The federal progressive income tax has been an issue that has been argued on the floors of Congress, in front of the United States Supreme Court, in front of television cameras, and around the dinner table. The tax served its purpose in supplementing revenue during the Civil War and World War I, but continued taking from Americans? income in peacetime, allowing fewer dollars to be spent on goods and services. When the American government was in a deficit, it was harder to argue for the abolishment of the income tax, but now that Congress is looking at a government surplus for the first time in decades, the question is raised again: Do we have to have a progressive federal income tax?
Prior to the Civil War, the vast majority of government funds came from tariffs on imports. The only exception was during the War of 1812, when blockades by the British, as well as the war being with the young country?s number one trade partner, lowered income from tariffs. Government revenues were accompanied by funds from the sale of public lands, such as the Louisiana Territory and the Oregon Country, as well as excise taxes, which were introduced during the War of 1812 (Hansen 62).
little to no inflow of customs duties, as well as an outflow of investments to foreign countries by investors who feared war. After attempts to raise money by selling bonds, doubling tariffs, increasing excise taxes, and creating license fees, it was realized that another form of tax was needed (Paul 7-8, Witte 67).
The details of the tax, however, were not agreed on easily. The tax was originally proposed to tax land in each state, with revenue to be handed out according to population. The idea of this tax created a ?congressional rebellion,? led by the South and West, because money from their land would go to states in the Northeast (Witte 68). The land tax shortly fell apart, and an income tax was proposed to the floor of the House of Representatives, enclosing ?a tax of three percent on all incomes over $600 a year? (68). The Senate passed a bill asking for a five percent tax on all income over $1000 a year on the same day. The Conference Committee came up with a three percent tax on annual incomes over $800 and the first income tax was born (68).
The tax was not progressive, and it was also not implemented. By 1862, the tax was altered by setting progressive rates ?at three percent on incomes between $600 and $10,000; five percent between $10,000 and $50,000; and 7.5 percent over $50,000? (68). The progressive rates were not, however, set for ?redistributing income from higher to lower income classes? or to distribute taxes ?across the population in such a way as to cause the least hardship (Davies 21, 77). The progressive rates were set simply to raise more income (Witte 69).
The income tax, along with other efforts to raise revenue in wartime, were repealed almost immediately after Lee?s surrender at Appomattox Court House. The cries for income tax repeal came strongest from the Northeast, who as a region paid a much higher percentage into the tax than other parts of the country. The progressive structure was dropped for a flat tax in 1867, and the entire tax was repealed in 1872. Although disliked by Northeastern states and California, who voted 61-14 as a group in favor of repeal, the income tax, according to Randolph Paul, ?produced needed revenue at a critical period of American history when other revenue-raising methods would have probably failed? (29). Paul also points out that tax revenue accounted for 25 percent of government expenditures in 1864 and 1865, compared to only ten percent in 1862, the first full year of the income tax (29).
For more than twenty years, Congress turned to tariffs and excise taxes to again be the primary sources of government revenues. Cries for the return of the income tax continued inside and outside of government, but efforts were voted down by the Republican majority in Congress, saying that additional revenue was not needed due to already existing surpluses in the budget. Those surpluses not only existed, but they soared about $100 million per year in the 1880s (Witte 70).
The success of the 1880s ended abruptly with the Panic of 1893, which was ?caused by a run on gold and fears in the eastern financial community that the nation would go off the gold standard for the dollar? (70). The panic lowered government
revenues and soon eliminated existing surpluses. At the same time, the Democratic Party gained control of both the presidency and Congress for the first time in the post-Civil War era. Formal debates over the renewal of the income tax soon followed, and a flat tax of two percent on all income was approved (Witte 70-73).
Although both parties almost unanimously approved the first income tax because, according to Susan B. Hansen, investments in the war-torn North were better protected if they were taxed than if they were lost in the war effort, many opponents gave their reasons for abolishing this tax. The new income tax was called undemocratic, socialist, and impossible to fairly implement, but these reasons were easily defeated with rational thought (Hansen 80, Seligman 518-21).
Not being able to win in Congress, opponents of the income tax then turned to the only body left: the Supreme Court. According to the United States Constitution, ?all duties, imposts, and excises shall be uniform throughout the United States? and ?no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken? (Seligman 531). After two hearings, the U.S. Supreme Court, by a 5-4 decision, declared the 1894 income unconstitutional because it was a direct tax and could not be assessed according to state population (Paul 59, Witte 73, Seligman 531).
down for over a decade, with the lone exception occurring during the Spanish-American War, when an income tax on corporations was submitted to Congress as a way to pay for the war effort. The measure was altered to become ?a special excise tax on the gross receipts of companies refining petroleum or refining sugar? which was later upheld by the Supreme Court (591). In 1906, President Theodore Roosevelt said that an income tax would be ?a desirable feature of federal taxation? adding that he hoped that one could be created without being struck down (591). But only two years later, most realized that one could not be created, and the idea of a constitutional amendment became part of the Democratic Party platform (Witte 74, Seligman 589-91).
