Before the Income Tax

(Photo credit: LendingMemo)

This is a great article from last year.

This year — 2013 — marks the 100th anniversary of the modern income tax, a tax that dominates the revenue scheme of the federal government today. Individual income taxes accounted for about 45 percent of all federal tax revenue in 2012, along with 35 percent for Social Security and Medicare payroll taxes (which are also a tax on income), 10 percent for corporate income taxes, and only 10 percent for all other tax sources.

It wasn’t always so. Prior to ratification of the 16th (income tax) Amendment in February 1913, the federal government managed its few constitutional responsibilities without an income tax, except during the Civil War period. During peacetime, it did so largely — or even entirely — on import taxes called “tariffs.” Congress could afford to run the federal government on tariffs alone because federal responsibilities did not include welfare programs, agricultural subsidies, or social insurance programs like Social Security or Medicare. After the Civil War, tariff revenues sometimes suffered under a protectionist policy ushered in by the Republican Party that supplemented federal income via excises on alcohol, tobacco, and inheritances. But before the war, the need for tariff revenue to finance the federal government generally kept the tariff at reasonable levels. During wartime throughout early American history, the Founding Fathers were able to raise additional revenue employing a different method of direct taxation authorized by the U.S. Constitution prior to the 16th Amendment. These alternative taxing methods gave the young American nation embarrassing peacetime budget surpluses that several times came close to paying off the national debt.

In one instance, the U.S. government paid off its entire national debt without the existence of an Internal Revenue Service. President Andrew Jackson boasted in his veto of the Maysville Road Bill in 1830 that God had blessed the nation with no taxes (except tariffs on imports) and no national debt:

Through the favor of an overruling and indulgent Providence our country is blessed with a general prosperity and our citizens exempted from the pressure of taxation, which other less favored portions of the human family are obliged to bear.... How gratifying the effect of presenting to the world the sublime spectacle of a Republic of more than 12,000,000 happy people, in the fifty-fourth year of her existence, after having passed through two protracted wars — one for the acquisition and the other for the maintenance of liberty — free from debt and all her immense resources unfettered!

In reality, Jackson had jumped the gun on his boast. The national debt would not be paid off for five more years, until the 1828 “Tariff of Abominations,” which were high tariffs primarily on British manufactured goods meant to protect northern U.S. industries, and as the compromise tariffs of 1832 and 1833 had created several years of massive budget surpluses. But “Old Hickory” presided over a nation where Congress had abolished all federal internal taxes, and no citizen saw a tax collector of the United States unless that citizen was in the business of importing foreign goods. And while American consumers were occasionally manipulated by outrageously high protective tariffs, especially the above-mentioned “Tariff of Abominations,” inside the United States a massive free market emerged over which the U.S. government had almost no influence. Even the Tariff of Abominations was not so high that it choked off revenue for imports from every industry.

By way of contrast, the advent of the income tax prompted some congressmen to note that this tax was designed not principally for revenue — the U.S. government had always had plenty of money from tariffs — but to manipulate the American people and their choices in the market. “The character of the argument which had been made,” Massachusetts Rep. Samuel McCall argued in a speech before the U.S. House of Representatives as Congress debated the 16th Amendment, legalizing the income tax in 1909, “leads me to believe that the chief purpose of the tax is not financial, but social. It is not primarily to raise money for the state, but to regulate the citizen and to regenerate the moral nature of man. The individual citizen will be called on to lay bare the inner-most recesses of his soul in affidavits, and with the aid of the Federal inspector, who will supervise his books and papers and business secrets, he may be made to be good, according the notions of virtue at the moment prevailing in Washington.” McCall’s Massachusetts constituents rewarded the Republican congressman’s efforts by electing him governor several years later.

This has been the legacy of the income tax. While the income tax has produced the type of revenue that has made a massive transfer of wealth from the productive to the unproductive possible, the incentives — through thousands of deductions and tax credits — have manipulated the American people into choices that they wouldn’t have otherwise made in a free market. These manipulations — whether in favor of “green energy” research, “cash for clunker” automobile purchases, or tobacco crop subsidies — have been chosen according to the prevailing virtue in Washington.

Read the rest of this article here:
Before the Income Tax

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