A Brief Tax History of America


This address was delivered at the National Archives on April 12, 1994.

It is more than a pleasure to be here in this great edifice that holds the original documents upon which our Republic was founded. Of all the buildings in Washington – the memorials, the federal offices, the Supreme Court, the White House, the Congress – only the National Archives strike me as a sacred sanctuary. For it is here, above and beyond the world of politics, that the original documents are kept that founded not only our nation, but which have spread throughout the free world as the ideals upon which all free governments are based. The Declaration of Independence belongs to the world as much as it does to us. It marked the death-knell for the divine right of kings everywhere in its day, and in our day it sounds a similar death-knell for tyrants and dictatorships of every kind that seek to rule.

The first thing I did this morning upon entering this great sanctuary was to see the Declaration of Independence. Close observation was not possible because of the barrier that separates the viewer from the green case that houses the Declaration, but I could see "John Hancock" standing out above all the other signatures. He signed the Declaration in large script so the British authorities would not, no, could not, miss his signature. Why did he want to stick his neck out like that? Especially, when one member of the Cabinet, upon reading the Declaration, charged, "They are a race of convicts and ought to be thankful for anything we give them short of a hanging!"

John Hancock was probably the leading tax evader in Boston. He was apparently wanted for evading what today would be hundreds of thousands of dollars in taxes. He was a very successful merchant and importer, his merchant ships arrived almost daily with goods from abroad, and he hadn't paid H.M.S. Customs its full tax for decades. Today, we would call him a tax protestor and he would have had a red flag on his tax file. Hancock's bold signature is a clear reminder that America was founded by tax rebels, and their rebellion eventually gave birth to the United States of America.

If you read British history you get a different slant on American history, even today. In my book, For Good and Evil, after I'd read British writers, I said, "Did the mother country, meaning Britain, have a bunch of spoiled brats on her hands who didn't realize just how well-off they were?" This was perhaps the choicest land on earth. Their sons were not conscripted to fight wars in far away places; they had the protection of the British nation, which was becoming the superpower of that age. They had all the rights of Englishmen. Their colonial charters guaranteed them those rights. They had just about everything going for them; there were jobs for everyone; there was prosperity throughout the land. All the British government wanted from them was to pay a portion of the costs of maintaining the 10,000 British troops stationed in America to protect them from French imperialism. Just recently, the French had been defeated on the Plains of Abraham (in Canada) and driven from the shores of the Atlantic. George Washington fought for the British in those battles and the threat of French imperialism still existed to the West and along the Gulf. So it didn't seem unreasonable to expect the American colonies to pay for some of the costs for their protection.

This British view justifying taxation upon moral grounds is difficult to refute, and the leading writer of British letters, Samuel Johnson, wrote a small tract, Taxation No Tyranny, which has never been very successfully refuted. The sovereign power of every community, argued Johnson, "has the right of requiring from all its subjects such contributions as are necessary to the public safety and public prosperity."

One British civil servant wrote home that if you talk to an American about providing funds to help defray the costs of British troops stationed in America, he will respond by giving a lengthy lecture on his rights. The chances are that lecture would have been too reasonable.

The British government had serious tax problems at this time. The prolonged war with France had been costly, as all wars are, and to increase taxes at home, in 1764, taxes were introduced on hard cider, the beverage of the common man. Riots erupted in London, excise houses were burned, and the tax was repealed. The Crown then turned to the untaxed colonies. In the House of Commons the question was asked, "Do you think the Americans will resent paying their mite for the protection of the colonies?" No one objected. The Crown then passed the Sugar Act with no dissents.

There were protests from the importers and merchants, arguing that a duty for revenue was illegal, but a duty for regulation was not, such as a heavy prohibitive duty. Thus the higher the tax, the more lawful it was. This kind of bizarre logic didn't do their cause much good.

The Sugar Act put a tax on non-British goods coming into the colonies, primarily goods from France and The Netherlands. It gave British importers a clear monopoly on trade and, at the same time, would provide some needed revenue. The bad part was the provision that took tax cases away from local courts and transferred them to the Admiralty Courts in Nova Scotia. Local courts had been decidedly pro-taxpayer and had impaired tax collection and smuggling prosecutions. Angry Yankee traders cried "foul," but outside of these smugglers, most of the rest of the colonies didn't find much fault with the Act.

