origin of the income tax

      The Origin of the Income Tax
      by Adam Young
      [Posted September 7, 2004]
      "The freedoms won by Americans in 1776 were lost in the
revolution of 1913," wrote Frank Chodorov. Indeed, a man's home
used to be his castle. The income tax, however, gave the
government the keys to every door and the sole right to change
the locks.
      Today the American people are no longer the master and the
government has ceased to be the servant. How could this be? The
Revolution fought in the name of the inherent natural rights to
life, liberty and the pursuit of happiness promised to enthrone
the gains of individualism. Instead, federal taxation bribes the
States and individuals to serve the interests of ever-greater
submission to the centralized will.
      How did tax slavery come to the land of the free?
      The first proposal to impose an income tax on America
occurred during the War of 1812. After two years of war, the
federal government had accumulated a then-staggering $100 million
of debt. To fund the war against Britain, the government doubled
the rates of its major source of revenue, customs duties on
imports, which obstructed trade and ended up yielding less
revenue than the previous lower rates. At the height of the war,
excise taxes were imposed on goods and commodities, and housing,
slaves and land were taxed. After the war ended in 1816, these
taxes were repealed and instead a high tariff was passed to
retire the accumulated war debt. Thankfully, the notion of an
income tax was defeated.
      However, the malevolent spirit of the income tax reappeared
as a measure to fund the Union armies in the war to prevent the
secession of the Confederacy. The war was expensive, costing on
average $1,750,000 a day.[1] Struggling to meet this expenditure,
the Republican Congress borrowed heavily, doubled tariff rates
(the Morrill Tariff initially provoked the Deep South to secede),
sold off public lands, imposed a maze of licensing fees,
increased old excise tax rates and created new excise taxes. But
none of this was enough.
      In July 1861, the Congress passed a 3% tax on all net
income above $600 a year (about $10,000 today). However, no
revenue was ever raised because a second tax passed before the
first was due (on June 30, 1862). The war's demand on resources
made the earlier tax ineffective, and the sale of bonds could not
keep up with the expenditures of the administration and the
armies. In March, the Congress passed an income tax of 3% on
annual incomes of $600 to $10,000 and 5% on incomes from $10,000
to $50,000 and threw in a small inheritance tax too. Lincoln
signed the bill on July 1, 1862 to take effect a month later. The
Union debt then stood at $505 million.[2] This tax also included
the first appearance of withholding and was applied to federal
salaries and on interest and dividends.[3]
      In 1863, Congress then passed a special 5% tax on incomes
above $600 to pay for an army recruitment program that would pay
men $2 per recruit and pay recruit's their first month's pay in
      In mid-1864, the rates were raised again. The 3% tax on
incomes above $600 was increased to 5%, a new 7.5% rate was
introduced on incomes over $5,000, and the old rate of 5% on
incomes above $10,000 was raised to 10%. The tax on interest and
dividends was also raised from 3% to 5%.
      And for the first time, with the changes, Americans now had
to swear to the veracity of their tax returns, and government
assessors could now challenge a return. The penalty for not
filing a tax return was likewise doubled to 10%.[5]
      At first, the income tax raised comparatively little
revenue in relation to the war's demand for it. Harvesting only
$2.7 million in 1862–1863, by the next year, the tax pulled in
$20.2 million. And believing that many large-income earners were
eluding the taxman, Congress raised the rate on incomes over
$5,000 to 10% and gave the assessors the power to estimate income
and increased the penalties for noncompliance, from fines of 25%
to double that for filing fraudulent returns. By 1866, 30% of
federal revenues derived from the income tax totaling $73
million, and derived primarily from just three states, New York,
Pennsylvania and Massachusetts.
      In a move to increase compliance and the veracity of
returns, the government even made tax returns available to the
press. This practice was outlawed in 1870.[6]
      The Confederacy also experimented with a progressive income
tax, eventually imposing a tax in kind that further destroyed the
already ruptured and blockaded economy of the South.[7]
      After the war ended, the income tax continued on to pay the
government's gigantic debt, but resistance was building. In 1867,
progressing rates were replaced with a flat tax of 5% on all
incomes above $1000 a year. However, the penalty for failure to
file was raised to 50% and the payment date was moved from June
30 to April 30.[8]
      This income tax expired in 1870 and was replaced with a
2.5% tax on incomes above $2,000. Finally, when that law expired
in 1872, the United States was again without an income tax.
