Unlike Bush, our first Republican president was a long-standing proponent of progressive taxation. As New York Times reporter Stephen R. Weisman explains in his new book, The Great Tax Wars, Lincoln started early, when he pushed (unsuccessfully) for a graduated property tax as an Illinois state legislator, arguing that such an approach was not only equitable within itself, but politically savvy, since the “wealthy few … are not sufficiently numerous to carry the elections.” Then, as president, facing the burden of finding money to wage the Civil War, Lincoln took an even more radical step. Congress had been considering only higher tariffs and excise taxes to pay for the war. But “after a storm of criticism that these new steps would fall most heavily on the poor,” writes Weisman, it became clear that something different was needed. After the Union’s devastating defeat at Bull Run, and amid a spate of war profiteering and other corporate scandals, Rep. Schuyler Colfax, a Republican from Indiana, suggested imposing a federal income tax, with higher rates for those best able to pay. Lincoln happily supported the idea.
Many in his own party furiously disagreed. Thaddeus Stevens, the Pennsylvania Republican who chaired the House Ways and Means Committee, complained–in language that still echoes in The Wall Street Journal editorial pages–that it was “vicious” and “unjust” to impose “a punishment of the rich man because he is rich.” When Congress passed a primitive income tax bill in 1862, Lincoln’s defiant treasury secretary, Samuel Chase, ignored the law, preferring to fund the war through more government borrowing (sound familiar?). When that source became difficult to tap and Union setbacks continued, Chase talked Lincoln into printing more greenbacks–despite justified fears that doing so would spark inflation.
The following year, Congress passed, and Lincoln signed, a more carefully thought out income tax bill, which included the creation of a new agency to administer it. The new law established a two-rate system of 3 percent (for incomes over $600) and 5 percent (for incomes over $10,000), as well as taxes on inheritances, corporations, and various commodities. By the end of the war, top tax rates had been raised to 10 percent to squeeze “the millionaires … who can afford to pay liberally of their means” as one proponent put it. But while the North funded its side of the war with a progressive income tax, the South took too long to follow suit. Unbacked by revenue, Confederate money soon became almost worthless, costing the South its ability to finance its rebellion. The North’s income tax, Weisman notes, was “crucial to the prosecution and winning of the civil war.”
Unfortunately, Lincoln’s example is lost on President Bush. Shortly after he took office, Bush pushed through a tax bill that drastically reduced taxes on the wealthy. Supposedly, projected surpluses were to cover the huge cost. But since then, as the costs of war and the size of deficits have mounted, the administration hasn’t pushed to raise taxes–as virtually every other president in wartime has done–but actually has sought to cut taxes further. Hints from the White House suggest that in his State of Union address, Bush will call for making last year’s tax cuts permanent and perhaps for replacing the corporate income tax with a far more regressive national sales tax–a move that, if successful, would probably put the personal income tax on the road to oblivion, too.
As Weisman makes clear in his excellent history of the income tax, this back-and-forth battle between Democrats and Republicans over income taxes is part of a debate that has held remarkably consistent over the years.
As every schoolchild is taught (and as many adults try to forget), the Founding Fathers adopted the Constitution to give the federal government the power to run the country effectively–and to do so, the power to tax. But the Founders’ dream of a robust United States took a long time to come to fruition because the taxing power lay largely dormant for the first 70 years after the Constitution was ratified. Instead, the federal government funded its limited activities through highly regressive consumption taxes, mainly protectionist import duties.
The Civil War income tax temporarily changed the consumption tax approach, and even after the war the income tax was maintained for a while to help pay off the war’s huge debt. At its peak in 1867, the income tax accounted for one-quarter of total federal revenues. But the Republican-controlled Congress soon returned to its Whiggish roots, gradually reducing and finally repealing the tax in 1872, and reverting to high, protectionist tariffs to pay its bills. “By the end of Reconstruction,” Weisman writes, “the system of high tariffs was impregnable and the income tax but a memory.”
Not everyone agreed with this return to regressivity. Republican Sen. John Sherman of Ohio, who later authored the Antitrust Act, for example, argued strenuously that it was unfair to tax the consumption of the poor and middle classes while leaving the rich alone. But for two decades after repeal of the income tax, proposals to reinstate it were rebuffed.
