Tax Policy

Compelling Policy Question: What role do taxes play in the relationship between Americans and their Government?

Policy Case Study: S.J.R. No. 40

"S.J.R. No. 40, Income Tax Constitutional Amendment”

Resolved by the Senate and House of Representatives of the united States of America in Congress assembled, two-thirds of each house that the following article is proposed as an amendment to the Constitution of the United States, which, when ratified by the legislatures of three-fourths of the several States, shall be valid to all and purposes as a part of the Constitution:

Article XVI: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration"

Explanation of the proposed 16th Amendment (source): The Congress shall have power to lay and collect taxes on incomes… (Congress is allowed to collect some of the money earned by people working in the United States) from whatever source derived… (it doesn’t matter where the money is earned, as long as it is “income”) without apportionment among the several States… (there is no need to share the revenue with the states) and without regard to any census or enumeration. (the census, a count of all the people that live in the United States that happens every ten years, can’t be used as a basis for distributing taxes on people)

Historical Context of Taxes in U.S. History

In some ways the United States of America exists as a result tax policy. One of the reasons the American Colonies revolted against Great Britain was because many people were upset they had to pay taxes created by an English Parliament, when they had no say in the taxes . The Stamp Act, the Townshend Act, and the The Tea Act were all British policies that angered Americans. (The Tea Act led to the Boston Tea Party). Once America had gained its independence, the Federal Government started generating revenue by creating Tariffs (which we studied in the Tariff Case Study). The American government causes the Whiskey Rebellion in Pennsylvania when they created the 1791 Excise Whiskey Tax, and angered farmers whose crops were used to make alcohol.

America created its first income tax in 1861. The Revenue Act of 1861 was created help pay for the cost of the Civil War. The tax was 3% of all incomes over US $800 . They then passed the Revenue Act of 1862 (3% tax on incomes above $600, 5% for incomes above $10,000. Rates raised again in 1864. This income tax was repealed in 1872

In the late 1800’s, and early 1900's political groups such as the Populists, and the Progressives pushed for financial and economic reforms, including income taxes. In 1894, as part of a tariff bill, Congress made a 2% tax on income over $4,000. The Supreme Court struck it down. In 1909 progressives in Congress tried again to attach an income tax to a tariff bill. Conservatives proposed making a constitutional amendment for the tax thinking people would oppose it and interest in taxes would go away.

Section #1 Supporting Question: Why do some people believe the relationship between the Government and the people requires an income tax?

President William Taft, Message to Congress on Taxes, 1909 (modified/link to original)

A quick timeline of Taft’s political rise- 1880- graduated law school. 1890- Solicitor General of the United States. 1892- Federal Judge. 1900- Civilian Governor of the Philippines 1904- Secretary of War under Roosevelt. 1908- elected President. Taft's biography

It is the constitutional duty of the President to recommend to Congress measures as he thinks are necessary.

I pointed out the obligation to secure an adequate income for the government in my inaugural address, and suggested new kinds of taxation must be adopted, and among them I recommended a graduated inheritance tax.

First I recommend imposing upon all corporations and joint stock companies for profit a tax of 2% on their net income. This is a tax for the privilege of doing business in America as a corporation.

The Supreme Court recently ruled the Federal Government does not have the power to create a direct tax. This deprived the National Government of a power it should have. It might be needed to save the nation in a great crises.

I have decided that an amendment to the Constitution is the only way for the National Government to gain this power it deserves. I recommend Congress propose an amendment to the Constitution giving the National Government the power to levy an income tax.

I am convinced that a great majority of the people of this country are in favor of giving the National Government the power to levy an income tax, and that they will secure the adoption of the amendment in the States, if proposed to them.

William Jennings Bryan, Income Tax Speech, 1894 (modified/link to original)

Bryan, known for his Cross of Gold Speech, was a Populist who ran for President in 1896 and 1900

Mr. George K. Holmes, of the Census Department found that 9% of the families in this country own about 71% of the wealth. Is it unfair that the taxes shall be equal between these two classes?

Who needs a navy most? Is it the farmer, or is it the man whose property is in an industrial city near the sea where it could be reached by an enemy's guns? Who demands a standing army? Is it the poor man as he goes about his work, or is it the capitalist who wants the army to help protect his property? Who benefits the most from the Federal Government?

Some claim that if there is an income tax of 2% on every income over $4,000, a rich man would give up all his wealth for the privilege of living in this country.

I don’t know a man who would rather leave America than support the Government that protects him. If we have people who value free government so little that they prefer to live under a king, without an income tax, rather than live under the stars and stripes and pay a tax, we can better afford to lose them and their fortunes than risk the contaminating influence of their presence.