      In the post-war years, a booming economy produced tariff
surpluses for decades, but this didn't deter many attempts to
reintroduce an income tax, with members of Congress introducing
sixty-eight bills to do so between 1874 and 1894.
      Amid the panic of 1893, an amendment was passed
establishing a 2% tax on all incomes above $4,000 a year (about
$50,000 today), but exempted the salaries of state and local
officials, federal judges, and the president.
      Democratic Senator David Hill of New York lamented, "It may
be impracticable that our distinctively American experiment of
individual freedom should go on."[9]
      President Cleveland opposed the income tax, but let it
become law without his signature, believing it to be
unconstitutional. In 1895, the Supreme Court ruled 5-4 against
the income tax, saying that its provisions amounted to a direct
tax, which was prohibited by the U.S. Constitution.[10]
      Article I, Section 8 and 9 declares that direct taxes must
be apportioned amongst the states according to the census. The
Sixteenth Amendment was designed to get around this problem.
      Aside from an attempt to float an income tax to pay for the
Spanish-American war, the income tax largely disappeared as a
major issue. Nonetheless, the Democratic Party, turning its back
on its Jeffersonian heritage, endorsed a constitutional income
tax amendment in their party platforms of 1896 and 1908.[11]
      In 1908 Theodore Roosevelt endorsed both an income tax and
an inheritance tax, becoming the first President of the United
States to openly propose that the political power of government
be used to redistribute wealth.
      Meanwhile, factions within the Congress cobbled together a
compromise amendment and in 1909, President Taft, known to be
favorable to an income tax, if not necessarily an amendment,
stated that although ratification may be difficult, he had
"become convinced that a great majority of the people of this
country are in favor of vesting the National Government with
power to levy an income tax."[12]
      That same year, the income tax amendment passed
overwhelmingly in the Congress and was sent off to the states.
The last state ratified the amendment on February 13, 1913. The
Springfield Republican reported "The Sixteenth Amendment owes its
existence mainly to the West and South, where individual incomes
of $5,000 or over are comparatively few."[13]
      Richard E. Byrd, speaker of the Virginia House of
Delegates, predicted, "a hand from Washington will be stretched
out and placed upon every man's business. . . . Heavy fines
imposed by distant and unfamiliar tribunals will constantly
menace the taxpayer. An army of Federal officials, spies and
detectives will descend upon the state. . . ."[14] Pandora had
opened the box.
      The presidential election of 1912 was contested between
three advocates of an income tax. The winner, Woodrow Wilson,
after the ratification of the Sixteenth Amendment, called a
special session of Congress in April 1913, which proceeded to
pass an income tax of 1% on incomes above $3,000 and applied
surcharges between 2% and 7% on income from $20,000 to $500,000.
A few years later the Supreme Court kissed and blessed
      The income tax returned as the product of an unholy combine
between statist intellectuals with visions of state-sponsored
utopias, envious demagogues and the desire by established,
wealthy interests to prevent any competition to their place and
to offload business costs to an expanding regulatory welfare
      At first the revenue raised by the new income tax was
disappointing: only $28 million in 1914. But then it accelerated.
$41 million the next year, when the top rate was 7%, and nearly
$68 million in 1916, when it was raised to 15%.[16] Eventually
more than $1 billion would be pulled in by the income tax during
the whole of World War I, when the rates were raised to 67% in
1917 and 77% in 1918, and make the hated tax the permanent
feature it has become today.[17]
      After the war, the top rate would fall to 73%. In the
1920's it fell to a low of 24% in 1929 but never again got as low
as the pre-war rate of 7%. What would Americans do for a 7% rate
today, one wonders? Hoover and the Republicans raised the rates
to 25% in 1930, then to 63% in 1932. Under the corporate statism
of the New Deal, rates leaped to 79% in 1936, 81% in 1940,
finally exhausting itself at 94% in 1944–1945.
      The lowest rates showed the same appetite, advancing from a
1% rate on incomes below $20,000 in 1915. In 1917, it became 2%
up to $2,000, then 6% up to $4,000. By 1941, the lowest rate was
10% on incomes below $2,000. In 1945, this had jumped to 23%.
