The Income Tax – A Brief History

Yesterday, I wrote an article explaining at least one of reasons why Americans aren’t rioting over the size of the national debt and yearly budget deficit – how Washington is taxing and spending us into oblivion and yet, we just don’t seem to care.

Sure, when a pollster calls, we tell him or her it is one of our top priorities, when, in the real world, it must not bother most of us as much as we claim. I explained that this odd juxtaposition is due almost entirely to income tax withholding – that we don’t miss what we never receive. It’s aptly called reduced taxpayer awareness.

As we all know, the income tax is the fault of both President Taft and President Wilson, with the passage and enactment of the Sixteenth Amendment in 1913. This merely allowed the government to collect income taxes. But the story neither starts nor ends there.

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Wartime has always afforded the government the optimal opportunity to introduce additional taxes. The introduction of the “Wartime” income tax actually began during the Civil War. It was adopted in 1862, although the idea gained traction during the War of 1812. This “Wartime” income tax was the first graduated (progressive) tax, with higher rates for higher incomes.

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The war ended in 1865, yet the income tax was not repealed until 1872. Another stab at the income tax (a flat rate this time) was again enacted in 1894 by the Grover Cleveland administration, but was declared unconstitutional (Pollock v. Farmers’ Loan and Trust Co., 1895), being that we were no longer at war and, more importantly, because it was a direct tax on wages (Article I, Section 9) which, at the time, was clearly not part of the Constitution. I guess they still knew what that document was back then.

In 1913, at the tail end of the Taft administration, the Sixteenth Amendment was ratified when Delaware accepted it in February of that year. One month later, the evil and now second worst President of the United States, Woodrow Wilson, was sworn in.

Within a month of being sworn in, a progressive rate income tax was introduced to Congress. The progressive income tax was now in place and the graduated rates were a clear measure for Wilson and his supporters to redistribute wealth. Sound familiar?

By October of 1913, the progressive income tax was in place. It still was not what we think of, being that there was no withholding as we have today; but, like all progressive ideas, they have to start somewhere, and that somewhere was to set up the framework for wealth redistribution.

The onset of World War I afforded progressives the opportunity to rapidly expand the tax system, but it wasn’t until World War II that the tax burden dramatically increased. Due to the war effort, federal spending went from $9 billion in 1940 to more than $98 billion in 1945.

Up until this time, present year income taxes were paid by the taxpayer in the following year. This posed a problem for the war effort. They needed that money now – not next year.

Enter a rather unlikely culprit – the great free-market economist Milton Friedman, who worked at the Treasury during the early part of the war. It was actually he and his colleagues at Treasury who proposed the pay-as-you-go income tax withholding idea, which was enacted in 1943.

In his memoirs, he described the reasoning, at the time, behind the idea of withholding. “It was clear to all of us at the Treasury, as we set out to multiply the amount of revenue to be collected from the personal income tax, that it would be impossible to do so unless we could develop a system to collect the taxes as the income was earned, not a year later.” He added that “the system would have been introduced had I been involved or not.” 

Later, he regretted that decision, as he wrote: “We concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.” Even the best of us can have serious lapses in judgment.

Unfortunately for us, unlike the “Wartime” income tax of 1862, this “Wartime” tax, now 70 years removed, was never repealed and has been the sole mechanism of our modern day redistributionist welfare state

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