Revenue was not anywhere near what was expected, so the Crown tried again with stamp taxes that would apply to all kinds of documents, newspapers, etc. No opposition was expected as there had been nothing of much significance to the protest over the Sugar Act. But this was a different kind of tax – it hit everyone, not just the smugglers in New England. Stamp taxes were in use in the colonies as a local revenue measure. They were popular most everywhere in Europe, having been invented at the beginning of the 18th century. It was this tax that prompted Adam Smith's comment, "There is no act which one nation sooner learns from another than how to drain money from the pockets of the people."

To the surprise and shock of British tax authorities, and even local governors, the colonists reacted with a fury. Even Ben Franklin, at first, applied for the job of stamp tax collector, not anticipating a major rebellion. The colonists called for a meeting of protest, which met in New York, and called itself "the Stamp Act Congress," which was the real birthplace of the United States. Most of the colonies showed up. This congress brought together the squabbling colonies for the first time with a common goal – defeat British efforts to tax the colonies internally.

Benjamin Franklin was sent to London to argue for the repeal of the Stamp Act, as a representative for Massachusetts, New Jersey, and Georgia. He told the Commons that prior to Stamp Act, the colonies loved the Crown and gave obedience to all its laws, and will continue to do so except for any internal taxes, like the Stamp Act. External taxes, like customs, would be accepted, said Franklin.

The Stamp Act rebellion brought trade to a standstill. British exporters went broke; merchant vessels were idle in the harbors in England. Opposition to the tax came from the merchants in Britain, and with that local opposition, plus the rebellion in America, Parliament repealed the Stamp Act. There were celebrations everywhere and soon it was business as usual. The Crown, however, wasn't going to let go of the tax issue, and in their repeal bill they asserted their right to tax in the future, should they so desire.

The British prime minister thought the distinction between internal and external taxes was "perfect nonsense," and frankly, he was right. He then proposed a new tax putting a duty on a number of goods coming into the colonies, since this was, "perfectly consistent with Dr. Franklin's views when he argued for the repeal of the Stamp Act." In a somewhat divided House of Commons, the Crown adopted some duties on a number of items, including tea. Edmund Burke argued against the duties. He said the Americans wouldn't accept the tax despite what they had said to repeal the Stamp Act. Burke obviously knew the Americans better than they knew themselves. The Americans had, in effect, left the door open for further taxation and the Crown was quick to seize upon their folly. Talk about putting your foot in your mouth; this was a critical error that would eventually lead to the Revolution.

The Americans immediately started to boycott the goods that carried the new taxes. The Crown had no choice but to repeal these duties, except for tea. This gave rise to the trigger for the Revolution, the Boston Tea Party. The Boston Tea Party was not the noble deed childhood history books try to depict. Benjamin Franklin acknowledged that this was a wanton destruction of private property and the tea owners should be compensated. It was much more than a tax protest.

British tea had been boycotted since the tax was first introduced. The Americans were big tea drinkers, so a brisk trade in smuggled Dutch tea was rampant throughout the colonies. British tea was nowhere to be purchased. The Crown decided to be clever, they repealed the tax on tea coming into Britain, and put a very small tax on tea coming into the colonies. The result was that the British tea would undersell the smuggled Dutch tea. American housewives would then buy the British tea causing economic ruin to those American merchants caught up in the tea smuggling trade. To make matters even more outrageous, the low-priced British tea was only sold to loyal British merchants. This was the last straw, so to speak.

Seven merchant ships sailed for America loaded with the low-priced tea. When news hit the colonies, threats of violence were passed along to the importing merchants. Four of the vessels returned to England, those for New York and Charleston. But three of the vessels, bound for Boston, entered the harbor, expecting the protection of the British fleet and military forces. The rest is well-known history. The merchants and their supporters, probably not more than a hundred, disguised as Indians, boarded the ships, and tossed the tea in the harbor. The British government reacted with a fury. They closed Boston's harbor; they adopted a number of oppressive measures that set off the Revolution. The tax rebellion became a full-fledged Revolution, which, historically, was not a rare phenomenon. The French Revolution and the British Civil War are stark reminders of what can happen when tax revolts get out of control, or when governments crack-down on defiant taxpayers.