Today it is 10% on annual income up to $7,000; 15% on income
below $28,000. The top 10% of all income earners pay 60% of all
tax revenue. And the top half pay over 95% of all revenue raised
by the federal income tax.[18] The average American now works
twenty years for the government simply to pay his taxes.[19]
      In 1943, the government began withholding taxes on the
advice of Milton Friedman.[20] After the war ended, this method
of stealth taxation (and tax increases) continued.
      Not until 1964 were the top rates lowered, down to 77%. In
1982, the top rate was lowered to 50% and by the late eighties
the rate had been lowered to 28%.[21] But rates were raised again
to 31% under George H.W. Bush, and again in 1993 to 39.6% under
Clinton. George W. Bush apparently holds as an unshakeable
principle that no American should be taxed more than a third of
his income by the federal government. John Kerry, should he
become president, appears likely to suggest the rates be raised
back to the Clinton level.
      The income tax lived up to its nature during World War II,
devouring American wealth and liberties like a swarm of locusts,
where it became the nearly universal tax we know today. In 1940,
fewer than fifteen million tax returns were filed. Just ten years
later in 1950, the number would be fifty-three million. In 1939
the income tax raised $1 billion. 16 years later it would raise
$19 billion.[22] The state had found its most fertile
harvests—middle class and working-class taxpayers. As Chief
Justice John Marshall remarked, truly "the power to tax involves
the power to destroy."
      Adjusting for inflation, in the 81 years between the
enactment of the income tax in 1913 to 1994, government spending
increased 13,592%![23]
      The great critic of the income tax, Frank Chodorov wrote
"Whichever way you turn this amendment, you come up with the fact
that it gives the government a prior lien on all the property
produced by its subjects."[24] The United States government
"unashamedly proclaims the doctrine of collectivized wealth. . .
. That which it does not take is a concession."[25]
      It was with great honesty that Frank Chodorov lamented,
"America is no longer the America of the Declaration of
      Adam Young is a freelance Austro-libertarian writer and
reviewer and lives in Canada. Send him MAIL, and see his
Mises.org Articles Archive. Comment on this article on the blog.
      [1] Emancipating Slaves, Enslaving Free Men: A History of
the Civil War, by Jeffrey Rogers Hummel (Open Court, 1996), p.
      [2] The Politics and Development of the Federal Income Tax,
by John F. Witte (University of Wisconsin Press, 1985), p. 69.
      [3] The United States Federal Income Tax History from 1861
to 1871, by Harry Edwin Smith (Houghton Mifflin Co., 1941), pp.
54, 56.
      [4] Ibid. p. 64.
      [5] Ibid. p. 66.
      [6] Ibid. pp. 67–68.
      [7] Hummel, p. 227.
      [8] Smith, pp. 74–75.
      [9] "The Sixteenth Amendment: The Historical Background,"
by Arthur A. Ekirch, Jr. Cato Journal 1 (Spring 1981), p. 168.
      [10] Ibid. pp. 168–69.
      [11] Ibid. pp. 171–72.
      [12] Ibid. p. 173.
      [13] Ibid. p. 178.
      [14] Ibid. pp. 177–78.
      [15] "The Political Economy of the Origin and Development
of the Federal Income Tax, by Bennett D. Baack and Edward John
Ray, in Emergence of Modern Political Economy, ed. Robert Higgs
(AI Press, 1985), pp. 127–31.
      [16] Ekirch, p. 182.
      [17] Ekirch, p. 182.
      [18] The Tax Foundation
      [19] Lost Rights: The Destruction of American Liberty, by
James Bovard (St. Martin's Griffin, 1995), p. 289.
      [20] "Best of Both Worlds" (an interview with Milton
Friedman), Reason, June 1995, p. 33.
      [21] Federal Tax Policy, 5th Ed. By Joseph A. Pechman
(Brookings Institution, 1967), p. 313.
      [22] The Internal Revenue Service, by John C. Chrommie
(Praeger Publishers, 1970), pp. 21–22.
      [23] "Original Intent and the Income Tax," by Raymond J.
Keating (The Freeman, February 1996), p. 71.
      [24] The Income Tax: Root of All Evil, by Frank Chodorov
(Devin-Adair, 1954), p. 12.
      [25] One Is a Crowd, by Frank Chodorov (Devin-Adair, 1952),
p. 154.
      [26] The Income Tax: Root of All Evil, by Frank Chodorov
(Devin-Adair, 1954), pp. 6, 8.
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