By George Warren, Columnist
Today we shall discuss how we came to enjoy the most thrilling of American participatory endeavors—the Federal Income Tax, another of the mistakes our forefathers made for us.
The original US Constitution (as ratified by 9 of the original states on June 1, 1788) made it clear in Article I, Section 9, Clause 4 that no direct tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.
In other words, no person can be taxed in relation to his or her income if it differs in any way from their neighbors. We managed to win the War of 1812 with Britain on borrowed money, the public debt rising from $45 million on January 1, 1812 to $119 million as of September 30, 1815. By 1835, President Andrew Jackson, my hero in spite of his racial prejudices, paid off the National Debt for the first and only time in history.
He also closed the Second Bank of the United States (predecessor to the Federal Reserve) in 1837. He distributed the $17 million plus reserve including profits to the several states. We went to war with Mexico in 1846, over the annexation of California and Texas. We financed the war with borrowing again, and by 1849 the debt was back up to $63 million.
It was the Civil War which started us down the path of perdition. The war brought about the Legal Tender Act of 1861, which allowed the Union to print $150 million in promissory notes (greenback dollars) and require their acceptance as money by every citizen, as discussed in our previous column. Additionally, they issued $500 million in general obligation bonds to be sold to investors.
Furthermore, the Union passed the Revenue Act of 1861, which imposed a flat tax of 3% on personal income over $800 annually (clearly unconstitutional). When there was no rebellion, they passed the Revenue Act of 1862, which raised it to a graduated tax of 3-5% on incomes over just $600.
Remember the story of the frog put into water that is gradually increased to boiling temperature? By the end of the war, the US debt had reached $5.2 billion. But in 1872, the Civil War income taxes expired.
Twenty years later, in 1894, the Wilson-Gorman Tariff Act included an amendment taxing incomes over $4,000 annually a flat 2%. This brought about the 1895 Supreme Court decision in Pollock vs Farmers’ Loan and Trust Company, which for the first time differentiated between wages and investment income.
The ruling stated that taxes coming from property ownership (rental or investment income) were unconstitutional unless apportioned to the states. This apparently left wage income subject to the tax. In spite of this elimination of income taxes on property income, and the $250 million cost of the Spanish American War; through prudent management the nation had reduced its debt to $1.9 billion by the end of the century, and our finances were in relatively good order.
So we made it through our first 100 years plus with no real progressive income tax, and with no excessive, over-regulating, ever-expanding Federal government.
It had to live within its means. However in 1909, Senator Nelson Aldrich (R) of Rhode Island (grandfather of Nelson Aldrich Rockefeller) was US Senate majority leader and Finance Committee chairman.
He introduced the 16th amendment to the US Constitution in 1909 to make direct income taxes on personal income legal.
On February 25, 1913, it was ratified by three-fourths of the states and became the law of the land. The following Revenue Act of 1913 lowered basic excise tariffs from 40% to 25%, and instituted personal income taxes.
Individuals making over $3,000; or couples making over $4,000, were subject to a 1% tax, with really rich persons subject to a progressive tax rate topping out at a whopping 7% on over one-half million dollars annual income. (Please remember the frog.)
Mind you, I am not adamantly against a direct personal tax on a person’s income without it being apportioned according to census, since it has now been made constitutional. My perception is, however, that it passed because it was described as a tax on rich persons which would never affect the average American.
However, the original, unconstitutional Revenue Act of 1861 had it most right when it imposed a FLAT tax rate of 3%. Regardless of the rate, only a flat tax on everyone’s income is fair and equitable.
It is fair for a person making $30,000 to pay $3,000, while a person making $300,000 has to pay $30,000. Certainly everyone benefits from the government. It could well be argued that those whose income is lowest in fact benefit the most, because of entitlements.
My many conservative friends who support the highly touted FAIR TAX should realize that it is in fact a rich man’s tax relief act, because it taxes only what you spend, not what you make.
The poor man has to spend all his income to live; while the rich man may spend only a small portion of what he earns, and invest the rest. His taxes would thus be much lower in proportion.