Edmund Burke, a member of the House of Commons, tried to heal the breach between the mother country and the colonies. In April 1775 he spoke for two or three hours in the Commons to try and make the Crown understand the American point-of-view. He argued that the "fierce spirit of Liberty is stronger in the English Colonies" than any place on earth, but that they are devoted to Liberty according to English ideas, and that Liberty, like in England, is centered in taxes more than anything else. His speech failed, as we know, but not even the colonists expressed themselves and their views as well as did this great writer and statesman.

The Revolution started shortly thereafter, and it was a hard and bitter struggle. It was said that in the winter you could find the American army by the blood in the snow from inadequate shoes and clothing. The Americans lost most of the battles, but won the war. They had logistics on their side being 3000 miles from England in a day of only sailing ships.

The war was carried on by the Continental Congress, which gave to the world the Declaration of Independence. They had no reliable source of revenue so they issued paper money called a "continental," which soon became worthless. They did draft a kind of constitution, eventually approved by all the states, called the Articles of Confederation. It was an impressive document. This government could even conduct wars, but it couldn't tax – that would defeat the very purpose of the Revolution. When money was needed, as it always was, they would ask the states to supply the funds, apportioned among the states by the value of real property. By using real property as a measure of value, they avoided the slave problem. This requisition procedure was copied from the Netherlands. It worked with the United Provinces of the Netherlands, but it didn't work well with the United States in Congress Assembled. Robert Morris the chief financial officer for the Confederation, summed up the problem with these words: The Congress had the privilege of requisitioning everything and the states had the prerogative of granting nothing. What money the states would grant, and when they would do so, was "known only to Him who knoweth all things."

The government was fast in decline, already bankrupt. In Madison's writings we sense the urgency of doing something to save the Confederation. Without adequate revenues it was only a matter of time before the nation fell apart, and may even have reverted back to the mother country or ended up like Europe. But an interesting thing happened. Fate stepped in or you could even say Providence. There was a minor rebellion in Massachusetts – the Shays’ Rebellion. It wasn't much more than a riot by hard-pressed veterans and poor farmers wanting to get the attention of the state government about taxes and hard times. Daniel Shays led a group of these dissidents who marched on a federal arsenal. A volley of cannon was fired, the rebels dispersed, and the rebellion was over. But the press picked up the fray and blew it all out of proportion, and even suggested that the national government, if you could call it that, could easily be defeated by the military forces of the City of Genoa. In haste, the states sent delegates to Philadelphia to attend a convention to amend the Articles – a convention that had previously been called, but which was about to die from lack of any attendance. Shay's Rebellion not only saved the convention, but probably saved the United States of America as well.

When Patrick Henry heard about the meeting in Philadelphia, he commented, "I smell a rat." Many of the Founders did not want any kind of a national government. What they envisioned was a common defence league, like in Switzerland among the Cantons. They greatly feared a central government, and the anemic Congress under the Confederation was just fine with them.

The convention usurped its authority and soon abandoned the idea of amending the Articles. What the Americans really needed was a new form of government, with limited powers to be sure, but with those enumerated powers, to be supreme over the states. There was to be no general endowment of police powers. The United States could only do what it was expressly authorized to do. Even taxing and spending powers were specifically defined.

A British writer some years ago said that never in the course of civilization had there been assembled at one time, in one place, so many men skilled in the art of statecraft. The Constitution they drafted was not a matter of luck. It did involve many compromises, as all government action does. But they were well educated; they knew the classics; and they studied the great political writers of the Enlightenment: John Locke and Baron du Montesquieu were their favorites. William Blackstone’s monumental Commentaries were constantly being cited. Even Adam Smith's The Wealth of Nations was popular among the Founders.