In 1909, Ollie M. James, the Democratic Senator from Kentucky, said in a speech to Congress on S.J.R. 40...

(modified/link to original)

James' biography

The income tax is the most equitable of all systems of taxation. It is the ideal way to support the Government. Let those who prosper little pay little, for they are least indebted to the Government; let those who prosper more pay more; let those who prosper most pay most; let those who prosper greatly pay greatly, for certainly they have been most blessed and are therefore most indebted to the Government.

What man is so ungrateful to his country that he is unwilling to pay a small tax upon his income to help sustain and perpetuate the Government under which he enjoys such success?

Mr. Speaker, this battle for an income tax will go on. This is the people's Government and the right will prevail. During all these years the mighty rich — an army of millionaires — have been exempted from taxation, but the people are now aroused. There are two lines of battle drawn for this great contest.

Under which flag will you stand — the flag of democracy or the flag of plutocracy?

Sereno E. Payne (R)New York, Speech to Congress on S.J.R. 40, 1909 (modified/link to original)

Payne served as the House Majority Leader. Payne's bio

I am utterly opposed to the general policy of an income tax. I believe it makes a nation of liars. I believe it is the most easily hidden of any tax that can be made, the most difficult of enforcement, and the hardest to collect. I believe it is a tax upon the income of the honest men and an exemption for the income of the rascals, they won’t pay it if they can get away with it. So I am opposed to any income tax whatever in time of peace.

But if this nation should ever be under the stress of a great war, exhausting her resources, I do not wish to be left, I do not wish this nation to be left, without an opportunity to find every resource to provide an income adequate to the carrying on of that war.

I hope that if the Constitution is amended in this way the time will not come when the American people will ever want to enact an income tax except in time of war.

Champ Clark (D)Missouri, Speech to Congress on S.J.R. 40, 1909 (modified/link to original)

Clarik's Biography

Man has never created a fairer or juster tax than a graduated income tax. I do not care what anybody else says — it is monstrous to say that the wealthy of this country shall not bear its fair proportion of the public burdens.

We would much prefer making an income tax part of normal legislation, rather than vote for a Constitutional amendment. But, since we cannot secure the passage of an income tax through this Congress, we will do the best thing possible under the circumstances and vote for the Constitutional amendment.

Opponents talk about the sacredness of the Constitution. Of course the Constitution is sacred, but the fathers of the Republic acted according to the circumstances under which they lived. We must act according to the circumstances under which we live. When the Constitution was created, the population was about equally distributed, and wealth was also ; but times change and men change with them, and things change, too.

Joseph M. Dixon (R)Montana, Speech to Congress on S.J.R. 40, (modified)

Dixon's biography. This speech is Dixon’s response to another Congressman’s suggestion that instead of making a Constitutional Amendment they have each State organize a Constitutional Convention to actually change the wording of the Constitution.

If Congress decides to change the wording of the Constitution It will cost my State $100,000 to hold a constitutional convention.

-or-

Congress can decide to pass a resolution asking each State Government to vote for a Constitutional Amendment.

I believe that this amendment will carry in nearly every State of the Union.

If the State legislature does not adopt the amendment, it makes it the burning live issue in that State, and the people will ask for it to be adopted..

If a State Legislature does not vote on it one year, it be voted upon again the next year. Then finally when three-fourths of States have finally ratified it, whether it be one, two, three, five, or ten years, it then becomes a part of the fundamental law of the United States.

J. Warren Keifer (R)Ohio, Speech to Congress on S.J.R. 40, 1909 (modified/link to original)

Before becoming a politician Kiefer served as a Major General in the Spanish American War. His Biography

If there ever is any necessity for an income tax, of course it is when the nation is at war. In the Civil War, in the most trying period of it to the Union, when the question of an income tax was voted upon on this floor, every Democrat voted against it and said it was unconstitutional.

Now I congratulate the Democratic party after these many years on a conversion to the income tax so that it may be levied in time of war.

Now, Mr. Speaker, there is something said about the necessity of an income tax to reach the idle rich ; but, if we had only the idle rich, I think I would rather like the program ; but there are in this country tens of thousands of enterprising spirits who have gone forth with energy, industry, and have acquired fortunes, and they are the persons who are to be reached by an income tax; and I am willing that they shall be reached when the trying times come.

An income must bear a proportionately great share of the government taxes; it should not be imposed upon them merely as a punishment.

