October 3 is the 100th anniversary of the Revenue Act of 1913 and with it, the first federal income tax of the 20th century. The law is often trotted out in tax reform discussions, especially by those convinced that the modern tax regime has strayed from its origins.
"People supported the income tax because it was originally meant to impose only very low tax rates on only the highest incomes," wrote Raymond J. Keating in a 1996 article for The Freeman. "Proponents argued that the 16th amendment to the U.S. Constitution would force the so-called 'robber barons' to pay taxes. It was not supposed to provide a mechanism for Washington to reach into most Americans' pockets."1
There's some truth to that argument -- but not much. Assuming that intent is best found among the people doing the intending, there's no reason to assign much normative value to the boundaries of the original law. In 1913 Congress enacted a top rate of 7 percent and a high exemption that spared all but 2 percent of households entirely. But just five years later, the top rate was 11 times higher. Many of the same lawmakers who voted for the light and narrow tax of 1913 also voted for the heavy and much broader tax of 1918.
Still, the 1913 act deserves some scrutiny because many of the arguments surrounding its enactment remain alive today. If nothing else, history can remind us that issues of fiscal fairness were just as nettlesome then as they are now.
A Dangerous Man
President Wilson had some dangerous ideas, at least in the view of many business leaders. As they waited for his inauguration in March 1913, the lords of "financial feudalism" found Wilson's opinion of the tariff especially problematic.2 The president-elect had long maintained that steep import duties shielded business from healthy competition (and, in doing so, promoted monopoly). Wilson also insisted that politics made the tariff "one of the most colossal systems of deliberate patronage that has ever been conceived."3 Finally, Wilson believed that the tariff was sneaky. "Very few of us taste the tariff in our sugar," he observed.4
Those ideas struck business leaders as distinctly unwholesome. Even more disconcerting, however, was Wilson's new revenue tool that he might use to fix the tariff. The 16th Amendment was ratified just a few weeks before his inauguration, and most observers expected the new president and his congressional allies to move quickly to enact a new tax on individual and corporate income.
And they did. The world moved more slowly in 1913 than it does today, but eight months after Wilson arrived in the Oval Office, he signed the 1913 revenue act into law. Most of the law was devoted to tariff reform, but many observers were fixated on the income tax. "Knocked out of a Democratic tariff bill by the Supreme Court eighteen years ago, thus in the whirligig of time" the tax "comes back from the grave in which it has rested ill and taps again at the door of a Democratic Administration," wrote Angus McSween of the Philadelphia North American.
The new income levy took shape in the House of Representatives, and especially in the office of Rep. Cordell Hull, who provided an early draft. Like many Southern Democrats, Hull was a longtime champion of taxing income, and he sketched out a low, flat-rate levy on a small group of very rich taxpayers.
But some Democrats had other ideas. According to Randolph Paul -- one of the great fiscal historians of the 20th century, as well as a leading Treasury official in the 1940s -- Rep. John Nance Garner led the drive for a graduated rate structure. Hull was reluctant, worried that progressive rates would leave the new tax vulnerable to judicial and political challenges. Eventually, however, he agreed to a modest amount of graduation. Rates in the House bill topped out at 4 percent.5
The House version of the income tax included a $4,000 exemption for both single and married taxpayers -- almost $100,000 in 2013 dollars. Wilson specifically asked Hull to set the exemption high, because he was eager to "burden as small a number of persons (as possible) with the obligations involved in the administration of what will at best be an unpopular law."
After passing the House, the tariff bill moved to the Senate, where left-leaning Democrats and progressive Republicans were intent on raising income tax rates. The Finance Committee resisted those changes, instead focusing on exemption levels. In particular, the panel lowered the exemption to $3,000 for single filers but kept the House's $4,000 figure for married couples. Finance members created a $500 child exemption (with a $1,000 maximum).
When the tariff bill reached the floor, insurgent Democrats and progressive Republicans teamed up to push for higher rates, with some amendments seeking to raise top rates as high as 20 percent. But the bill's Democratic floor manager, Sen. John Sharp Williams, tried to beat back the insurgency. "No honest man can make war upon great fortunes per se," he insisted. "The Democratic Party never has done it; and when the Democratic Party begins to do it, it will cease to be the Democratic Party and become the socialistic party of the United States; or better expressed, the communistic party, or quasi-communistic party, of the United States."
Williams had plenty of support from old-line Republicans like Henry Cabot Lodge of Massachusetts, who denounced the "confiscation of property under the guise of taxation." Lodge urged his colleagues not to transform "the imposition of a tax to the pillage of class."6
Democratic leaders and their conservative Republican allies eventually agreed to a compromise with the insurgents. As passed by the Senate, the income tax law featured rates as high as 7 percent -- a long way from 20 percent, to be sure, but also a fair distance from the House's top rate of 4 percent. The Senate's higher rates prevailed in the conference committee, and the tariff bill moved smoothly to final passage. Wilson happily signed it on October 3, and the new income tax (made retroactive to March 1) took effect immediately.
Rates and exemptions were not the only contentious aspects of the new tax. As it moved through Congress, critics railed about its complexity. "I guess you will have to go to jail," wrote Sen. Elihu Root to a correspondent. "If that is the result of not understanding the Income Tax law I shall meet you there. We will have a merry, merry time, for all our friends will be there. It will be an intellectual center, for no one understands the Income Tax law except persons who have not sufficient intelligence to understand the questions that arise under it."