Benjamin Franklin was the senior statesman at the Convention. He didn't participate in the debates as much as you might expect, but when it was over, he is reputed to have made a very sober observation, with tears in his eyes he said "its complexion was doubtful, that it might last for ages, involve one quarter of the globe, and probably end in despotism."

The main reason for the convention in the first place was to give the Congress the power to tax, and it was generally believed this should be limited to duties on imports. The right to tax without limitation was repudiated by even the most ardent nationalists, like Noah Webster and Hamilton. Hamilton argued successfully against limiting taxes to a single form. If great revenues were needed, as they may be at times, then a single form of tax would be excessive, fostering evasion and hurting commerce. Let Congress have the power to select many different forms of taxation and spread the burdens more equitably. So as you might expect, the first power granted to Congress was to tax.

One thing they didn't want was a tax system like the one that existed in France at that time. One writer called it the Devil's tax system, primarily because of all the exemptions and tax immunities that so many classes in France enjoyed. To prevent this, the Framers first put in the condition that taxes had to be "common to all." No one was to be let off the tax hook, French style. This was later changed to require taxes to be "uniform and equal throughout the United States," and that was approved by the delegates. When the approved draft was sent to a Committee on Style, this condition was dropped completely, and we have no explanation for this, especially since it was a committee on style only. Madison then wrote in the draft from this committee, "uniform throughout the United States," and that's the way it still reads today.

Direct taxes were of serious concern to the Framers. Their great mentor, Montesquieu, copying from Greek and Roman thinkers, wrote that direct taxes were likely to lead to slavery. With almost 3,000 years of history to back this up, the Framers cautiously gave Congress direct taxing powers, but restricted the power to require an apportionment among the states by population. Slaves were a problem, so they compromised and considered every slave 3/5th of a person. When the matter of ratification came up in the many state legislatures, concern about direct taxing powers was expressed by the representatives. Without exception, it was almost axiomatic that direct taxation would only occur during an extraordinary emergency (Madison). A delegate to the Maryland state convention, noted that the federal government must hold the power of direct taxation in reserve, "nothing but some unforeseen disaster will ever drive them [federal government] to such ineligible expedients." At the Convention, Luther Martin seemed to express the universal view that direct taxation "should not be used but in cases of absolute necessity." James Wilson, whom many believe was the primary architect of the Constitution, even eclipsing Madison, said that direct taxes were for emergencies only.

The Framers' final control on taxation was to control all spending. In this, they showed their genius and realism. Taxes, said the Constitution could be used "to pay the Debts and provide for the common Defence and general Welfare of the United States." Debts, Defence, and Welfare all began with capital letters. Hamilton, undoubtedly the leading advocate for a strong national government, in The Federalist, 34, said, the Constitution tied up the hands of government and prevented using taxes for any, "offensive war founded on reasons of state." Tax moneys could only be used for Defence, at least that's what the Framers put in the Constitution. General Welfare meant the opposite of special welfare – but that restriction, like the common Defence restriction has been tossed out the window by national government.

Whiskey Rebellion #1

It is interesting that "white lightning," or "moonshine" has played such an important role in our tax history. I have identified two Whiskey Rebellions, not just one. The first is well known, but not well understood. Hamilton as the Secretary of the Treasury, persuaded the first Congress to adopt a tax on whiskey to help pay for the huge war debt as well as to run the country along with import duties. At that time, there was no tax more hated than excises by both the Americans and the British. It was an extremely unpopular form of taxation, as the ruling Federalist Party was to learn the hard way. A revolt immediately erupted in Western Pennsylvania where whiskey was used as money, more than as drink. Any farmer who paid the tax, had his still shot full of holes by "Tommy Tinker," the name used by the rebels against the tax. Tax collectors were tarred and feathered and ridden out of town on a rail, as some of the fascinating etchings from this period show.

Eventually the rebels capitulated and signed an amnesty agreement, promising to pay the tax. President Washington pardoned the few who led the uprising. Historians now know the military force called out to put down the rebellion was unnecessary as the rebels had capitulated beforehand. It was Hamilton's idea of showing force to strengthen the support for the new national government. In the end, however, when Jefferson came to power, the tax was repealed and the Federalist Party disappeared from history – its demise, undoubtedly caused by its unpopular taxes.