Richmond P. Hobson (D)Alabama, Speech to Congress on S.J.R. 40, 1909 (modified/link to original)

Hobson won the Medal of Honor in the Spanish American war . His biography

I believe it is wise to substitute direct taxation for indirect taxation. A prime advantage of the direct taxes is that the people know when they are being taxed. I am sure many Americans don’t how many times in the day they are being taxed for all the comforts, conveniences, and necessities of life through these tariff taxes.

Another prime advantage of a direct tax is that it lets people to know how much they are taxed. This helps them prevent abuse of the taxing power

A third prime advantage of a direct tax is that we know where the tax goes. Most of the taxation of the American people does not go to the Government of the American people. For example: The pig iron tariff taxes gives some money to the Government. However the price of all pig iron goes up because of the tariff, so this helps the companies make more money off the American people. When people are taxed under direct tax they would know who is paying the taxes.

A fourth prime advantage of direct taxation is that it would be more adjustable to the needs of the Government, and it would be more economical and efficient for the Government.

Udo J. Keppler's illustration, "Polly's chance to get some nice crackers" was published by Puck Magazine in 1909.

Caption: "We don't want an Income-Tax Amendment! Say it, Polly! We don't want an Income-Tax Amendment! Say it, Polly! Amendment! Amendment! We don't want it!"

Library of Congress Summary:

• Summary: Illustration shows a well-dressed man labeled "Plutocracy", wearing a top hat, holding a parrot labeled "State Legislature" on his right hand, trying to get it to repeat a phrase after him, "We don't want an Income-Tax Amendment!", and promising it "some nice crackers" in return for correctly learning to repeat the phrase.

Frederick Burr Opper,"Step up to the captain's office and settle!", 1895

Library of Congress Summary:

Print shows Uncle Sam at a cashier's window labeled "U.S. Treasury" next to a notice that states "Pay Your Income Tax Here - No Escape for Millionaire Tax-Dodgers". Russell Sage, Hetty Green, and George J. Gould are standing in line, looking forlorn and crying as they pass their "Check for Income Tax - Russell Sage, Check for Income Tax - Hetty Green, [and] Check for Income Tax - George Gould" to Uncle Sam. In their pockets are papers labeled "Taxes Evaded".

L.M. Glackens, Uncle Sam's income, Puck, 1909

Library of Congress Summary:

Illustration shows a customs officer placing a tax stamp on an American heiress, also vignettes showing some suggested ways of generating revenue, such as taxing "poodles and other precious pups", people who tell tall stories, "divorce", "sidewhiskers", "amateur elocutionists", and "rubber plants", "instead of putting it all over the poor old consumer".

Charles Jay Taylor, No income tax! , Puck, 1894

Caption: It is not only Inquisitorial: But Public Morality Forbids That The Taxpayer Should Be Forced to Do Any More Hard Swearing Than He Already Does.

Library of Congress Summary:

Print shows a scene at the "Income Tax Office" with a crowd clamoring at the door where a notice states "One at a Time"; inside, a wealthy man is standing by a desk, on the floor at his feet, in his hat, are papers labeled "Personal Property Tax Sworn Off", "Tax on Capital Sworn Off", and "Tax on Investments", he kisses the Bible while a government official sits at the desk with his right hand raised.

Frank A. Nankivell, Bad dreams, Puck, 1909

Library of Congress Summary:

Illustration shows a sleeping, bloated man labeled "Protected Monopolist" shying away from a turkey labeled "Income Tax" that appears to have risen from the remains of the Thanksgiving Day dinner labeled "High Tariff Plunder".

Supporting Question #2: Why do some people believe that taxes harm the relationship between the people and the Government?

Anselm J. McLaurin (D)Mississippi, Speech to Congress on S.J.R. 40, 1909 (modified)

McLaurin's biography.

I do not believe that there is any need for a constitutional amendment to authorize the Congress of the United States to enact an income tax. I think it will make it impossible to make a law creating an income tax.

I think more than a fourth of the States of the Union will refuse to ratify this proposed amendment to the Constitution. It will be taken to the Supreme Court and argue that the people are not in favor of an income tax and do not believe that an income tax would be constitutional. I cannot think of any need for a constitutional amendment.

There are many Senators who believe that it is not necessary to have any amendment to the Constitution.

The problem with creating an income tax comes out of six words in the Constitution. Those words are "and direct taxes” and "or other direct" taxes. If we took these six words out of the Constitution there could be no trouble creating and collecting an income tax.

I propose we strike those words out of the Constitution instead of making this amendment.

