Why Americans Voted for an Income Tax

 
 
Matthew Weinzierl looks at the justifications for the United States income tax and whether it is an unfair burden or fair payment for services rendered.
 
 
by Matthew C. Weinzierl

We can be forgiven, especially this time of year, for questioning a decision our predecessors made just over a century ago. In the 1910s, Americans decided to make personal and corporate income taxes a permanent feature of the United States economy.

Why did they start us down this road? And given that the taxes they endorsed started out small in scope and size but have multiplied by a factor of eight as a share of our economy, have we gone off course?

After all, when an income tax was introduced in 1862 to fund the Civil War, it lasted just six years before being replaced by other taxes. It took another 50 years before the 16th Amendment, which allows Congress to levy a national income tax, was adopted in 1913.

Why We Tax Ourselves

One of the clearest statements of why Americans in the early twentieth century were willing to tax their incomes came from President Franklin Delano Roosevelt in the 1930s:

"With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay."

Here, FDR sounds very much like an economics professor. He identifies a principle, a "guide," for policy that relies on abstract concepts like "ability to pay" and "benefits received."

But FDR is also saying something quite simple: if people do well, it is only right that they should help to pay for the setup that made their success possible. More to FDR's point, people who do better should pay for more of that setup.

FDR's reasoning is far from obsolete; our current President seems to agree with him. In 2011, Barack Obama explained why he supported higher taxes on higher incomes:

"As a country that values fairness, wealthier individuals have traditionally borne a greater share of this [tax] burden than the middle class or those less fortunate… [This is] a basic reflection of our belief that those who've benefited most from our way of life can afford to give back a little bit more."

Like FDR, Obama wants us to see taxes not as a burden to be lamented but as a fair payment for benefits received. And as our society has grown more complex, the increasing size of taxes we are willing to pay reflects the greater benefits we gain from the activities of government required to support it.

A rare document: IRS notifies a taxpayer that as a
result of an audit, the taxpayer is due a refund.Source: Whitin Machine Works Records,
Baker Library, Harvard Business School

President Obama disagreed on many policies with Mitt Romney, his opponent in the 2012 presidential election, but on this logic for taxation they are not so far apart. Lost in the press coverage of the president's 2012 rebuttal to anti-government forces "You didn't build that" was Romney's reply:

"[The President] describes people who we care very deeply about, who make a difference in our lives: our school teachers, fire fighters, people who build roads. We need those things… You really couldn't have a business if you didn't have those things. But, you know, we pay for those things…in fact, we pay for them and we benefit from them."

It turns out that Romney, like Obama and FDR, views taxes as our way of paying for what we want government to do for us. As US Supreme Court justice Oliver Wendell Holmes famously said: "I like to pay taxes. With them I buy civilization."

Part of the appeal of this logic for taxes is that it seems fair. Each person paying for what they get reminds us of a group of friends who split the bill at dinner according to what they ordered.

But perhaps fairness demands something in addition, namely that we help those who are less fortunate. Some people appear to benefit very little from our economic system, earning little income and having even less to spend. Is it fair to ask them to contribute to the pool of taxes nevertheless, or should we focus on providing them with the opportunity to share the benefits most of us enjoy?

As President Obama said in 2013:

"And the result is an economy that's become profoundly unequal and families that are more insecure…The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe."

Paying Our Fair Share

Americans have long balanced competing notions of fairness when deciding on policy toward the poor. We want everyone to pitch in, to pay their "fair share," so we have moved away from making cash transfers to low-income households and have avoided proposals for a minimum guaranteed income.

At the same time, we want to support those in need, to give them a "fair shot," so we make use of policies such as the earned income tax credit, childcare subsidies, and Medicaid to help people work their way into the broad middle class.

The same balance is at play in how we design policy toward the rich. We ask the highest earners among us to pay a greater share of their income than the rest of us. But, despite the well-known fact that inequality in incomes is now at levels not seen since FDR's time, President Obama faced stiff opposition in Congress when he sought to raise the marginal tax rate (the share of the next dollar earned that is paid in taxes) at the top of the income ladder.

