Tax Analysts Blog

A Century of Soaking the Rich

Posted on Feb 20, 2013

Originally, the income tax was a rich man’s problem.

Next week, Americans will celebrate – or mourn – the 100th birthday of the 16th Amendment to the Constitution. On February 25, 1913, Secretary of State Philander Knox formally certified ratification, establishing once and for all that Congress had the to power to tax Income "from whatever source derived."

Lawmakers made the most of that authority, although it took them eight months to actually pass an income tax. But when they did, they made sure it applied to the nation’s economic elite -- and pretty much no one else.

The 1913 income tax exempted every family earning less than $4,000 – about $70,000 in today’s dollars. By most estimates, that left about 98 percent of Americans outside the tax man’s grasp.

And those poor souls who did have to pay? Well, they weren’t so poor, and they didn’t pay much; rates started at just 1 percent and topped out at 7 percent.

Critics of our current system like to point to these rates as evidence that the tax was never meant to be a heavy burden on those who paid it. As Raymond Keating argued in a frequently-cited essay on "Original Intent and the Income Tax," the American people "supported the income tax because it was originally meant to impose only very low tax rates on only the highest incomes."

Keating was half right: the tax was intended to burden only the rich. But it wasn’t necessarily intended (at least by its early supporters) to keep its low rates for very long. Indeed,just five years after they established the 7 percent rate of 1913, lawmakers had pushed the top bracket to 77 percent.

To be sure, the onset of World War I explains this quick run-up in rates. But it doesn’t change the fact that lawmakers chose to raise this tax and to raise it a lot. In the quest for revenue to fight the war, Congress preferred a super-high rate on incomes to a range of alternatives, including broader and heavier taxes on personal consumption. (Although they raised consumption taxes, too: just not as much as they might have.)

So what’s the moral of this story? According to Keating, it’s a cautionary tale for those who would be seduced by the siren song of progressivity. "Alas, people attracted to the income tax through appeals to envy soon discovered that envy knows no boundaries and never makes for good economic policy," he wrote. "Government rather quickly transformed the income tax from a light tax on high incomes to a heavy tax on almost all incomes."

Well, not so much. "Rather quickly" obscures the fact that it took 20 years and another world war to transform the income tax from a "class tax" on the rich to a "mass tax" on everyone else. The income tax of World War I got a lot heavier, but it stayed almost as narrow as its 1913 predecessor. Exemptions came down, but the tax remained quite narrow.

The real moral of the story is about fairness. The income tax grew quickly during World War I because it struck most people as fair. Which doesn't mean that it was fair, in any timeless or ideal sense. But it seemed fair to the people who mattered: voters and their elected representatives. And it kept seeming fair throughout the Republican 1920s and into the Democratic 1930s. Americans liked the income tax while it was a narrow burden on the rich.

But they also liked it when it became a broader tax on the middle class. Asked in a 1940 Gallup poll how the country should pay for its stepped-up defense program, respondents preferred broader income taxes to a new national sales tax by 54 percent to 30 percent. (And 8 percent wanted both!)

In other words, the fairness of taxing people according to their income -- and doing it with progressive rates -- seemed fair, whether the tax was narrow or broad. The income tax is the levy we all love to hate. But there's a reason it's lasted so long: Americans sort of like it.

Read Comments (3)

Rusty SteeleFeb 20, 2013

The original 1913 income threshold ($4000, or $70000 adjusted for inflation) is
oddly close to the Michael Graetz add-on VAT proposal. His plan would exempt or
zero rate the first $100,000 of income, per year, per taxpayer. Okay, not
identical, but same ballpark. Coincidence? As you say, the moral of the story
is fairness, but what's fair these days? And who said the income tax must be a
'mass' tax. Maybe they had it right originally.

von gneisenauFeb 21, 2013

The income tax grew quickly during World War I because it struck most people as
fair. Which doesn't mean that it was fair, in any timeless or ideal sense. But
it seemed fair to the people who mattered: voters and their elected
representatives.

It seemed fair to most voters because most voters weren't net payors - if I
weren't a net payor it would seem fair to me too

Nat CFeb 27, 2013

At least they had the sense back then to try and fund the war effort. NOT SO
with IRAQ and AFGANHISTAN - Tax Cuts went thru anyway.

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.

By submitting this form, you accept our privacy policy.

* REQUIRED FIELD

All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.