Hernando De Soto Money, (D)Mississippi, Speech to Congress on S.J.R. 40, 1909 (modified)

After serving in the Confederate army Money became a lawyer and newspaper editor. He entered politics and became a Senator. Money's Biography

We had great difficulty in passing the last two amendments to the Constitution, which were necessary in our system of political economy to fix the status of several million freedmen who had been freed from slavery. I do not believe that either the fourteenth or fifteenth amendment was ever successfully made a part of the Constitution.

Mr. President, I do not believe that this amendment to the Constitution will ever be a part of it. I am willing to vote for it, and I would like to see it adopted.

However, I am sure that those who have prevented a vote on the income-tax amendment in this Senate will also prevent a vote in at least twelve of the legislatures of this Union.

We can feel quite sure that an act of such far-reaching importance, that touches the pockets of very many rich people, is not very likely to become a part of the organic law of our Republic or of our confederation.

Samuel W. McCall (R)Massachusetts, Speech to Congress on S.J.R. 40, 1909 (modified)

McCall's Biography

Many gentlemen say that they desire the power to tax incomes for time of war.

Why not, then, limit the power to tax income to times of war? Why not, for the just protection and the equal rights of the people of New York and of the other great States of this Union, preserve the limitation upon the power of the central Government ?

Why drag every government power to Washington so that a big centralized government may devour the States and the liberty of the individual as well?

Because:

1. I believe this amendment does away with an important part of the Constitution.

2. It is not limited to the war emergency for which some say we need it.

and

3. Five States will probably pay nine-tenths of the tax, although they will have only one- ninth of the representation in the Senate.

I will vote against it.

Ebenezer J. Hill (R)Connecticut, Speech to Congress on S.J.R. 40, 1909 (modified/link to original)

Hill's biography

I shall vote against this amendment because I think that a question of such magnitude should be submitted to the people and discussed in a campaign.

Stop a moment and consider what we are doing in voting to give this Government the power to lay an income tax in time of peace.

Consider the inheritance tax made to help pay for the Spanish-American war. Six States paid three-fourths of all the money that was brought in by the tax.

Thirty-Five States paid less than the little States of Connecticut and Rhode Island, and yet you come and ask me to vote now for a constitutional amendment that will enable these 35 States to force a far greater tax upon my people?

It is not because our people desire to avoid taxation.

We are ready to vote for an income tax to meet any emergencies which may arise in this Union and to stand by the Government in time of war; but do not ask us, at least without consulting our people at home, to put this burden on them.

Resolutions passed by the New York Chamber of Commerce 1894 (modified/link to original)

The proposal to impose an income tax is unwise, unwise, and unjust for the following reasons:

1. Experience during the Civil war demonstrated that an income tax was bad for our people, and only tolerated because it was needed to win the war.

2. Experience has also shown that is expensive to put in operation; that it can not be fairly collected, and is an unjust distribution of the burdens of taxation and promotes evasions of the law.

3. The proposal to exempt incomes under $4,000 is purely class legislation, which is socialistic and vicious in its tendency, and contrary to the traditions and principles of republican government.

William Bourke Cockran (D)NY, Speech to Congress, 1894 (modified/link to original)

Cockran's biography

I oppose this tax because it is an assault on Democracy. By excluding the majority of our citizens from participation in the burdens of government it will ultimately result in limiting their participation in the control of the Government.

All citizens should take an active part in politics, and their activity should be in proportion to their taxes. If you exclude sixty-five million people from taxation in order to burden eighty-five thousand people with taxes you lessen the number people interested in politics.

This legislation places the Government in an attitude of hostility to the true patriots of this country, whose industry makes the land valuable, and whose intelligence makes businesses successful. It is sad and evil when the creators of wealth fear that their success will cause the hostility of their government.

Taxation must fall on all the people equally. He who is exempt from taxes, forfeits his right to control the Government.

I oppose this bill, not in the interests of the rich, but in the interests of the poor. I oppose this bill because it will place the poorest of my fellow-citizens on a political plane lower than that occupied by the richest and the proudest.

Once the equality of citizens before the law is disturbed, it may never be restored. To persuade a majority to oppress a minority is not to serve the people but to injure them.

Congressional Debate on taxes between Thaddeus Stevens (R)Pennsylvania, Henry Dawes (R)Massachusetts, and Justin Morrill (R)Vermont. 1876 (modified/link to original)

Mr Stevens: It seems to me that it is a strange way to punish men because they are rich. I do not know but that there ought to an indictment against every man who makes a lot of money. If any man dare go above a certain amount, more than I am worth or any other member, then we would take it all.

Mr. Dawes: Does the gentleman from Pennsylvania call it punishing the rich men to make them pay their share of the burdens of taxation, or does he think that the poor should pay the taxes for the rich?

