Happy 100th Birthday to the Federal Income Tax

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CharmNewton
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Happy 100th Birthday to the Federal Income Tax

Post by CharmNewton » Thu Oct 03, 2013 6:08 pm

The Revenue Act of 1913 was signed into law 100 years ago today by Woodrow Wilson (D). The act had the additional purpose of updating tariff rates (reducing a great many), which up until the imposition of an income tax on individuals had been the main source of revenue for the Federal Government. Permanent income taxes were unconstitutional prior to ratification of the 16th Amendment, also in 1913.

The top rate in 1913 was 7%, which applied to marginal income above $500,000 (about $11 million in todays dollars). This was deemed fair, not because it was felt the rich should pay more (although some did feel that way), but because they had more property that required protection.

I don't know if the President gave a speech thanking the hundreds of millions who have paid the tax over the last century or whether a stamp commemorating the event was or will be issued.

It's funny, I was wondering earlier what was the actual day the tax was signed into law and by sheer coincidence it happened to be today.

I know this information will brighten the day of hose who read it. :D

John

jbuck919
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Re: Happy 100th Birthday to the Federal Income Tax

Post by jbuck919 » Thu Oct 03, 2013 10:45 pm

Although nobody likes it and it has been qualified in endless ways, the progressive income tax is still the best tax every devised. The only reason we don't rely on it for all revenue is sticker shock.

There's nothing remarkable about it. All one has to do is hit the right keys at the right time and the instrument plays itself.
-- Johann Sebastian Bach

John F
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Re: Happy 100th Birthday to the Federal Income Tax

Post by John F » Fri Oct 04, 2013 3:11 am

CharmNewton wrote:The Revenue Act of 1913 was signed into law 100 years ago today by Woodrow Wilson (D). The act had the additional purpose of updating tariff rates (reducing a great many), which up until the imposition of an income tax on individuals had been the main source of revenue for the Federal Government.
I've read that it was the excise tax on liquor on which the federal government depended, and the income tax was part of a package (women's suffrage was another) in support of Prohibition, to replace lost revenue when there was no liquor to tax. Is this not so?
John Francis

CharmNewton
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Re: Happy 100th Birthday to the Federal Income Tax

Post by CharmNewton » Fri Oct 04, 2013 11:48 am

John F wrote:
CharmNewton wrote:The Revenue Act of 1913 was signed into law 100 years ago today by Woodrow Wilson (D). The act had the additional purpose of updating tariff rates (reducing a great many), which up until the imposition of an income tax on individuals had been the main source of revenue for the Federal Government.
I've read that it was the excise tax on liquor on which the federal government depended, and the income tax was part of a package (women's suffrage was another) in support of Prohibition, to replace lost revenue when there was no liquor to tax. Is this not so?
These weren't factors in the original adoption of the income tax, which was desired by many early Progressives. The National Prohibition Act (Volstead Act) became law in 1920 after ratification of the 18th Amendment to the Constitution. The 19th Amendment, which prohibited states from denying the right to vote based on sex, was ratified in 1920.

A Wikipedia article http://en.wikipedia.org/wiki/Volstead_Act on the National Prohibition Act notes that states rather than the Federal Government were the primary beneficiary of liquor taxes.

A lengthy article on women's suffrage can be found here: http://en.wikipedia.org/wiki/Women's_su ... ted_States

Interesting to note that the 19th Amendment would have never been sent to the states for ratification without the overwhelming support of Republicans (who controlled the Congress in 1919), although at the time of ratification in 1920, women had full voting rights in 15 states and partial voting rights in a number of others.

John

John F
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Re: Happy 100th Birthday to the Federal Income Tax

Post by John F » Fri Oct 04, 2013 3:00 pm

My source is Daniel Okrent, "Last Call: The Rise and Fall of Prohibition." A great read, by the way.

The federal government collected excise taxes on liquor beginning in 1791. "After lapsing in 1802, the alcohol excise was reimposed under James Madison to pay for the War of 1812, suspended in 1817, and then brought back by Abraham Lincoln in 1862 to finance the Civil War. This time the tax did not fade away when the war ended, for it had become addictive."

