History of the US Income Tax

Planet Money


But our country has this really conflicted history with the income tax. It was not designed by our founding fathers for most of American history there was no income tax at all in the years are brand new government needed some way to raise money, but there was no need to mess around with an income tax. The government had a much simpler way just. Tax The stuff that comes into the ports for a long time really the only way that they raised money was using tariff duties duties on imported goods. This is tax historian Joe, thorndike and tariffs are simple. Right? You send out a tax collector told the major ports ship pulls import us go through the manifests, check the cargo and you add up whatever you WANNA tax sugar guns, books simple. But there's one big problem with tariffs they fail you the one time you really really really need revenue tariff duties are great way to raise money as long as you're not fighting a war yet because someone's blocking airport right or sinking your ships on the way. News Yeah. And that that does tend to depress a little bit. So when in the United States do people start to think and talk about an income tax will you know the earliest? In American history that I know of comes during the war of eighteen twelve when the treasury secretary throws it out there it's it's really kind of a throw away in a report that he sends to Congress. You know, hey, we could consider taxing incomes but this suggestion during the war of eighteen twelve, it goes nowhere an income tax is actually a very complicated thing to pull off successfully there are three big obstacles to getting it. Right. The first obstacle is logistics like how do you make sure people pay a percentage of their income? Oh, it's enormously complicated because it really does come down to. The individual, who's filing this return, and that person we're going to expect them to begin with just to keep track of how much they're earning. Then expect a lot of honesty from them about reporting those records to the government and to make sure that they're actually doing the job you didn't have to create this huge administrative apparatus to go in and enforce it, and you have to give these people the power to dig through the personal financial records of every taxpayer, and that's usually pretty unappealing to tax payers and the government is not going to radically reform the tax code unless it has to. Unless, there's something incredibly expensive it needs to fund. This is how a lot of taxes come out. There's a war, and in fact, fifty years after the idea of the income taxes I floated such a war comes to pass the civil war. This is a very, very, very expensive warm Congress needs money to feed its soldiers by guns, cannon ships. So this time, it's not just one guy. Bringing up the income taxes a suggestion this time. Congress makes it law and even more importantly they come up with a way to enforce it Congress provides for the creation of the Bureau of internal. Revenue this is the first real income tax in the United States, but it doesn't look quite like the one we have today during the civil war only the wealthy had to pay income tax. And the government does this really very clever thing to get rich people to pay it. It makes tax returns public during the civil war anyone could go in and look up your income tax return or at least your report of how much you earn and the idea was that this would help improve compliance because your neighbor would see you driving around on your brand new plow and he'd. Say Wait a minute I that guy get all that money I'm going to see how much he reported on his income tax and they'd go in and they check it out and they could report to the agency and say, Hey, you know I. Don't think that this is the right number. This guy looks like he's living too large for this sort of an income they sort of conscripted. And made the tax collector. So who is living large in? Let's say Washington DC in eighteen, sixty four. Well, we pulled up a copy of the tax assessor sheets for DC, during the civil war and there happens to be a guy here Abraham. Lincoln. Address White House at the White House. Everyone knows where it is it's senator and and the taxes he paid I'm sure people were very interested in this one, thousand, two, hundred, ninety dollars. They're also entries here for restaurant owners for liquor dealers some guy lived on longboat may be in the Potomac River. It's clear from this list that people were paying taxes, the plan worked. Well, some people are paying taxes the north part of the country. Remember this is the civil war, the south. Also attempted an income tax attempted they had a much less effective, a tax system and their income tax was much less effective than the North's version. Is there a case to be made? The civil war was sort of an economic battle in the in the north was better at at that and raising money and and that's one reason at one. Oh, absolutely I mean taxes do have a lot to do with the. North. Winning the war. Not just taxes, but the North's ability to borrow money it. It just had a better economic foundation for fighting a big warlike that you know the income tax worked. So well during the war, you would think that the US government would want to keep it around I. Mean it's Nice to have extra money when you're actually