Speaker of the House John Boehner, for example, argued that those high earners already paid their fair share: "The top one percent of wage earners in the United States pay 40 percent of the income tax. The people [the president is] talking about taxing are the very people that we expect to reinvest in our economy and to create jobs."

With the Presidential election of 2016 around the corner and political polarization at peak levels, debates over the purpose and fairness of taxation are once again front-and-center in US politics. Sometimes it can seem that these debates go around in circles, with partisans from both extremes advocating reforms that even they don't imagine becoming reality.

But we should celebrate these debates, for they are how we work our way toward an economic policy that reflects Americans' nuanced, evolving sense of fairness. They are a part of what makes our economy, and our society, work. And that knowledge might even make writing that check on April 15th a bit less painful.

This article was originally published on The Conversation. Read the original article. This work was reprinted under a Creative Commons Attribution-NoDerivatives 4.0 International License.

Post A Comment

In order to be published, comments must be on-topic and civil in tone, with no name calling or personal attacks. Your comment may be edited for clarity and length.
    • Roger Levy
    • President, Levy Associates
    This article seems to be missing any logical arguments or justification for our tax system. Instead it reads more like a political essay with broad unsupported generalizations. There are several issues. First, is income tax a means to pay for services consumed or is it a vehicle for achieving income redistribution / social justice? Second, to claim that society should subsidize the less fortunate who have "little income" and "even less to spend" ignores why some are less fortunate and how these welfare payments further incent more potential less productive behavior.
    • Gail L Johnson
    • Author, Two Years to Democracy: The 2Y2D Plan
    Andrew Mellon (Treasury Secretary 19221 - 1932) wrote in Taxation: People's Business, "The fairness of taxing more lightly incomes from wages, salaries and professional services than the incomes from business or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it....
    Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy, and the people whose income is derived from investments."
    • Harley Farmer
    • CPA
    I agree with the basic premise of the article. Having said that what I don't like is the growth of government and the amount of waste of tax payers money.
    • John
    Basing tax rates on income is a populist notion - it is easy to agree that the person who makes more than me should pay more (as long as it is not me who has to pay more). The idea that this is "fair" is mentioned but not defended with any depth. Two people grow up in the same neighborhood and attend the same schools, one chooses to study and work hard while the other cuts school and attends more parties. When the more successful person winds up making more income, explain how it is "fair" based on having received more from the government. The premise is flawed and plays on a popular notion that we are all victims and can't accept responsibility for our own decisions.
    • Ezra P. Mager
    • CEO, EPM Advisory, LLC
    The principle of a progressive income tax is fine and few people would disagree. The issue is scale. I believe it does not make sense for 50% of the US population to pay for (subsidize) the other 50%. We have come to rely on a system that is generous at the bottom and punitive at the top. Two ways to solve the problem: 1. Tax consumption (VAT); 2. Have a huge estate tax over $25million/beneficiary and force billionaires to create foundations which are then tightly regulated to give money to charitable causes and scientific research alone.
    • Regan Boorve
    • President, Devin Management
    Taxes should not be assessed on an income; then in turn assessed AGAIN when that income is spent. And if it's not spent and instead invested, it is taxed again. Therein lies the problem many Americans have with taxes. There are just too many varieties. And what the government GETS - it wastes.
    • Chris
    I don't believe "our" intention was ever to create an "...economic policy that (reflected) Americans' nuanced, evolving sense of fairness."; I believe the intention of our founders was to create a federal government based on philosophical human rights and self-evident reason.

    Therefore, any argument in favor of - or against - any type of taxation will only ever be valid if it is supported solely by logical thought. This article lacks that support, as most in the last 100 years likely have.
    • Robert Moore
    • Retired
    When folks are asked, what is the maximum percentage of one's total income should be required to pay in taxes. The poll results are often no more than 25%.

    Fed taxes already take over 20% of total GDP. State and Local taxes add to this percentage.