By the 1890s, Weisman points out, tariffs had jumped to “nearly 50 percent of the value of goods purchased by consumers”–an enormous burden on most Americans, but a boon to U.S. corporations who could keep their own prices high due to the absence of price competition from abroad, making the tariff system effectively a negative tax on the wealthy. Voters became fed up with the GOP’s corrupt corporate toadying and in 1892 elected Democrat Grover Cleveland, who promised reform, to the White House. Two years later, Cleveland joined the populist Rep. William Jennings Bryan of Nebraska in a fight to restore the income tax. Bryan’s proposal was remarkably timid: a mere 2 percent tax, applicable to corporations and the 2 percent of the population making more than $4,000 a year.
Nevertheless, it was quickly attacked. During the congressional debate, one opponent argued that poor Americans would feel “humiliated and degraded” by not having to pay the income tax, fearing they would lack the “first-class citizenship” accorded those whose incomes were sufficiently high. Noting that poor Americans paid far more than their fair share of tariffs, Bryan replied, “If taxation is a badge of free men, the poor people of this country are covered all over with the insignia of free men.” Another critic contended that the 2 percent income tax would drive “rich men to go abroad and live,” to which Bryan countered, “Of all the mean men I have ever known, I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 percent deep.”
Congress eventually approved the 1894 income tax bill, but it faced one more hurdle: the U.S. Supreme Court. The high court of the late 19th and early 20th centuries was one of the most notorious in American history, legitimizing Jim Crow laws in Plessy v. Ferguson by establishing the infamous “separate but equal” precedent for black and white facilities, and rejecting a state law to establish a maximum work week of 60 hours in the 1905 decision Lochner v. New York.
In 1895, the court considered the newly passed income tax law, which was being challenged by corporate interests. By a 5-4 vote, the court declared it to be unconstitutional. There was no single majority opinion in Pollack v. Farmers’ Loan and Trust Co., but rather several opinions, offering conflicting and wholly unpersuasive legal arguments for the decision. But the underlying rationale was clear: The income tax, wrote one justice, is “an assault on capital,” a path to “sure decadence,” and a “stepping-stone to … a war of the poor against the rich.” (The contemporary conservative tactic of attacking those who favor progressive taxes as indulging in “class warfare” is apparently nothing new.) It would take two decades and a constitutional amendment to undo the decision.
In the early part of the 20th century, concerns about excessive concentrations of wealth and power continued to grow. Ironically, Theodore Roosevelt, who was number two on the extremely conservative McKinley-Roosevelt ticket that defeated Bryan in the presidential election of 1900, came to personify the Progressive campaign to improve tax policies. In the spring of 1906, President Roosevelt proposed restoring the federal estate tax. Later that year, he called for a graduated tax on income as well.
But Roosevelt was more talk than action when it came to taxes. His Republican successor, William Howard Taft, who believed it was his mission to fulfill Roosevelt’s goals, succeeded in enacting a 1 percent corporate income tax in 1909 (dubbed an “excise tax” to get around the Pollack decision). Taft’s efforts to pass a personal income tax, however, were thwarted by the GOP Congress. As a sop to Taft and public opinion, Congress instead approved a constitutional amendment to overrule Pollack, confidently assuming that it would fail to gain the required support of three-fourths of the mostly Republican-controlled state legislatures.
A few, mostly southern states, quickly endorsed the income tax amendment, led by Alabama in 1909 and followed by Georgia, Illinois, Kentucky, Maryland, Mississippi, Oklahoma, and Texas. But support in the wealthy northeast and mid-Atlantic states looked doubtful. Then Roosevelt intervened once again. His petulant decision in 1912 to challenge Taft for the presidency as a “Bull Moose” split the Republican party, and, Weisman explains, “Democratic routs of previously Republican [state] legislatures … turned the tide [for ratification].”