Fries Rebellion

When President Adams replaced Washington, he too as a strong Federalist, introduced the first direct tax, and like the Whiskey tax, it set off another tax revolt, this time in Eastern Pennsylvania. When tax assessors showed up in the various counties, an armed uprising followed. Some of the rebels were put in jail, and an auctioneer named John Fries showed up with a mob and got the men released. Adams called out the militia, Fries was arrested and tried for treason. His conviction and subsequent sentence to be hanged, was overturned by a pardon given by President Adams, against the unanimous advise of his cabinet. Adams felt it was not treason, but just a riot. That unpopular tax, along with the whiskey tax, added to the popular contempt for the Federalist Party.

Hamilton was behind this tax as well as the whiskey tax. Historians have often called him the right man, at the right time, in the right place, in American history. His firm policy to make the country fiscally strong, with sound credit and a sound currency, no doubt justify that observation. But to the Federalist Party, his taxes brought about the total destruction of our first political party, for after the election of Jefferson and the repeal of Hamilton's taxes, his party vanished forever. Lobbying a tax law through the Congress, as he did so ably, was not the same as taxation by consent, as the Declaration of Independence demanded.

The Tax Road to the War of the Rebellion

The tariff became the primary tool to raise revenue for the federal government, and finally, in 1834, the national debt was paid off. It was long struggle, but with a frugal government, and only one short war, the finances of the federal government were slowly being put in good order.

The tariff had been used for some protectionist purposes in the beginning, but in 1828, northern industrialists pushed through a high tariff, greatly resented by the South. They called it the "tariff of abomination," a biblical term meaning the highest evil. In 1832, when this high tariff continued, South Carolina nullified the tariff as unconstitutional. There was a brief threat of war by President Jackson, but cool heads prevailed, the tariff was to be reduced, and the nullification ordinance passed away.

The hatred for the tariff was universal throughout the South. It made Southerners vassals of the North, being just a sophisticated form of tribute. The argument went like this: The tariff prevented competition from Europe, which meant that Northern industrialists could charge excessive prices for their goods sold in the South, thus shifting a large part of Southern wealth to Northern interests. If the South should chose to buy foreign goods with the high tax, this put Southern moneys into the federal coffers to be spent on Northern projects, in effect another form of tribute from the South to the North. Either way it was an injustice upon the Southern people and their economy.

Compromise, however, prevailed up until 1860 when the new Republican Party held its convention in Chicago which nominated Abraham Lincoln as the Republican candidate for President. The platform of the party included a demand for a high tariff, and when the tariff issue came up before the delegates for approval, there was so much yelling and hoopla, it was "as if a herd of buffalo had stampeded through the conventional hall." The noise of that stampede must have been heard all the way to the Southern States. The Southerners got the message, and while the new Republican nominee for president, reassured the South, time and time again, that slavery was in no danger, no doubt their economy was – with the proposed high tariff. The first thing the Republicans did when they arrived in Washington in March of 1861, was to push through a high tariff, called the Morrill Tariff, the highest in history, with rates of over 50% on many items. This tax, more than anything else, probably made any reconciliation with the seceding states impossible.

In Lincoln's first inaugural address, he made a clear demand on the seceding states of "taxes or war." With slavery he was conciliatory, never even mentioning the Republican demand to end slavery in the territories. He went so far as the state that he had no personal inclination to interfere with slavery. He even said he supported a constitutional amendment (ironically #13) to protect slavery forever in the states where it existed, and that would have included New Jersey, Delaware, and the border states. But on taxes he was committed – there would be no invasion of the South he said, except to collect taxes and recover any federal property. Many Southern newspaper editorials saw this and correctly interpreted this as an appeasement to slavery, but a call for aggression to collect the high tariff on imports to the South. Lincoln and his party had resurrected the old animosity with a new and more severe "tariff of abomination." To the South this came as no surprise considering the platform of the Republican Party adopted in the summer of 1860.