Mr. Stevens: The rich man pays according to his wealth. If he is made to increase the tax according to his wealth, it is a punishment.

Mr. Morrill: No one doubts our constitutional power to levy this tax. The question is how to make the policy. Experiences in the past show us that people who are taxed unequally on their incomes regard themselves as being unjustly treated, and seek all manner of ways to get out of paying it. This inequality is in fact no less than a confiscation of property, because one man happens to have a little more money than another.

Puck Magazine published an illustration by Louis Dalrymple titled, "Don't!!" in1894.

Library of Congress summary:

Print shows a man, possibly Joseph Pulitzer, dressed as a jester holding papers labeled "Income Tax Law", which he is pointing to with his right hand, standing before a woman labeled "Democracy" who is sitting in a chair labeled "Congress"; she is holding a quill pen in her hand and appears to be pondering whether or not to sign the bill. In the background, a man with a ballot box for a head and with one finger raised, tells "Democracy" not to sign the bill.

Louis Dalrymple, Andrew Carnegie's philanthropy, Puck magazine, 1903

Samuel Ehrhardt “The Popular Tendency to Rail at Wealth is Not Entirely Justified”. 1897

Library of Congress Summary

Print shows a vignette cartoon with a group of working class individuals complaining about the selfish accumulation of wealth by a small percentage of society; the surrounding vignettes illustrate the philanthropic deeds of the rich, such as a "Museum of Art" open to all, "Low-Rent Tenements", "Free Milk for the Poor", "Free Ice for the Poor", "Fresh Air Excursion for Poor Mothers and Children", "Free Kindergarten for Poor Children", colleges endowed by wealthy citizens, health care centers, and "Free" libraries.

Thomas Nast, Income Tax Liberty being Weighed Down, Harper’s Weekly, 1878.

A discouraged Slave of Liberty, weighed down by Income Tax, and other laws and taxes. Explanation

What were the results of the Debate? What were the consequences?

S.J.R. 40 was passed by Congress and then the 16th Amendment was ratified by the States and became law in 1913

Since the 16th Amendment was ratified taxes, the rate of taxes (who paid, and how much did they pay) has fluctuated, but taxes have always been a hotly debated topic.

Timeline of Tax rates.

(source: The Bradford Tax Institute)

As Will Rogers said: “The difference between death and taxes is death doesn't get worse every time Congress meets.”

In 1913, the top tax bracket was 7 percent on all income over $500,000 ($11 million in today’s dollars); and the lowest tax bracket was 1 percent.

World War I

In order to finance U.S. participation in World War One, Congress passed the 1916 Revenue Act, and then the War Revenue Act of 1917. The highest income tax rate jumped from 15 percent in 1916 to 67 percent in 1917 to 77 percent in 1918. War is expensive.

After the war, federal income tax rates took on the steam of the roaring 1920s, dropping to 25 percent from 1925 through 1931.

The Depression

Congress raised taxes again in 1932 during the Great Depression from 25 percent to 63 percent on the top earners.

World War II

As we mentioned earlier, war is expensive.

In 1944, the top rate peaked at 94 percent on taxable income over $200,000 ($2.5 million in today’s dollars3). That’s a high tax rate.

The 1950s, 1960s, and 1970s

Over the next three decades, the top federal income tax rate remained high, never dipping below 70 percent.

The 1980s

The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent, and indexed the brackets for inflation.

Then, the Tax Reform Act of 1986, claiming that it was a two-tiered flat tax, expanded the tax base and dropped the top rate to 28 percent for tax years beginning in 1988.4 The hype here was that the broader base contained fewer deductions, but brought in the same revenue. Further, lawmakers claimed that they would never have to raise the 28 percent top rate.

The 28 percent top rate promise lasted three years before it was broken.

The 1990s-2012

During the 1990s, the top rate jumped to 39.6 percent.

However, the Economic Growth and Tax Relief and Reconciliation Act of 2001 dropped the highest income tax rate to 35 percent from 2003 to 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 maintained the 35 percent tax rate through 2012.

2013 – 2017

The American Taxpayer Relief Act of 2012 increased the highest income tax rate to 39.6 percent. The Patient Protection and Affordable Care Act added an additional 3.8 percent on to this making the maximum federal income tax rate 43.4 percent.

2018-2019

The highest income tax rate was lowered to 37 percent for tax years beginning in 2018. The additional 3.8 percent is still applicable, making the maximum federal income tax rate 40.8 percent.

History of Tax Rates: 1913 – 2019