In 1909, two different tax bills, one with a flat tax of three percent on all income over $5,000, and another with a graduated tax from two to six percent on incomes above $5,000 were written, even though both were in direct violation of the Supreme Court?s ruling. They were later combined, and congressmen from both parties agreed to vote for the compromise, much to the chagrin of Senator Nelson Aldrich, who a not only against the tax itself, but was also against a direct confrontation between Congress and the Supreme Court. As part of the leadership of the Senate, he managed to delay vote on the issue until he could meet with President William Taft. The two agreed that the only way to alleviate the situation was to propose a constitutional amendment that would allow ?an income tax without equal apportionment among the states? (Witte 75). Aldrich hoped that the amendment would kill the income tax bill currently on the floor, and his hopes
became reality as the bill died without a vote. The constitutional amendment, however, passed the Senate unanimously on July 5, 1909 and passed the House a week later by a vote of 318 to 14 with 55 abstaining (Witte 74-75, Paul 97, Seligman 594).
But what Aldrich did not expect was states to approve the measure. Only one state, Alabama, approved it in 1909, but Georgia, Illinois, Kentucky, Maryland, Mississippi, Oklahoma, and Texas followed. Charles Evans Hughes, the governor of New York and future Chief Justice of the Supreme Court, argued feverishly against it, saying that the federal government would gain the power to tax state and municipal bonds, but New York passed the amendment on its second try. Other eastern states also had movements against the amendment, but they eventually ratified it as well. Wyoming?s ratification on February 3, 1913, gave Congress the three-quarters majority it needed to make the amendment part of the U.S. Constitution. Congress now had the ability of the federal government to levy taxes on income. Six other states eventually ratified the amendment, bringing the total to forty-two. Only Connecticut, Florida, Rhode Island, and Utah failed in its attempts to ratify the amendment. Pennsylvania and Virginia never attempted to ratify. The first modern income tax soon followed, with a progressive structure, shown below, along with 1994 income equivalents (Paul 97-98, Witte 75, table- Waltman 29, www.olywa.net).
Tax Rate 1913 Dollars 1994 Dollars
1% $20,000-$50,000 $298,000-$746,000
2% $50,000-$75,000 $746,000-$1,119,000
3% $75,000-$100,000 $1,119,00-$1,492,000
4% $100,000-$250,000 $1,492,000-$3,731,000
5% $250,000-$500,000 $3,731,000-$7,462,000
6% Over $500,000 Over $7,462,000
Shortly after the Sixteenth Amendment was passed, World War I broke out in Europe. Although the United States? neutrality would be a benefit in exporting goods, the first thing noticed by budget analysts was plummeting import duties, which still accounted for a large percent of government revenue. According to Jerold L. Waltman, ?receipts plummeted from $73,224,173 in July  to $44,563,946 in October? (32). Congress responded in a similar way to the Spanish-American War, by raising and levying new excise taxes, but left the income tax untouched. This action seemed to alleviate the situation, but only because of the boom in the economy that also followed the beginning of World War I. But by late 1915, Congress realized that higher excise taxes alone would not cure the budget deficit, so they turned to the income tax for additional funding (Waltman 32-33, Witte 79).
After failed attempts to lower the tax exemption, which would make more people eligible to pay a one percent income tax, Congress passed the Revenue Act of 1916,
which kept the minimum income to be taxed at $20,000 a year, but followed the structure below:
Percentage Rate Incomes (thousands) Percentage Rate Incomes (thousands)
1% $20-$40 6% $150-$200
2% $40-$60 7% $200-$250
3% $60-$80 8% $250-$300
4% $80-$100 9% $300-$500
5% $100-$150 10% Over $500
The primary purpose of the Revenue Act of 1916 was, of course, to raise revenue, but lawmakers saw it as a temporary measure, or at least that worked when the traveled back to their constituents. But, as Waltman notes, ?The income tax?by this act proved itself to be one of the easiest taxes to juggle? (36-37, 42).