And its revenues were crucial. "By 1910 the federal government was drawing more than $200 million a year from the bottle and the keg - 71 percent of all internal revenue, and more than 30 percent of federal revenue overall. Only external revenue - the tariff - provided a larger share of the federal budget, and by the end of the first decade of the twentieth century the tariff's continuation was the most intensely debated issue in American public life. It would be hard enough to fund the cost of government without the tariff and impossible without a liquor tax."

The movement for an income tax wasn't just about prohibition. It was populist - only the rich would be taxed - and it was the south's revenge for reconstruction, since most of the rich lived in the north. But prohibition was most important of all. "Given that you couldn't collect much revenue from a liquor tax in a nation where there was no liquor, this might have seemed an insurmountable problem for the Prohibition movement. unless, that is, you could weld the drive for Prohibition to the campaign for another reform, the creation of a tax on incomes." Which is what happened.

The income tax necessarily came first, to prepare the way for prohibition. Soon after that amendment was ratified and the Revenue Act to enforce it was enacted, in 1914 a constitutional amendment for prohibition was reported out of committee, debated on the floor of the House, and received a majority of the votes, 197 to 190, though not the 2/3 majority required to pass. After elections brought more "drys" into the House, the amendment was voted on in 1917 and this time it passed. Ratification took two years - there was pressure to get it done before the census of 1920 and redistricting might have put it out of reach.

The amendment for woman suffrage was voted out of committee in 1914 on the same day as prohibition, as the two campaigns by then had been "welded to each other, not because of any moral congruence, but because of an expedient relativism..." It took longer to pass, but did so in 1919, the year in which the prohibition amendment was ratified, and was itself ratified in 1920 just in time to beat the census and redistricting.

A sidelight: the campaign for prohibition had a lot in common with the Tea Party's tactics.
John Francis

piston
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Re: Happy 100th Birthday to the Federal Income Tax

Post by piston » Sun Oct 06, 2013 12:17 pm

I would give credit to Teddy Roosevelt, not to Wilson, for this development. And all politicians of the Progressive era were keeping in mind a relevant 1895 Supreme Court decision. All of those who pushed for a progressive income tax system knew that they had to do it without provoking the Court once more.
In the eyes of those lovers of perfection, a work is never finished—a word that for them has no sense—but abandoned....(Paul Valéry)

John F
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Re: Happy 100th Birthday to the Federal Income Tax

Post by John F » Sun Oct 06, 2013 1:03 pm

piston wrote:I would give credit to Teddy Roosevelt, not to Wilson+, for this development.
TR was no longer president when the federal income tax amendment was passed. According to the Wikipedia article, it was his successor William Howard Taft who proposed it to Congress and was president when it was passed and ratified. However, according to Okrent, the prohibitionists were a driving force, and Taft was anti-Prohibition. It was during Wilson's presidency that Prohibition and women's suffrage were passed and ratified.
John Francis

piston
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Re: Happy 100th Birthday to the Federal Income Tax

Post by piston » Sun Oct 06, 2013 1:40 pm

You know as well as I do that important laws such as this are not the result of some spontaneous political combustion. Beginning in 1906, Roosevelt is the leader who stepped up the campaign for more progressive taxation measures. On December 7, 1907, "he urged lawmakers to consider an income tax."
When our tax laws are revised the question of an income tax and an inheritance tax should receive the careful attention of our legislators. In my judgment both of these taxes should be part of our system of Federal taxation. I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is to be hoped that one may be devised which the Supreme Court will declare constitutional.

He also advocated a "heavy" estate tax.
Under Taft, a coalition formed between Democrats and Republicans in 1909 to support passage of individual income tax. Taft took the wind out of that coalition by proposing passage of the moderate corporate income tax:
President Taft convinced the senator that a modest tax on corporate income would siphon off support for general income taxation. In doing so, it would deny victory to the congressional income tax coalition, preserving GOP unity.
And it is Taft, not Wilson, that proposed the constitutional amendment:
[As part of his 1909 tax compromise, Taft had agreed to support a constitutional amendment authorizing federal income taxes. Not only would an amendment settle constitutional questions once and for all, it would also delay substantive action on the income tax, at least until ratification was complete. And since ratification was far from certain anyway, the amendment might defuse the income tax issue indefinitely, allowing it to simply fade away in the state legislatures.