The war, however, got started over another tax matter – the free trade zone in the Confederacy. Lincoln, even if he had been a strong advocate for abolition in the nation, never would have received the support, especially the financial support he got from the banks, Wall Street, and the commercial powers of the North. Abolitionists were a small minority that had been repudiated in all the elections in the North. This war, like so many wars, had economic factors that overpowered all other considerations. What was at stake for the North, was not freedom for the slave, but the prosperity and commerce of the North.

At first, few Northerners saw the danger of a free trade zone in the South. The New York Times, for example, its editorials up until March 20th, proclaimed that the confederacy was no threat to Northern prosperity and commerce. On the 21st of March, after months of taking the opposite view, the economic editor changed his tune dramatically. He argued that the South would destroy the commerce and prosperity of the North with its free trade zone vis-à-vis the high Morrill Tariff. Trade from New York, Boston, and Philadelphia would shift to Southern ports, and it already was doing so, as New York importers saw their trade contracts cancelled and rebooked to New Orleans. The President has got to blockade all Southern ports and bring utter ruin to the confederacy, wrote the chief economic editor of the New York Times. At the same time the leading newspaper in Philadelphia expressed the same view as did newspapers in Boston and elsewhere. The demand for war replaced demands of "letting the South go."

Shortly thereafter, in only a week, Lincoln called his cabinet for advice on reinforcing Fort Sumter. It was almost unanimous that any such show of force would provoke war, and Lincoln then made the decision to do so. As expected, he did provoke a foolish assault on the Fort. The North rallied around the President's call for 75,000 troops for four months to put down the South. Little did he or anyone know what horrible carnage would be unleashed on the United States, with consequences that have lasted to this day.

In December of 1861, Charles Dickens, who gave us the Mr. Scrooge and scores of marvelous novels and writing still in print today, saw through the Civil War, and wrote this in a weekly London paper, All the Year Round:

So the case stands, and under all the passion of the parties and the cries of battle lie the two chief moving causes of the struggle. Union means so many millions a year lost to the South; secession means the loss of the same millions to the North. The love of money is the root of this as of many many other evils.

We can say that the trigger for the Civil War was the press, just as it triggered the war with Spain in 1898 with its cry of "Remember the Maine" In 1861, it was remember Fort Sumter, and remember your prosperity, and what Southern freeports will do to it. What makes the start of the Civil War of especial interest to the economic historian, is not just a single tax factor, like so many other revolutions and revolts, but two tax factors in conflict with each other. It apparently took the two of them – the Morrill Tariff and the free trade zone – to act as the fuse that set off this terrible war and the suffering, carnage, and destruction it brought to the nation, including tragic moral and spiritual tosses as well.

Whiskey Rebellion #2

Few historians take note of Whiskey Rebellion #2 which began as the Civil War ended and raged for almost 40 years, in Appalachia – from West Virginia south to Georgia and Alabama. The heart of the rebellion was probably in North Carolina. To support the war, the North adopted a tax on whiskey, eventually up to $2 a gallon. When the war ended, the tax naturally spread throughout the South and federal tax men, call revenuers, scoured this mountain region to collect the tax. Open war erupted and hundreds were killed, on both sides, as the IRB (Internal Revenue Bureau) came into existence and enforced this hated tax on what was a poverty area of the nation. As one moonshiner said, being led off to jail for tax evasion, "What did my granddaddy fit in the Revolution if it wasn't to make a little corn licker." Others argued it was an assault on their liberties; they had just as much right to grind corn into mash as they did to grind it into flour to make bread.

The spirit of the assault on these mountain people, and the numerous death that resulted from trying to serve arrest warrants, indicates a kind of savage enforcement of a tax law that has survived to this day. The violence we see from time to time in enforcing federal laws, even misdemeanors, may well be traced to the spirit of enforcement of the whiskey tax in the South among the moonshiners. The Internal Revenue Bureau grew from this small paramilitary operation to enforce the income tax that came some 30 years later, eventually becoming the I.R.S. in our day. The spirit of tax enforcement that characterized that early IRE seems to have infected not only the IRS, but other federal agencies with similar endowments of powers of enforcement. Resistance to the service of any federal warrant justifies deadly force today, as it did during the days of the moonshiners. Waco, Texas, is proof enough of this policy of violence to the disobedient, and Waco is not a rare exception to official policy.

