Romney's 47% Has a Venerable Legacy in the 1913 Origins of the Income Tax

In February 1913 the federal government first gained the power to levy an income tax and that fall, a progressive income tax became law. During this time, rates were all of 1% to 7% and the threshold to pay even the 1% rate was about $75,000 in today's dollars.

Brian Domitrovic
3/26/2013 @ 8:00AM
Forbes

As we limp toward tax time this early spring, it’s worth giving thought to a hundred years ago. A century back, in February 1913, the federal government first gained the power to levy an income tax. The 16th Amendment to the Constitution was passed that month, when Delaware’s approval made three-fourths of the states in favor. The First State has since had second thoughts. These days, at least to corporations, all Delaware does is flaunt itself as a tax haven.

With the amendment in parchment in 1913, Congress made good on the new power. That fall, a progressive income tax became law. Rates were all of 1% to 7%. The threshold to pay even the 1% rate was about $75,000 in today’s dollars.

Ever wonder why they started this bane to begin with? It wasn’t any sort of deficit problem. The United States was putting up surpluses at the time. It was a trade, a quid pro quo. In exchange for the income tax (on high-earners), Congress would lower the tariff by 38%.

Here was the logic. The tariff, which had basically been around for the whole of the United States’ existence up to that point, was good at punishing every last soul in the country, rich and poor alike, indeed the poor a little more. The tariff made imported goods cost more; it gave domestic producers little incentive to lower their prices; and it raised the costs of both capital and labor (labor demanded wages that covered the tariff surcharges) to all businesses, including, perversely, exporters.

In the early 20th century, it was generally thought, and not at all implausibly, that the much-maligned tariff had plenty to do with the coming of the civil war back in the 1860s. Why not cut down the piggish thing?

In stepped the rich with a bright idea. They had been doing very well over the last fifty years of industrial revolution. They could pay a little from their surpluses via a modest income tax, and the tariff could be lowered most nicely. The trade was a favorable one. For an income tax on high earners maxing out at 7%, the tariff would go down by 15 points, from 40% to 25%.

To the plutocracy, eyeing as it was anarchist assassinations of the president (William McKinley in 1901), labor agitators’ near-lethal headshots of captains of industry (Henry Clay Frick, 1892), and the formation in this country of the communistic International Workers of the World in 1905, it looked like a good deal. Pay a little on their own in an income tax so as to relieve taxation on the masses. The body politic stood to get relaxed. After all, the tariff had been the most debated question in Congress in every era of American history to date.

That was the consensus that gave us the income tax. The rich would pay it, nobody else would, and everyone else’s taxes would be cut and minimized. In the 1920s, the Treasury Secretary, Andrew Mellon, actually spelled it all out on a number of occasions. Taxes were to be paid by the settled rich, out of their yearly surpluses. They were not to be paid by the little guy (outside of a few sin excises), and certainly not the up-and-comer.

Last fall, Republican presidential candidate Mitt Romney got excoriated for his remark that 47% of the nation pays no income tax. Now, to be sure, Romney had no good reason to think, as he did, that those people should not bump the unemployment-generator Barack Obama from office. Yet the question everyone forgot to ask is why that 47% number is not much higher.

Why is it that more than half the people in this country pay the income tax? The consensus that gave us the thing a hundred years ago was that the top percentiles should pay and modestly, with everybody else off the hook.

The reason, of course, is big government. You can charge government wholly to the rich so long as government is reasonably sized, which is to say small. But once government gets big, you’ve got to start dunning the middle and lower classes.

Which is what we got with President Franklin D. Roosevelt in the 1930s and have lived with ever since. Government now does all sorts of things far beyond the capacity of the rich to pay for it. Therefore, a great proportion of everyone else is hit with exaction. What is it that the middle and lower classes can’t do that government can do with their money remains anyone’s guess.

Back in 1913, the government had in its hands the option of taxing the rich exclusively. The only thing government had to do in turn was keep itself modest in size. The feds proved unable to keep to this reasonable constraint. Government soon got big and claimed the resources of the far-less-prosperous.

All in all, quite a scandal. The red herring in our current political discourse is the complaint that the rich are not doing their fair share. As history shows, the rich could carry the entire load of government if one simple concession were made.

If our president and those who carp about the “top 1%” were serious, their mission would be to cut down the size of government and send the entire bill to the rich. The tradition of American political economy was placed squarely in this direction in 1913, only to be traduced by now eighty years of oily enablers of leviathan.

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