    Fed income taxes are a minus 3.2% for the lowest two fifths of income earners, who have 13.8% of total US income per 2014 data cited in the 4/11/15 Wall Street Journal.

    The highest 5% of income, with 29.2% of total US income paid 66% of Fed income taxes. This is a highly skewed progressive set of taxation results.

    The lower 40% have little concern re: income taxes because their share is a net negative. They are often supportive of "higher taxes on the so-called rich" in part because they are hopeful of receiving more of "other people's money".

    When one looks at the vast array of Federal spending programs with over 100 for teenage employment; over 20 for non-emergency doctor visits; and endless other programs that primarily benefit the bureaucrats employed to "run them", certainly not "manage them".

    Also, government programs have political incentives to under-price them. Medicare is actuarially over $40 Trillion in the hole after only 50 years of existence. Social Security is over $13 Trillion in the hole. Such unfunded liabilities total over $100 Trillion.

    The excessive spending by Washington DC and Congresses is bankrupting the USA for future generations - in spite of the progressive taxation in place.

    Politicians can always find interest groups who want more benefits for themselves by taking other people's money.

    Rather than continuously pushing for affluent folks to "pay a little bit more", Washington needs to spend much less.
    • Michael
    The notion of fairness is of fundamental importance in the USA, which is founded on the basic principle of equality of all its citizens - not an equality in terms of ability nor of wealth, but an equality of worth as spiritual beings, entitled always to equal rights and equal opportunity. Thus in order to correctly address the question of what constitutes fairness in our tax system, one must consider fairness in terms of the whole system, rather than only considering what constitutes fairness in the small portion of the whole system called the tax system. Since our great country has gradually become so unequal in terms of basic rights and opportunities, any effort to make the tax system more fair in light of these conditions is like putting a piece of tape over a crack on the deck of the Titanic.
    • Ricardo Durazzo
    • Partner, Terra Boa Capital
    A bit disappointed with the article. It reads more like an informal liberal justification why "the rich" (those bastards who hogged "opportunity" from others) should be soaked.

    I laughed out loud at the restaurant metaphor, because it is so inexact. This is not a case of 10 friends getting together and sharing lunch - and I'll throw in an additional $20 because I ordered the stake. The current system is one in which one guy pays for everybody's full dinner, another pays for the soda pops, two pay for nothing and the other six pay nothing AND take home a doggy bag...
    • Aim
    • DSV, KOC
    Ladies & Gentlemen,

    Below radicalism, comes from an American history, and they were no fools. In fact they were quite clever people with excellent deductions of events that lead them to their difficulties. With much gratitude to Oliver Stone and Peter Kuznick, please see below:

    Here is what Secretary of Agriculture, Henry A. Wallace, did in the Great Depression:

    Farmers, who still constituted a quarter of the population in 1933, were in miserable shape when Wallace became secretary. Production of farm commodities had flooded the markets, driving down prices. The problem, which persisted throughout the 1920's, reached crisis proportions after 1929. Total farm income in 1932 stood at one-third of what it had been in 1929. By 1933, desperation stalked rural America. Roosevelt understood that the overall success of the New Deal depended on the restoration of farm prosperity. Wallace's solution proved extremely controversial. He proposed paying farmers to reduce agricultural production on the assumption that lowered supply would increase demand and thereby raise prices. But in 1933, he was forced to take even more drastic action. The price of cotton had dropped to 5 cents/lbs. Warehouses were bursting. Export markets had evaporated. And another large crop was sprouting. Wallace decided to pay farmers to destroy 25% of the crop that was then in th
    e ground. For Wallace who had spent years perfecting a strain of hybrid corn and who believed that abundant food supplies were essential for peaceful world, the thought was almost inconceivable. "To have to destroy a growing crop", he lamented, "is a shocking commentary on our civilization". That August, more than 10 Million acres of cotton were plowed under.