In making his case for the amendment to wary Republican legislators, Taft stressed the importance of avoiding a confrontation with the Supreme Court. Such a fight , he warned, would diminish public confidence in the Court and threaten one of the pillars of American government. Congress agreed, and lawmakers soon approved the amendment and sent it to the states.
http://www.taxhistory.org/www/website.nsf/Web/THM1901
In the eyes of those lovers of perfection, a work is never finished—a word that for them has no sense—but abandoned....(Paul Valéry)

John F
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Re: Happy 100th Birthday to the Federal Income Tax

Post by John F » Sun Oct 06, 2013 2:20 pm

Interesting stuff - thanks! However, neither TR nor any other president had a role in the process of making constitutional amendments, as someone here informed me (I hadn't realized it before). That is entirely the domain of Congress and the state legislatures, and as such is a grass roots, bottom-up thing rather than top-down.

Okrent says that William Jennings Bryan was "in the forefront of the campaigns" for the federal income tax, women's suffrage, and prohibition. As a congressman, he had introduced the income tax into a tariff bill, which is what led to the 1895 Supreme Court decision that such a tax was unconstitutional. "For the next decade and a half the income tax became the longed-for sword that Bryan's supporters and other advocates of income redistribution hoped would slay the money power. So consuming was the passion among its supporters from the South and West that for some it took on the color of monomania." And so on.

As you say, laws such as this do not spring up overnight. By the time of your Roosevelt quotation, there was already a powerful pro-tax movement, and it looks to me that he probably saw which direction the parade was marching and joined it. Whatever, Okrent doesn't bother to mention Roosevelt as an important proponent; instead he names the Congressmen and Senators who actually sponsored the amendment - Richmond Hobson, Morris Sheppard, Wesley L. Jones, and a familiar name, Andrew J. Volstead - also major supporters of the Prohibition amendment. Ratification of the amendment was followed by enabling legislation which was signed into law by President Taft.
John Francis

CharmNewton
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Re: Happy 100th Birthday to the Federal Income Tax

Post by CharmNewton » Fri Oct 11, 2013 1:50 pm

I stand corrected on the importance of the Federal excise tax on liquor to overall revenue. I suspect tobacco played a part as well. I'll have to get a copy of Oreck's book.

Looking at the relationship between the temperance movement and the passage of the Revenue Act of 1913, it's hard to see a connection just yet. Yet by 1919, temperance had swept the nation and the National Prohibition Act was passed by a Republican Congress over Wilson's veto. Unfortunately, the Congressional Record and Ways and Means Committee proceedings for 1913 are not yet available online and these would shed light on Congressional and Executive Branch thinking at the time.

While some saw the income tax as a fairness issue, others saw the possible need for a military buildup given the rise of imperial powers such as Britain, Germany and Japan and the need for a more consistent revenue source than the tariff. The years 1904-05 and 1908-10 all showed outlays exceeding revenues for the year (i.e. deficits); not the norm as the government generally balanced its books during peacetime (unfortunately, the WhiteHouse.gov web site has lumped the years 1850-1900 into a single line item, giving undue prominence to the Civil War debt and making deficit spending look more common than it actually was). Taft, being a hard-working executive, would have likely seen this as unsustainable and in line with forward-looking thinking.

This is a period in U.S. history that can get me sidetracked.

John

John F
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Re: Happy 100th Birthday to the Federal Income Tax

Post by John F » Fri Oct 11, 2013 2:37 pm

CharmNewton wrote:I'll have to get a copy of Oreck's book.
By all means, do yourself a favor! Okrent is not only informative about that strange episode in our history, but entertaining sometimes downright funny.
John Francis

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