rebuilding from the carnage and such but once the conflict ended, there was this big argument about whether to keep the. Income tax round or not, and now the income tax hits its second obstacle a legal obstacle. Remember how he said the income tax only hits the rich. Well, the rich did not like it and the rich have lawyers in eighteen ninety, five legal challenge to the income tax reaches the US Supreme Court here's economic historian John Steele Gordon. My great great uncle was one of the lead lawyers in that case and guess which side he was on. The trying to shoot down the income then you've got. Cable. He was a Morgan partner at five years later. The argument John Steele Gordon great great uncle made in court was that the income tax violated little document that we'd like to call the US Constitution here Ariba line to you. It says quote direct taxes shall be apportioned among the states according to their respective numbers. I will translate that for you if the federal government wants to raise money directly from people or property, then it has to divide the tax burden up equally Among the states according to their population. So if a state had ten percent of America's population, it should only have to pay about ten percent of the tax and the income tax wasn't taxing according to population it was taxing according to income. So the question before the Supreme Court is and as is often the case it's something kind of knowingly subtle and hard to follow. The question is, is the income tax eight direct tax. I stayed up late last night reading court documents. This is a huge rabbit hole of complicated things, but it comes down to this if any part of this income tax law passed by Congress, if any of the many taxes embedded inside considered a direct tax, then Congress did it wrong? The law is unconstitutional. That is the question that justices had to decide a very interesting thing happened in the Supreme Court. One justice was ill evacuate dying Justice Jackson from Tennessee who was argued before eight justices and they split four four as to whether or not the income tax was a direct tax and therefore unconstitutional. That's why we have an odd number of justices. He can't have a tire. Exactly. was. A four four time. The court decided that the case was simply too important to be tied, and so they haul justice Jackson out of his deathbed. Now odd number of justices and everybody knew that he was in favor of the income tax because he'd said. So publicly, Z. Really Dying Jesse really died two months later. So the lawyers re argue the case Justice Robert Jackson is. In the final days of his life is a pro income tax guy. So he's going to break the tie in favor of the income tax and the tie was broken case was decided five four. But the crazy thing is it was five four the other way it was a five four decision against the income tax. One of the other justices we don't know who switched his vote. and. So the tax was unconstitutional. No income tax. How do people reacted the time to this little intrigue Oh they've there would be a there was a lot of. In the papers about it, but the Supreme Court was silent as it so often is to what the internal workings we really don't know who who, really don't know who it but somebody's which their vote we just don't know. So there's this weird stretch in the middle of American history where the income tax has been ruled unconstitutional but this didn't in anyway settled the argument I mean, if anything the debate over income tax in America grew more heated. This is the time when a lot of big industrialists are getting filthy rich JP Morgan, Rockefeller Carnegie, and at this exact time, the nation has no income tax, the people who are not JP Morgan or Rockefeller Carnegie in the country. A lot of them feel those guys the rich need to bear more of the burden. So nearly twenty years after the income tax is ruled unconstitutional, we get an amendment to the Constitution the sixteen, th amendment ratified in nineteen thirteen a single sentence which begins the Congress shall have the power to lay and collect taxes on incomes just in time for another war World War One. So the income tax has cleared to hurdles so far logistics check legality check. The income tax needs one more thing to bring it into the modern age. One More L. Word Love the income tax of to this point has been a tax on the rich right everyone else was exempt in fact when they bring the income tax back after the constitutional amendment, less than two percent of the population has to pay. All this changes though with World War Two, the government needs more money and now ordinary folks are asked to pay again Joe Thorndike this is a is a real revolution because for most Americans, they've never had this kind of direct tax paying relationship with the federal government. You know they're paying excise taxes on alcohol tobacco or consumer goods but those things are are usually levied somewhere other than like on the consumer you know they're levied at the manufacturer level for the first time. Americans are sort of confronting the federal government as a tax collector and the middle. Class has never paid this tax before they not sure what to do a whole in nineteen forty-three show that one third to one half of people were unclear what

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