A History of US Economic Law Part 3: The Conception of the Income Tax

Beyond Saving's picture

In 1894, the Democratic Party was under significant pressure to reduce the tariffs imposed by the 1890 McKinley Tariff. As I discussed in my previous blog the economy was in recession and the average Americans purchasing power had dropped. Government revenue had been significantly reduced by the recession.

 

However, it was difficult to build a consensus between the House and the Senate- a bill that started as significant tariff cuts was diluted by over 600 amendments in the Senate. The result was the Wilson-Gorman Tariff, a hodgepodge of tariff cuts and tariff increases that became law without the signature of President Cleveland.

 

For purposes of discussion here, the most important aspect of the Wilson-Gorman Tariff was that for the first time an income tax was imposed during peacetime. The tax consisted of 2% on all income over $4,000 for individuals and corporations. 

 

This wasn’t the first income tax imposed in the US. The first was the Civil War income tax imposed in 1861 which was a progressive tax with rates ranging from 3%-10%. It was passed along with a slough of other taxes as an emergency measure. After the war, the income tax was gradually reduced and eventually eliminated in 1872 along with most of the other taxes imposed during the war.  

 

Since the national debate was focused on more immediate issues surrounding the secession, war, and later reconstruction the argument over the income tax during the Civil War. The passage of the income tax in the Wilson-Gorman Tariff was far more controversial and led to a decade long national debate. 

 

Many saw the income tax as a continuing backlash against the barons of industry, rather than a means to raise significant funds as demonstrated by an article written in “The Quarterly Journal of Economics” Vol. 9, No. 1, Oct. 1894  

 

Charles F. Dunbar wrote:
 

…it will be clear that the considerations which weighed with Congress in taking this important step were not fiscal, and that the provisions of the new act were not studied and perfected by its framers from this point of view. The very fact that the limit of exemption is set so high as $4,000 will be a standing demonstration that the measure was shaped to meet some supposed social or reformatory end, possibly with some sectional bearing, but at any rate, not as the best result of either modern theory or modern practice.

 

He then goes on to criticize the tax in detail from a conservative point of view. 

 

Newspaper reports support the idea that the income tax was meant to redistribute the tax burden from the public at large to the extremely wealthy. From a New York Times article on Jan. 29th 1894  

Representative McMillin is quoted as saying, 

McMillin wrote:

If a man owns $50,000,000 or $100,000,000 worth of property in the United States, as some do, he pays only on what he eats, what he drinks, what he wears and the other things he uses.

 

With this small exception this vast aggregation of wealth contributes nothing else to pay the expenses of the General Government.

 

The time has come when this should be changed, it seems to me. I ask of any reasonable person whether it is unjust to expect that a small per cent of this enormous revenus shall be placed upon the accumulated wealth of the country instead of placing all upon the consumption of the country.

 

Other New York Times articles suggest that the income tax was less than popular even among democrats but ultimately, the pressure to pass tariff reform was enough to pass the bill. 

 

The income tax didn’t survive long. Charles Pollock owned ten shares of stock in the Farmers’ Loan & Trust Company and sued the company to prevent them from paying the tax. The resulting case went all the way to the Supreme Court, Pollock v. Farmers’ Loan & Trust Company 157 U.S. 429 (1895) resulted in a narrow 5 to 4 decision overturning the income tax. 

 

Originally, the Constitution required that all direct taxes be 

Constitution wrote:
… apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.

Article 1, Section 2, Clause 3.

 

The Court ruled, 

Quote:

A tax on the rents or income of real estate is a direct tax within the meaning of that term as used in the Constitution of the United States.

A tax upon income derived from the interest of bonds issued by a municipal corporation is a tax upon the power of the State and its instrumentalities to borrow money, and is consequently repugnant to the Constitution of the United States.

So much of the act "to reduce taxation, to provide revenue for the government, and for other purposes," 28 Stat. 509, c. 349, as provides for levying taxes upon rents or income derived from real estate, or from the interest on municipal bonds, is repugnant to the Constitution of the United States, and is invalid.

 

This case fueled the efforts of Progressives and Socialists sympathetic to the income tax both as a tool for raising greater revenues for the federal government and as a tool to reduce the large fortunes held by trusts and the extraordinarily wealthy. It would take another 18 years to pass and ratify the 16th Amendment effectively overturning Pollock but with the passage of the Wilson-Gormann Tariff and the subsequent Supreme Court Case, the idea of a peace time income tax became a topic of debate for the public at large.   

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X

EXC's picture

jcgadfly wrote: The laws

jcgadfly wrote:

 

The laws were put into place because of the unions. They stay in place because of the unions. Not sure what repealing the protections after the unions go away (which would very likely happen in America) would be good for anyone.

I think that's a myth like we only have morality because of religion. If religion went away we'd have no morality.

jcgadfly wrote:

Negotiating directly with the employer works fine if you have a workforce of less than 10. Get up into the hundreds and thousands and you can forget about functioning as a business. You'll spend so much time negotiating that nothing will get done.

What is there to negotiate? You have a job category, you have a salary. Take it or leave it. Your salary is based on supply and demand. Just like everything you buy. Walmart has millions of customers but they don't negociate with any of them.

This union propaganda is such BS. The want to create a monopoly, they want to intimidate with violent threats anyone that would work for less. Just thuggery.

You only need a union when you don't have any in demand job skills, then you have to resort to violent threats to get what you think is fair.

 

“Religion is regarded by the common people as true, by the wise as false, and by the rulers as useful.” Seneca

EXC wrote:jcgadfly

EXC wrote:

jcgadfly wrote:

 

The laws were put into place because of the unions. They stay in place because of the unions. Not sure what repealing the protections after the unions go away (which would very likely happen in America) would be good for anyone.

I think that's a myth like we only have morality because of religion. If religion went away we'd have no morality.

jcgadfly wrote:

Negotiating directly with the employer works fine if you have a workforce of less than 10. Get up into the hundreds and thousands and you can forget about functioning as a business. You'll spend so much time negotiating that nothing will get done.

What is there to negotiate? You have a job category, you have a salary. Take it or leave it. Your salary is based on supply and demand. Just like everything you buy. Walmart has millions of customers but they don't negociate with any of them.

This union propaganda is such BS. The want to create a monopoly, they want to intimidate with violent threats anyone that would work for less. Just thuggery.

You only need a union when you don't have any in demand job skills, then you have to resort to violent threats to get what you think is fair.

 

1. Sorry - just because you believe it to be a myth doesn't make it false.  the evidence also stands against you. Let me know if you want links.

2. I was waiting for the "union thug" argument. You realize that a good portion of union violence throughout history was started by people who were planted in the group by the union busting companies, right? Do you know what an agent provacateur is? No one can create a monopoly, son. Unions can't even have closed shops anymore (they're illegal)

3. No one should want to work for less. Wages and salaries suck to begin with. Why volunteer for slavery? 

4. I don'r believe you fit this but your lack of knowledge of history and the economic situation leads me to believe you've never had a job. 

5. Many people, myself included, would not have been able to go to college and work a job also without the unions negotiating for it. So much for the unions not wanting people to improve their job skills.

"I do this real moron thing, and it's called thinking. And apparently I'm not a very good American because I like to form my own opinions."
— George Carlin