanderbilt, Frick, Harriman, and many others amassed smaller but nonetheless spectacular fortunes.

To progressives and other redistributionists, the new income inequality was unacceptable.

The import tariffs only increased the income inequality. The tariffs were regressive taxes: they raised prices of basic goods and were thus borne disproportionately by the poor and middle class.

An income tax, its advocates argued, was the fix. By replacing the tariffs with an income tax, income inequality could be reduced, and the tax burden could be shifted onto the wealthy.

The income tax advocates were persistent. Between 1874 and 1894, 68 bills were submitted in Congress to restore the tax. The 68th bill was tacked on to the Revenue Act of 1894 (now known as the Wilson-Gorman Tariff Act of 1894), which Congress passed on August 15, 1894. President Cleveland allowed the bill to become law without his signature.

The new income tax was soon challenged before the Supreme Court. On April 8, 1895, the Court declared the income tax unconstitutional.  To Choate, the income tax was not a slippery slope but the thin edge of a razor. He warned that the 2-percent rate of the 1894 income tax might one day rise to 20 percent.

Choate, of course, was right. In 1913, the 16th amendment to the Constitution was ratified, giving Congress the authority to tax income. Instead of taking 2 percent of income over $80,000 as it did in 1894, the government today takes 15 percent of income up to $45,200, 27.5 percent of income between $45,200 and $109,250, 30.5 percent on income between $109,250 and $166,500, 35.5 percent on income between $166,500 and $297,350, and 39.1 percent on any income above $297,350. And that’s for married tax filers. The income thresholds are lower for single filers.

Envy has a steep price.


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