    But what came next was even more difficult. Wallace still had to deal with an abundance of hogs. On the advice of hog farmers, Wallace supported a program of slaughtering 6 million baby pigs weighing under 100 lbs, approximately half the normal 200 lbs market weight of adults. Critics lambasted Wallace's "pig infanticide" and "pig birth control". Wallace retorted, "Doubtless it is just as inhumane to kill a big hog as a little one...To hear them talk, you would have thought that pigs are raised for pets." Wallace made sure that some good came of this program. He distributed 100 Million Lbs of pork, lard, and soap to needy Americans. "Not many people realized how radical it was - ", he reflected, "this idea of having the Government buy from those who had too much, in order to give to those who had too little."
    Wallace's much-maligned policies produced the desired effect. The price of cotton doubled. Farm income jumped by 30% in one year. Still, Wallace regretted the unfortunate message such policies sent: "The plowing under of 10 Million acres of cotton in August 1933, and the slaughter of 6 Million pigs in September 1933, were not acts of idealism in any sane society. They were emergency acts made necessary by the almost insane lack of world statesmanship during the period of 1920 to 1932".

    Unless Americans act radically, the system in which you are looking for "sensible" solutions will ultimately fail your entire civilization. The above lines have much similarities to what is happening now. It seems to me like a copy paste really.

    Best regards,

    Aim of satellite states.
    • Jacqueline Bugnion
    • Director, American Citizens Abroad
    I would be interested to learn of Mr. Weinzeirl's view on the fact that the United States is unique in imposing US taxation on American citizens and green card holders who reside abroad. His discussion centers around the concept of receiving benefits, ability to pay and fairness. Americans abroad, the vast majority of whom are long-term overseas residents, do not receive the same benefits as U.S. residents. They already pay taxes to the country where they reside and the US recognizes the first right of taxation with the country of residence, so the argument of ability to pay does not apply. As for fairness, Americans abroad suffer from two distinct sources of unfairness related to citizenship-based taxation. First, incompatibilities between the US tax system and foreign tax systems lead to double taxation and in the case of the NIIT, Congress has imposed double taxation as it does not allow foreign tax credits against NIIT. The second s
    ource of unfairness relates to the extreme complexity and cost of filing from abroad, at least double that of domestic filers, due to the additional forms, the inherent complexity of the foreign tax credit Form 1116 and the need to use the U.S. dollar as the functional currency.

    American Citizens Abroad, advocates for residence-based taxation to align US tax policy with that of the rest of the world. Details can be found at www.americansabroad.org
    • Peter McEllhenney
    • Principal, ENDGAME
    Prohibition was one of the driving forces behind the income tax because so much of federal revenue came from taxes on the sale of alcohol. The Drys knew they would need to replace the revenue from alcohol taxes before they could hope to succeed. The income tax turned out to be the replacement. Whether it was the best way then - or a good idea today - well, those are different questions!
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    This blog has provided knowledge of the birth of the concept of income tax and its growth over the years. Yes, the public must share with the State the cost of various services being enjoyed of course in proportion to their income. So those who earn more are made to pay more.
    Problems and difficulties arise when those at the bottom of the pyramid find it difficult to pay. Lack of database of such people leads to injustice to them. I wish a day comes when all pay equitably in accordance with their capacity to pay.
    • Keith Woodbridge
    • Retired & Working Again
    I disagree with the general principal of progressive tax rates. I find it interesting that people require a "flat vote" in government (all votes must weigh the same), yet not a flat tax.

    Unless math has changed, paying the same % on higher income IS paying more tax and is more accurately "levied in proportion". What could be more fair?

    I would only support a progressive tax rate if we begin to multiply each of our political votes by the respective tax rate we pay. This is "fair" because those paying for most of the government benefits should have the most say in how the benefits are used / distributed, and by whom.
    • Thoko Mkavea
    • CIBO, CDH Investment Bank
    I agree with this article though it has not justified enough why the proposed basis of paying taxes is deemed "fair". It is vital to keep this discussion going to try to arrive at an alternative way of distributing the tax burden among citizens. However, as we do so, governments must also find ways to efficiently use our tax moneys. Otherwise, as much as taxes are hard, governments are becoming more and more extravagant, less accountable and wasteful.