Think About IT: The Birth and Nurture of Federal Income Tax—Make the Wealthy Pay Mentality

The following article ((this article appeared in its entirety in Kairos Journal for pastors)) chronicles the tax the wealthy mentality as clearly and succinctly as any article I have seen. At this season of elections, I thought it was worth sharing.

The Birth and Rise of the U.S. Income Tax

In the summer of 1861, the U.S. Treasury had only $2 million to fund the Union side of the Civil War, leaving Secretary Salmon P. Chase in a quandary. The North may have been rich in land and resources, but none of this could quickly be converted into cash to pay an army. Moreover, New York bankers did not consider the U.S. government a sound investment. Chase retorted he had a war to fight, and if necessary “he was prepared to print money . . . even if the price of a breakfast rose to $1,000.”[1] Eventually, he secured a loan but he also turned to the American people, and on July 1, 1862, President Lincoln signed into law a federal income tax.

Prior to 1862, Americans funded a much smaller federal government largely through tariffs on imported goods.[2] Because legislators set the threshold so high, few Americans actually paid the income tax (250,000 of 39.5 million in 1870). Nonetheless, the controversial income tax was important because “[i]t embodied a new principle at the federal level: that the rich should pay taxes at higher rates than the poor.”[3] However, when the crisis of the Civil War had ended, critics won the day, and the income tax failed to win reauthorization–much to the disappointment of Senator Sherman of Ohio, who insisted, “the income tax is the only one that tends to equalize these burdens between the rich and the poor.”[4]

Congressman William Jennings Bryan shared Sherman’s concerns and successfully spearheaded an effort to pass another bill–a 2% tax on incomes in excess of $4,000–only to have the Supreme Court strike it down arguing that if it was a “direct” tax, it was unconstitutional because it was not being apportioned according to each state’s population.[5] Years later, Theodore Roosevelt urged Congress to find a way to make an income tax possible.[6] President Taft followed suit.

However, it was President Woodrow Wilson, emboldened by the Sixteenth Amendment to the Constitution, that made the income tax as we know it a reality. The amendment, ratified in 1913, allowed the federal government to tax a person’s income notwithstanding the population of any state. Then, on October 3, 1913, Wilson signed an income tax law the Court would not overturn. Citizens who earned less than $3,000 were exempt and the highest tax rate was a level of 7% for Americans earning more than $500,000.[7] However, these rates did not last long. Salmon Chase’s problems funding the Civil War were not distant memories, and when America considered engagement in World War I, the government raised taxes. During the war, the tax rate for the wealthiest Americans soared to 77%.[8]

Tax cuts quickly followed under the conservative fiscal stewardship of Treasury Secretary Andrew Mellon; however, Pandora’s Box had been opened: “Once it was possible to see a great revenue engine financing a gigantic conflict, taxing the wealthiest Americans at high rates, it was more possible to contemplate such an engine supporting a welfare state.”[9] Tax policies originally intended to fund a global conflict wound up funding Franklin Roosevelt’s New Deal and, eventually, Lyndon Johnson’s Great Society.

This goes a long way toward explaining the popular view of higher taxes as the answer to some of life’s most difficult problems. If taxes can be raised for some expenditures then they should be raised for any expenditures. A government able to collect income taxes ought to collect income taxes. In short, in its approximately 100-year history, the income tax has become an august and unquestioned institution, as American as apple pie. At present the lowest federal income tax bracket is 10% and the highest, 35%.[10] (This, of course, does not include a variety of municipal, state, and other taxes.) But if the past is indicative of the future, these rates will likely rise.