Digging a Ditch for the Rich to Fall Into

The Civil War brought forth the first incomes taxes as both the North and South introduced these forms of war taxation. The modern income tax was invented by the British and it has been quite properly called "The tax that beat Napoleon." But it was a war tax only and as soon as the war ended the British Parliament, against the wishes of the Crown, repealed the tax and ordered all the records to be destroyed. They hated it, but were willing to tolerate the tax as a war – time measure. So in keeping with the British view, these first American income taxes ended shortly after the war. Collections apparently weren't too successful, at least some writers report that anyone who paid the tax was the laughing stock of his neighbors.

A populist movement developed in the late 19th Century and one of its demands was a tax on the rich via income taxation. In 1894 they had sufficient votes in the Congress plus a Democratic president to put through a peacetime income tax to essentially have the rich pick up the whole tab of running the government. Some excises (like whiskey) remained along with import duties. This first income tax was a low 2%, but it exempted 98% of the nation, which immediately reminds me of President Clinton's increased income taxes which were also targetted for the rich, the top 2%.

My wife many years ago told me about a Russian proverb she had learned as a young girl which said: "If you dig a ditch for someone to fall into, you will probably fall in yourself." The first income taxes after the Civil War were undoubtedly class legislation against the rich – they were a ditch for the rich to fall into. The rich fought back immediately, challenging the tax on a number of constitutional grounds, two of which stuck. First, it was a direct tax and had to be apportioned among the states; second, it violated the command of uniformity by exempting 98% of the population. There was a dissenting view by Justice John Harlan who gave us the dissent in the segregation case of that era, "The Constitution is color-blind." He argued that the income tax was an excise on earnings, not a direct tax; it did exempt 98% of the people, but that was tolerable; however, if any tax became legislative plunder, under the guise of taxation, the Court would look into that. Exemptions, said Harlan, were most liable to objection.

In the next two decades the proponents for income taxes pushed the 16th Amendment through the state legislatures and by 1916 another income tax law was passed. It was also class legislation against the rich, with progressive rates from 1% to 7%. Most people were exempt and many paid the 1% rate even if not required to do so, believing all citizens have a duty to pay something toward the expenses of maintaining the government.

The problem with trying to soak the rich, from an historian's perspective, is, it doesn't work as planned. The rich, going all the way back to the Romans, have had the means to control and evade taxes that got out of line. Howard Hughes paid no income taxes, and his tax planning was quite legal. In the final analysis, the middle class is the only dependable source of tax revenue – and that is a truism tax makers should not forget when they seriously need more revenue. As any tax practitioner will tell you, the richer you are, the easier it is to control taxable income. Going back to Mr. Hughes, in his final years of madness, he neglected to plan for death taxes. He didn’t even have a will. So, the tax man had the last laugh as death taxes made up for the income taxes he avoided.

So, in 1916, off we go with the income tax. It's supposed to solve all our fiscal ills, and it's supposed to make the rich pick up most of the tab. Of course, as might be expected it didn't quite do that, and the more the rates were increased, collections didn't go up for the rich, although they did go up for everyone else. In 1916, with a top rate of 7% the treasury reported 206 people with incomes over one million dollars. Five years later, when the tax rate went up 1100 percent, from 7% to 77%, there were only 21 people with an income of a million dollars or more. What happened? Simple arithmetic shows that 9 out of 10 million-dollar earners had vanished, as if by magic. Well, maybe they moved to some low tax country. We don't know, but they obviously rearranged their lives or finances so they no longer had million dollar earnings that were taxable. As for a 77% tax rate, I think that's just plain plunder, or you can call it stealing. It is certainly not in keeping with the ideals of the Framers that taxes had to be "common to all."

