The income tax's ups and downs


History: It began in the dark days of civil war, was voided by the Supreme Court, then enshrined in an amendment to the Constitution.

April 15, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

In the beginning, the Internal Revenue Service and income taxes were concerns only for the rich.

Income tax was due every March 1 -- the deadline was pushed back to April 15 in 1955 -- and the top rate was 7 percent, rather than the 39.6 percent of today. Less than 2 percent of the population owed the government even a penny.

"It was something for the super wealthy when we got the first income tax, that awful dark day in 1913," says Daniel Mitchell, a senior fellow at the Heritage Foundation in Washington. "I can't imagine that the people who supported the income tax back then would support it now if they knew the monster they were creating."

It was not a monster but a necessity when the income tax came into being, during the Civil War.

In 1862, Congress authorized income taxes as a temporary measure for raising money for the Union effort. With amazing speed and skill, the government created the office of the Commissioner of Internal Revenue and sophisticated tax forms. After helping pay off the war debt, the tax was repealed in 1872. It left the federal government dependent on tariffs on imports and excise taxes on alcohol and tobacco for all its revenue.

And those levies were the real monsters tearing at society: Because the only taxes were those on goods, the taxes pushed up the price of goods and fell heavier on the poor because a greater percentage of their income went to pay the levies.

That structure pitted land-rich farmers in the South and West, who had little income that could be taxed, against rich industrialists in the Northeast, who preferred high tariffs that protected their goods from foreign competition.

By the 1880s, farmers and small-business owners were arguing for a graduated income tax. It would tax individuals based on their ability to pay. Tariffs, they said, subsidized monopolies and burdened consumers. "Don't tax want, tax wealth," said the Populist slogan of the late 19th century.

Some people defended the gap between rich and poor by arguing that the rich were wealthy because they deserved to be by their virtue and hard work, says John O. Fox, a visiting lecturer at Mount Holyoke College and author of "If Americans Really Understood the Income Tax." As Russell Conwell, a Philadelphia minister and founder of Temple University, preached in the 1890s: "I say that you ought to get rich, and it is your duty to get rich. ... The men who get rich may be the most honest men you find in the community. ... Ninety-eight out of one hundred of the rich men of America are honest. That is why they are rich."

By the early 1890s, economic and political conditions had changed. The Panic of 1893 pushed the country into an economic depression, and tariff revenue dropped. Democrats from the West and South joined the Populists in calling for an income tax.

In 1893, Democrats had gained control of Congress and the White House. In 1894 they passed a tax of 2 percent on incomes of more than $4,000. The tax was immediately challenged in court.

In 1895, the Supreme Court declared the income tax law unconstitutional, ruling 5-4 that such a tax couldn't be levied unless it was apportioned among the states by population: If Alabama, for example, had 8 percent of the population, residents there must pay 8 percent of the tax regardless of their income.

Supporters of the income tax thought it was just a matter of waiting for the composition on the Supreme Court to change before an income tax would be re-enacted, says Erik Jensen, a law professor at Case Western Reserve University in Cleveland. They were reluctant to press for a constitutional amendment creating an income tax, fearing a failure to ratify it would doom the tax forever.

But the political and economic climate shifted again -- and against the tax. Republicans swept into office in 1896 and shelved the tax proposals as the economy improved.

In 1906, President Theodore Roosevelt -- a moderate Republican from a wealthy New York family -- surprised tax supporters and opponents by suggesting graduated income and estate taxes.

"What he saw in the election of 1904 concerned him greatly," Fox says. What he saw was Socialist presidential candidate Eugene V. Debs of Indiana get 402,400 votes -- up from only 94,800 in 1900. "What Roosevelt feared was a rising movement within the labor class that potentially was dangerous to not just the wealthy, but to democracy itself."

Roosevelt and other Republicans came to see income and estate taxes as necessary to maintain the existing order. "They saw it not as a radical movement, but as a conservative movement to conserve our basic institutions," Fox says.

But Roosevelt made no strong push to get the tax enacted.

The Democratic presidential platform in 1908 called for a constitutional amendment to allow an income tax. But Republican William Howard Taft won the election, and conservative Republicans vehemently opposed to income taxes controlled Congress.

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