Administrative provisions of the law were controversial, especially the requirement that much of the tax be collected at source. Withholding had been used during the Civil War to collect taxes on some kinds of income, but the 1913 act envisioned a more ambitious regime. In particular, the law required withholding on dividend and interest payments paid out by corporations, as well as rent, interest, wages, and salaries paid by both corporations and individuals. (Eventually, critics would win the argument about withholding, persuading lawmakers in 1916 to repeal it. It would not reappear until World War II.)
Another controversial aspect of the law was its geographic incidence. Observers understood that the new levy would fall most heavily on the Northeastern states (as had the Civil War income tax). Yankee lawmakers complained long and hard about that fact, arguing that the law's high exemption was to blame. But Hull, mustering well-rehearsed Southern arguments, insisted that the tax was sectional because "wealth first made itself sectional." In other words, the North paid more because the North had more. "It would be monstrous to say that the receivers of great incomes which are drawn from every section of the country may segregate themselves and on the plea of segregation or sectionalism successfully exempt their entire wealth from taxation," Hull said.
In the Senate, Sen. James Lewis offered an even more vigorous defense of the law's geographic incidence. In response to complaints from Root that New Yorkers would be overpaying, Lewis was openly scornful. "Who are the people of New York for whom the senator is so solicitous?" Lewis asked. "Are they those who breed around Wall Street and flock to the Waldorf-Astoria? Are they those whose names are seldom found on the assessors' lists, but who hover around the Mediterranean in the summer and the islands of the Caribbean in the winter?"7
For his part, Root claimed to support the income tax in principle, but he insisted that the high exemption was dangerous and unfair. "I am in favor of an income tax," he declared. "And I believe in the principle of it. I think it is fair, and I voted for the income tax amendment to the Constitution, and urged it upon my people. I have no fault to find with an income tax or a graded tax, but if you impose too great a tax upon the industrial States you will, to that extent, diminish their taxable resources for State or other local purposes."8
Ultimately, however, if Root had no problem with a graded tax, plenty of other observers did. Editorial critics objected to the high exemption as a form of class legislation. The New York Sun, for instance, called it "taxation of the few for the benefit of the many." And their crosstown colleagues were similarly unhappy. "The aim of the cumulative tax is to take from those who have much for the benefit of those who have little," The New York Times wrote. At the end of the day, such a tax would hurt the rich (and the economy) but do little to help the poor.9
Indeed, The New York Times had succinctly voiced its objections some four years earlier when the 16th Amendment first made its way to the states. "When men once get the habit of helping themselves to the property of others, they are not easily cured of it," the paper warned.10
The 1913 debate over rates and exemptions did nothing to resolve those contentious issues. Indeed, they have remained at the center of most political tax debates ever since. And as modern politicians wrangle over tax reform, many point nostalgically to the low, narrow tax of 1913 as some sort of object lesson. In a 2011 presidential debate, for instance, Rep. Michele Bachmann, R-Minn., eagerly observed that "when we got the income tax in 1913, the top rate was 7 percent. By 1980, the top rate was 70 percent."
True enough. But, in fact, the rate had reached 77 percent by 1918, just five years after Congress created its first, single-digit levy. World War I explains the rapid escalation in rates, of course. But the willingness of lawmakers to transform the income tax in the face of national emergency tells us something about the way they viewed that tax in the first place. After all, lawmakers had other revenue options.
But the income tax had several virtues. To begin with, it was already on the books, and its administrative machinery, while embryonic, was at least operational. That couldn't be said for most alternatives, including any form of broad-based consumption tax (other than the tariff, which was a poor revenue tool in wartime).
But almost as important, the income tax struck many wartime lawmakers as fair. Which is no surprise, because many of those same lawmakers had voted for the tax -- and endorsed its fairness claims -- just five years before. The low taxers of 1913 were the high taxers of 1918. Necessity may have forced their hand during the wartime emergency, but lawmakers of the late 1910s were not somehow wed to the notion of low-rate income taxes. If the legislative majority was wed to anything, it was to the essential fairness of taxing income. And to taxing it progressively.
1 Raymond J. Keating, "Original Intent and the Income Tax," The Freeman, Feb. 1, 1996, available at http://www.fee.org/the_freeman/detail/original-intent-and-the-income-tax#ixzz2g0q7i9Gg.
2 Randolph E. Paul, Taxation in the United States (Boston: Little Brown, 1954), at 99. Unless otherwise cited, all quotations from political and journalistic sources are drawn from Paul's magisterial -- but maddeningly unfootnoted -- chronicle of the law's development.
3 "Wilson Hits Tariff and the Third Party," The New York Times, Sept. 10, 1912, available at http://query.nytimes.com/mem/archive-free/pdf?res=F00C1FFB3A5E13738DDDA90994D1405B828DF1D3.
4 Woodrow Wilson, Congressional Government: A Study in American Politics (Boston: Houghton Mifflin, 1900), available at http://www.gutenberg.org/files/35861/35861-h/35861-h.htm.
5 Sidney Ratner, Taxation and Democracy in America (New York: John Wiley and Sons, 1967), at 325-326.
6 Id. at 331.
7 "Lewis Clashes With Root," Chicago Daily Tribune (1872-1922) Sept. 3, 1913, at 5.
8 "Root Wants to Tax Small Incomes, Too," The New York Times, Sept. 3, 1913, at 11.
9 "Anti-Wealth Policy," The New York Times, Sept. 3, 1913, at 6.
10 "An Unnecessary Amendment," The New York Times, July 8, 1909.
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