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April 11, 2013
The Birth of Tax Day and the Tea Party
Joseph J. Thorndike

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Last week, Citizens for Tax Justice (CTJ) offered a reminder that Americans are not suffering unduly from heavy taxation, at least not compared with our trading partners. The United States is the "third least taxed nation" among OECD members, according to the CTJ .

That is not exactly news. But it's still worth contemplating, especially as Americans rush to file their tax returns today. April 15 is our annual anti-holiday, the date we love to hate. It provides an excuse for ruminations on the tax-hating element of U.S. political culture.

"Americans hate everything about taxation -- with a passion," Berkeley historian Robin Einhorn wrote in 2006 (Tax Notes, June 12, 2006, p. 1277 ). "The evidence is clear, and especially around April 15." Of course, Einhorn is right. And she offers a brilliant analysis of our antitax inclinations in her book American Taxation, American Slavery (2006). She writes that we have Southern slaveholders to thank for that strand of our national politics.

But Einhorn's argument, while persuasive and vital to our understanding of U.S. tax culture, is only a partial explanation for our modern inclination to dislike taxes and feel oppressed by them. It's a long way from the antebellum South to the early 21st century.

In addition to slavery, there are other, more proximate explanations for the continued vitality of antitax politics, especially as manifested in recent years by the Tea Party movement. In particular, much can be explained by how we collect our tax revenue, as opposed to the amount of that revenue overall.

As a general rule, tax collection is uniformly unpopular, and tax collectors have been reviled always and everywhere. But the American distaste for taxation draws special strength from our use of a particularly onerous sort of revenue tool. While most countries, including our colleagues in the OECD, make good use of income taxes, they rely on some sort of national consumption tax, usually in the form of a VAT. In refusing to adopt such a levy, the United States has created a truly exceptional form of public finance.

The roots of that distinctive approach to national taxation can be found closer to our own time than to the time of slavery. While Southern slaveholders may be the original source for some of our modern antitax politics, the misery around April 15 -- and our overwhelming dependence on the revenue collected by the income tax -- can be laid at the feet of Franklin D. Roosevelt.

As I argue in my new book, Their Fair Share: Taxing the Rich in the Age of FDR (2013), Roosevelt's contribution to the modern structure of U.S. public finance was crucial. And it was Roosevelt personally, not just his minions, who gave formative shape to our tax regime. His preference for progressive income taxation -- and steadfast opposition to broad consumption taxes -- proved crucial to policy formulation when it really mattered: during the fiscal crucible of World War II.

The mass-based income tax was not an easy fit for FDR. He built his early political career defending the narrow focus of income taxes at both the state and federal level. The taxes were designed to be a rich man's burden. Even as liberal economists were calling for broadening the tax base by lowering exemptions, he resisted them. Experts believed that broader income taxes could be used to pay for cuts in regressive excise levies. But FDR was unwilling to make the conceptual (and political) switch required by that trade.

That is, until WWII forced his hand. When the war's fiscal demands proved overwhelming, FDR was forced to choose between a vastly expanded income tax and a new form of national consumption tax. In retrospect, his decision was almost inevitable. After all, Treasury had a lot of experience collecting income taxes, at least from the well-to-do, and a national sales tax would have entailed considerable improvisation (and difficulty).

But the sales tax was a very real option. And remarkably popular, especially on Capitol Hill. Roosevelt's point man on tax policy, Treasury General Counsel Randolph E. Paul, later remarked that the most surprising aspect of wartime tax reform was the absence of a new sales tax. For a while, everyone thought it was coming.

The failure of the sales tax was largely because of Roosevelt's personal distaste for the levy. In the face of strong congressional interest in a sales tax during debate over the Revenue Act of 1942, FDR asked Treasury for a memo on the evils of the sales tax. The department, which harbored few sales tax fans anyway, was happy to oblige.1

FDR's opposition proved politically pivotal. Drawing on his enormous personal popularity and his long record of progressive tax reform during the New Deal, he managed to deflect the sales tax drive. Lawmakers opted instead for a rapid -- and ultimately permanent -- expansion of the individual income tax.

Of course, that expansion came with its own administrative problems, not the least of which involved schooling millions of neophyte taxpayers in how to complete their tax returns every April -- no small task. But with help from the new system of wage withholding and threats about the penalties for failing to file, Treasury managed to make the mass-based income tax collectable.

We've been filing tax returns ever since. Even most of the vaunted 47 percent still have to file. This annual ritual comes with a genuine payoff for some low-income filers and an illusory one for many overwithholders. But in any case, it's something we do. It's a yearly point of engagement between taxpayer and tax collector, a moment of awareness when we all get to reexamine the value proposition that undergirds government.

For many people, of course, it's not a happy moment. Completing a return is burdensome and intrusive. We disclose a remarkable amount of personal information on the way to meeting our fiscal obligations, and many Americans don't like it. Add to that the sense of fear surrounding tax enforcement and you end up with a problem.

I don't mean to imply that alternative forms of taxation are uniformly or even occasionally popular. It's safe to say that no one ever likes a tax. But we hate some taxes more than others. The income tax, for its part, is remarkably hateable, requiring lots of work and causing plenty of confusion, and creating the lurking possibility of taxpayers being called on the carpet for innocent (or not-so-innocent) mistakes.

That is a toxic brew from the perspective of tax politics. Indeed, the United States' reliance on income taxation has had profound, if sometimes paradoxical, effects on the U.S. government. It has fostered the rise of the modern welfare state by providing lots of money to pay for it. But it has also constrained the size of that state by depriving it of all the extra money that a VAT could raise. It has bolstered notions of fiscal citizenship by creating a shared ritual of tax payment. But it has also undermined faith in government by making this ritual so difficult and intrusive.

The Tea Party's fixation on cutting taxes -- and its flirtation with alternative forms of taxation, like a national retail sales tax -- is a direct result of FDR's chosen fiscal path. Counterfactual history is a dangerous game, but it seems likely that if FDR had been willing to accept some sort of national consumption tax, we might not see quite the same tax resistance we do today.


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