Entrenched business interests fought bitterly in places like New York, where a Republican newspaper argued that the tax would “divide the population into two classes, the class which contributes to the support of the Government, and the class which does not contribute.” Again, one hears almost exactly this argument from conservatives today. One GOP lawmaker told The New Yorker’s Nicholas Lemann in 2001 that unless Congress passed Bush’s tax cuts for the wealthy, “[t]he tax code will destroy democracy, by putting us in a position where most voters don’t pay for government.” The truth, of course, is that ordinary citizens pay dearly for government, not just through their share of the income tax but also through payroll taxes, state, and local taxes, and other levies that fall much harder on them than on the rich. The idea that the wealthy alone carry the burden of paying for government is as wrong today as it was a century ago. As Weisman points out, that Republican newspaper’s comment was “absurd … given that the class that supposedly ?does not contribute’ was actually paying most of the revenues in the federal treasury as customs duties and excise taxes.” By early 1913, all but six states had ratified the 16th Amendment authorizing Congress to “tax incomes from whatever source derived.”
The new Democratic president, Woodrow Wilson, became the first to implement this new authority, which he did eagerly, quickly proposing to slash tariffs and replace them with a progressive income tax. The protectionist tariff system, Wilson argued, “cuts us off from our proper part in the commerce of the world, violates the just principles of taxation, and makes the government a facile instrument in the hand of private interests.” To blunt charges of class warfare, Wilson’s Treasury secretary, a wealthy businessman named William Gibbs McAdoo, added his voice, condemning the tariff system as “a general tax on the entire population for the benefit of private industry,” the effect of which was to raise consumer prices not only on imports but on domestic products as well.
At the end of the summer of 1913, over strenuous Republican opposition, the Democratic Congress approved Wilson’s tax reform program, which sharply cut tariffs and exempted many necessities altogether. To replace the lost revenue, the new law established a progressive income tax on the wealthiest 4 percent of the population, with rates topping out at 7 percent on incomes greater than $500,000.
Wilson’s tax reform was a huge victory for tax fairness. Conservatives were, of course, not happy. The president of the American Bar Association accused Democrats of “seeking to turn back the tide of progress” and “plunge us into a sea of socialism.” The National Association of Manufacturers issued stickers saying “Free Business from Political Persecution.” But such rants, at that moment in history anyway, were generally ignored.
The new income tax was propitiously timed. With the United States’ entry into World War I, the federal budget jumped from less than a billion dollars in 1916 to almost $14 billion two years later. “The income tax,” Weisman notes, “was needed to finance that explosion in spending.” By the war’s end, the top income tax rate had reached 77 percent, corporate rates had increased sharply, and a permanent estate tax had been instituted as well.
Weisman ends his tale with the Republican takeover of the Congress in 1918 and the White House two years later. But he points out that while taxes were cut sharply after World War I, the philosophy “that taxes ought to be borne according to the ability to pay” had taken root in the American psyche. He notes that in 1913, nearly 95 percent of federal revenues came from regressive taxes on consumer spending. Yet by 1930, even after Presidents Harding and Coolidge reduced taxes, two-thirds of federal revenues came from progressive personal and corporate income taxes–percentages similar to today’s.
The battle over just what constitutes equitable taxes will probably never be conclusively settled, if only because so much money is at stake. Since Wilson first instituted the income tax, conservative presidents and Congresses have typically advocated less-progressive tax rates and more loopholes for corporations and the wealthy, while liberals have usually pushed in the opposite direction. But the terms of the tax debate haven’t much changed. To this day, the rich are alternately tarred as unpatriotic tax evaders and praised as swashbuckling engines of economic growth (who somehow manage to become uninspired and indolent at the thought of paying taxes).
But with all the ebbs and flows, even politicians who favor the most outrageous tax giveaways to the well-off have tended to couch their arguments in faux-populist tones. George W. Bush, for example, finds it necessary to insist–preposterously–that his recent upper-income tax cuts made the tax system more progressive and that his repeal of taxes on inherited wealth reflects his concern for small businesses and farmers.
Weisman successfully gets to the heart of what the tax fights were really about from 1860 to 1920, and thereby helps us understand much better what they’re about today. With the Bush administration’s new economic team in place and an eye on reelection in 2004, it’s a good bet that history–tax history, anyway–will soon be repeating itself once again.