The Controversial History of the Graduate Income Tax

By Earl Hunsinger

In a letter written in 1789, Benjamin Franklin said that, "In this world nothing can be said to be certain, except death and taxes." Many before and since have agreed with this sentiment, and with the comparison. In the United States, never is this more true than on April 15th. In addition to being a painful subject, most people probably also consider taxes to be a boring subject. Even so, you might find the history of the graduated income tax in the United States to be an interesting story, although it's doubtful that it will make you feel better about paying your taxes.

The United States had very few taxes in its early years. The nation's first sales tax was implemented as a result of the high cost of the War of 1812. This was a tax on the sale of gold, silverware, jewelry, and watches. However, in 1817, Congress did away with all internal taxes. Instead, tariffs on imported goods were used to provide sufficient funds to run the government.

When war came again in 1862, this time in the form of a civil war, Congress again felt that taxes were needed. Included in these was the predecessor of today's graduated, or progressive, income tax. It was abolished in 1872, but was re-instituted in 1894. Incomes over $4,000 were taxed at a rate of 2%. This was very controversial at the time. Opponents of the income tax derided it as "class legislation." One economist argued that it violated the principle of equality before the law by penalizing the rich and favoring those below the exemption level. Some even went further, calling it communistic or the tool of socialist labor.

The opposition to the income tax was so serious that it was declared unconstitutional in 1895. The Supreme Court felt that it was a violation of the direct tax clause of the constitution and the principle of federalism upon which the country was founded. Many rejoiced over this decision. For instance, the New York Tribune commented, "Thanks to the Court, our government is not to be dragged into a communistic warfare against the rights of property and the rewards of industry."

Of course, the issue was far from settled. Politicians continued to argue for a graduated income tax, one that the Supreme Court would accept. Yet, even these men recognized its potential problems. In his December 7, 1906 message to congress, President Roosevelt urged them to consider an income tax, but admitted that, "it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man."

In 1908, William Howard Taft was elected president. In 1913, he agreed to support a constitutional amendment authorizing federal income taxes. This would solve any problems with an income tax being viewed as unconstitutional.

Opponents argued long and hard against such an amendment. Richard E. Byrd, who was speaker of the Virginia House of Delegates, warned that it would be the beginning of a new and dangerous period in American government. "A hand from Washington will be stretched out and placed upon every man's business; the eye of the Federal inspector will be in every man's counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of Federal inspectors, spies and detectives will descend upon the state . . . Who of us who have had knowledge of the doings of the Federal officials in the Internal Revenue service can be blind to what will follow?"

Despite such impassioned pleas, it was ratified by the states in February of 1913, becoming the sixteenth amendment to the U.S. constitution. Almost immediately, in 1915, congressmen were complaining that the new tax forms, dubbed 1040, were too complicated.

The new law taxed income over $3,000 for an individual or $4,000 for a couple, at rates starting at a mere 1% and increasing to 6%. Since then, the rates have been progressively increased.

There is a hidden pitfall, at least for taxpayers, that perhaps was not publicly considered when the graduated income tax was first enacted. Initially it was meant to force those with greater wealth to bear a greater burden for government, without creating a hardship for those with limited means. For example, an income of $4,000 in 1913 was equivalent to an income of close to $100,000 today. The problem is inflation. Of course, tax rates have also gone up, but even if they hadn't, the average income has. An income of $4,000 in 1913 made you wealthy. Today you can make several times that and still be struggling. Yet the graduated income tax is designed so that the more you make, the more you pay, regardless of your relative worth or ability to pay. Because of inflation, your income may double over a period of years. The cost of living also doubles, at least. This means that, even though you are receiving, and spending, a larger number of dollars, you are not actually any better off. Yet because your income has officially increased, the graduated income tax puts you in a higher tax bracket, requiring a larger percentage of your income.

Despite its controversial history, the graduated income tax is here to stay. If anything, Benjamin Franklin's words are truer now than they were when he wrote them, "In this world nothing can be said to be certain, except death and taxes."