The History of Our Income Tax
No . . . you haven't bought a history book. You've bought a book that details a new method of raising revenue for the federal government that will send the American economy into warp drive—while restoring financial privacy and economic liberty to American families and wage earners.
To plan successfully for the future, though, it's necessary to have at least a basic understanding of the past. If we're trying to kill a bureaucratic monster that destroys initiative and impedes economic growth, it's crucial that we know just what cave that monster crawled out of. In the words of the American philosopher George Santayana, "Those who cannot remember the past are condemned to repeat it."
As you read this depressing (though brief) history of the income tax in America—and the chapter on withholding that follows—keep this basic fact in mind: There is absolutely no limit to the government's desire for your money. When it comes to politicians' powers of taxation, the only limit they recognize is the people's willingness to tolerate the confiscation of their wealth. The amount of your earnings that the government is willing to leave in your pocket is only the amount it cannot seize without promoting an outright rebellion.
In the early years of our republic, the federal government levied few taxes. The Feds managed to get by with only a handful: taxes on alcohol, carriages, and some basic consumer items such as sugar and tobacco. When the United States went to war against Great Britain in 1812, sales taxes were placed on various luxury items to cover the cost. The cost of fighting a war can be high, but citizens are generally amenable to higher taxes in times of war because they realize that the cost of not fighting the war can be even higher. These patriotic feelings would be exploited in later years to the immense benefit of the free-spending political class.
In 1817, with Great Britain once again defeated, Congress did away with all internal taxes and funded the cost of the federal government with tariffs on imports.
Remember, please, that during this period of American history most governing was done at the local, not the national, level. This is as our founding fathers wanted it. Various people present when our Constitution was drafted expressed a belief that, in times of peace, roughly 95 percent of all governing should be at the state and local levels, with the remaining 5 percent coming from the federal government. Add that to the list of founding principles that have been all but ignored.
The first attempt at an income tax came about to raise funds for what we know as the Civil War.1 In 1861, Congress passed a bill assessing a 3 percent income tax on everyone earning between $600 and $10,000 a year. Six hundred dollars a year in 1861 would equal about $10,000 now. If you earned more than $10,000 (about $166,700 today), the rate went to 5 percent and a nice little inheritance tax was added to the mix, as were some additional sales and excise taxes.
The Union wasn't alone in enacting the income tax. The idea also caught hold south of the Mason-Dixon line, and the Confederate states enacted their own version. Misery, it seems, has always loved company.
By 1872, with the war over, the populace was starting to show its displeasure with the income tax. The political class reacted by eliminating the income tax. The Feds went back to taxing tobacco and booze. Yet the politicians' dreams of a permanent income tax weren't easy to squelch; the snake was hibernating, not dead. Over the next twenty years or more, members of Congress introduced no less than sixty-eight bills to enact another income tax.
The second term of President Grover Cleveland brought us the economic fiasco that's gone down in history as the Panic of 1893. First, the Reading Railroad (remember it from Monopoly?) went into receivership. A few banks and other businesses dependent on the railroad followed, and soon we had a general economic downturn. Now, as we've learned, when the economy goes sour that's a signal for the government to start taking more money out of the pockets of its citizens. It was time to try an income tax again.
Using the Panic as a handy excuse, eager politicians passed a law calling for a new income tax in 1894. Politicians then, as now, were not particularly eager to showcase just what they were trying to accomplish, so they made a blatant attempt to quell any possibility of a strong anti-income tax response from the voters by assigning a rather bizarre title to the new tax bill. They called it "An act to reduce taxation, to provide revenue for the government, and for other purposes."2 Just how much can you trust a politician who passes a law to tax your income, and calls it an "act to reduce taxation"?
The 1894 "act to reduce taxation" presented Americans with a 2 percent tax on everyone making more than $4,000 a year (the equivalent of $50,000 today). In a nice twist, our politicians decided that all government officials—state and local alike—would be exempt from the new tax. Not a bad deal! Tax the people, exempt yourself. That's what the politicians of 1894 meant by "equal treatment under the law." Why not give it a try? Who knows . . . it just might have worked.
As it turned out, this 2 percent tax on incomes over $4,000 started a chain of events that culminated in a constitutional amendment and our current income tax system. President Grover Cleveland, you see, thought that the 2 percent income tax was unconstitutional, so he let it become law without his signature. The question of constitutionality was presented to the U.S. Supreme Court—and the income tax lost.4 The Supremes ruled that the income tax was actually a direct tax on the citizens of the United States, a violation of the Constitution.
Now here's where things get really depressing. After an income tax was declared unconstitutional, the politicians in . . .