1917 saw the United States enter World War I, and expenditures were again predicted to heavily outweigh receipts. Congress knew that all taxes needed to be increased, and the income tax became the hottest item to debate. Radicals suggested a progressive structure that drastically lowered the minimum income to tax as well as taxing all incomes over $100,000 a year at 100 percent, effectively making the maximum income in the country $100,000 annually. Secretary of the Treasury recommended a base rate of one percent on incomes about $3,000 and a maximum of forty percent on incomes over $1,000,000. Congress was able to pass a resolution to raise war revenue on March 3, 1917, but it took months of debate before the Revenue Act of 1917 was passed, with a minimum tax of one percent on incomes over $5,000 and a maximum of fifty percent on
Tax rates were again looked at in 1918, and Congress wrote the War Revenue Act of 1918, raising the minimum tax rate to five percent on incomes below $4,000 and to twelve percent on incomes above $4,000. The maximum tax rate was also increased to 65 percent. The bill was passed unanimously by the House, but not passed by the Senate before 1918 elections and Armistice Day. But instead of rates being decreased due to the end of the war, the Senate amended the bill with a maximum rate of 77 percent (Witte 85-86).
World War I was a watershed in the history of American taxation. According to Witte, ?it marked the end of the tariff and excise as the dominant sources of revenue? and although the war was an external shock, it ?dramatically and permanently affected the internal revenue system in the United States?the income tax would never again be a minor source of revenue? (86-87).
Income tax rates stayed at the 1918 rates through 1919 and 1920 to get rid of the budget deficit gained by the war. The share of revenue gained from the income tax actually continued to rise after the war reaching a peak of 69 percent in 1920. The consensus of government by 1920 was that tax rates should be cut, especially from the upper brackets, which found ways to avoid paying such high taxes anyways. The results
were income tax cuts in 1921, as well as cuts again in 1924 and 1926, due to a continual growth in government surpluses. Rates fell in the 1920s according to the following table:
Income 1918 (%) 1921 (%) 1924 (%) 1926 (%)
$2,000 6 4 2 1.5
$10,000 15 11 6 5
$20,000 20 16 10 9
$50,000 35 31 23 18
$100,000 60 56 42 24
$500,000 75 71 45 25
$1,000,000 76 72 46 25
Overall, the tax rates reflected the nation?s post-war growth and prosperity (Smiley and Keehn 285-88, ?How the U.S. Income Tax System Grew?, 21).
Looking back through the early years of the American income tax, it is easy to see why some people were for it and others against it. Financial conservatives did not want to see money leaving their incomes and going to a growing government, while liberals argued for the money, according to David G. Davies, to help balance the budget and to redistribute income from higher to lower classes (23-24).
Looking at taxation today, there are similarities to the post-WWI pre-depression period. The stock market is soaring, there is a government surplus, and taxes, although not at WWI levels, are a reason for the surplus. The number of people arguing for reductions in the income tax has a valid point. The budget is taking in a surplus, yet taxes
across the board have not been cuts, even though they were in the 1920s. Although people arguing for the abolishing of the progressive income tax, and more radically, the Sixteenth Amendment all together, have been around, more and more people are jumping on the bandwagon. Republican presidential hopeful Steve Forbes has been a long-time proponent of abolishing the progressive system in favor of a fifteen percent flat tax, while Ambassador Alan Keyes is even more radical, wanting to abolish the income tax all together in favor of a national sales tax. According to Keyes, ?The income tax is a 20th-century socialist experiment that has failed? (www.keyes2000.org). Others, including, John McCain, George W. Bush, and Bill Bradley have more conservative stances on the issue, but all agree that taxes need to be cut across the board (www.forbes2000.com, www.keyes2000.org, www.georgewbush.com, www.mccain2000.com, www.billbradley.com).
The history of the American income tax has never been controversial and always been politically fun to watch. Does it need to be abolished? Some say yes. Does it need to be changed? Another yes. But until it is, we will just have to watch the government surplus grow and keep blowing the cobwebs out of our wallets.
Bill Bradley for President. 13 Dec. 1999. 14 Dec. 1999. .
Davies, David G. United States Taxes and Tax Policy. Cambridge: Cambridge UP, 1986.
George W. Bush for President: Prosperity With a Purpose. 14 Dec. 1999. 14 Dec. 1999. .
History of the Income Tax. 12 Oct. 1998. 18 Nov. 1999. .
?How the U.S. Income Tax System Grew.? Nation?s Business April 1995: 21.
John McCain for President Official Site. 13 Dec. 1999. 14 Dec. 1999. .
Paul, Randolph E. Taxation in the United States. Boston: Little, Brown, and Co., 1954.
President Alan Keyes 2000. 14 Dec. 1999. 15 Dec. 1999. .
The Steve Forbes National Online Headquarters. 13 Dec. 1999. 14 Dec. 1999. .