You may wonder about progressive tax rates. How are such rates possible when the Constitution commands uniformity in taxation? That issue faced the Court at the turn of the century in an inheritance tax case to raise funds for the Spanish-American War. The Court felt that for inheritance purposes you could have graduated rates based on one's relationship, like children as opposed to strangers or cousins. But the Court also noted that in other areas, such discrimination could not stand. That was what lawyers call dicta – side comments that are not really part of the issues. But in that case, one Justice spoke out strongly against any tax that was deliberately and intentionally made unequal: Progressive rates violated the command of uniformity and equality in the Constitution. This Justice, David Brewer, is hardly known, even by scholars. In my book you will find his picture. The story behind that picture is interesting. When I called the Curator of the Supreme Court for his picture, they first said, no problem. But after checking their archives, they had never had a request for his picture and all they had was an extremely old negative that had never been developed. So I had them develop it, and there in my book is the only picture of this remarkable justice who stood up for uniformity and equality in taxation.

When the 1916 income tax came before the high Court with a challenge to its progressive rates, Justice Brewer had passed away and the Court dismissed the challenge with not much more than a one liner, even though the leading legal scholars and Law Reviews had zeroed in on this issue as the most important tax issue in the Constitutional history of the United States.

The tolerance for discrimination in taxation by the Courts, contrasts with Chief Justice Warren's lack of tolerance for discrimination in racial matters. He ruled in the famous Brown case that overruled all racial segregation, that such laws, though supposed to be "separate but equal," were inherently unequal despite all appearances. Yet, with discrimination in taxation, we have a much stronger case. The tax laws are not just "inherently" unequal, they are intentionally made that way, like a few centuries ago when Jews paid four times the tax rates as Christians, and in Protestant countries, Catholics paid twice the rate. The Supreme Court retreated immediately from its unconstitutional ruling in the 1894 income tax case, to the position today, that no challenge to a federal tax law will be taken seriously. Like Pontius Pilate, they have taken "water and washed their hands before the multitude."

    From the Rosetta Stone to the US Code: The History of Taxation (CD) CD with ten MP3 files Author: Adams, Charles Your Price: $35.00    

The history of the income tax is an old story, a perfect example of a good tax going bad. In fact, one of the universal factors in tax history is that most all good taxes go bad. The income tax certainly followed that course, especially in the last 30 years. It was initially a tax supported primarily by the duty and honor of all citizens – in short, the income tax was an honor system, which is the only way it will work in a free society. Today, the honor part is gone. Over the past two decades, especially in the Reagan years, the intrusions and spying on citizen taxpayers has reached alarming levels. Thirty years ago nothing was reported to the tax man except the W-2 which allowed a worker to claim a refund. Today, everything of any possible tax nature is reported. Banks photograph everything going through your bank account and hold those photos for Big Brother to see. We have evolved from a nation with a tax system based on honor to one based on espionage against all citizens. But there is hope. President Ulysses S. Grant said that the best way to get rid of a bad law is to strictly enforce it. If that is true, then the Congress has been digging a grave unwittingly for the income tax law over the past 20 years. Let us hope President Grant's observation comes true.

You could interpret this mass of tax surveillance legislation as the sure sign of a decadent society as compared to our recent ancestors. But the more likely cause is a major cold war type tax rebellion against a tax that is tyrannical and corrupt. Adam Smith in The Wealth of Nations made some surprising arguments against making tax evasion a crime. He said that the evader is ordinarily an excellent citizen had not the state made a crime which nature never meant to be. He concluded by noting that when there is much unnecessary expense by government and misapplication of the public revenue, the laws that protect it will not be respected.

When popular support for a law, especially a tax law, disappears, the state has to fall back on what the great sage of the Enlightenment, Montesquieu called, "extraordinary means of oppression." That seems to be what we have experienced and are likely to experience in the decades ahead. The likelihood of a major tax change in our society may depend on just how fed-up the people are with the income tax system. With the "evil empire" now gone, tolerance for a bad tax law may completely disappear and a powerful democratic force for change may bring us a new and better tax law. But beware, don't expect too much, unless someone comes up with a much better mousetrap. And even then, we should remember this poetic couplet of Alexander Pope, written 250 years ago:

Who ever hopes a faultless tax to see, Hopes what ne'er was, is not, and ne'er will be.

October 7, 2006