Friday, September 21, 2012

A Little History of U.S. Income Taxation

I've always assumed people knew this stuff, because I was forced to learn it, because my parents and teachers insisted it was essential to becoming a responsible adult, in order to do things like vote intelligently.  They told me EVERYBODY had to learn this stuff.

Apparently NOT EVERYBODY DID, especially those who grew up to be conservatives. What also annoys me is that I'm reasonably sure that while rank and file conservatives might not know this stuff(although they SHOULD), Romney and Ryan almost certainly DO know it.

Finding out I did and other people didn't do the work of learning these things tends to annoy me, because that seems inherently unfair, that - and ignorance irritates me. So Penigma readers are getting the short version here - and lucky you, no quiz questions will be asked.

The first war the United States engaged in was the war of 1812; in part to pay for the War of 1812, the first U.S. income tax was modeled after a very progressive British income tax - which was interesting, since it was the British we were fighting. 

We enacted that income tax to make up for the loss of revenue from tariffs that was anticipated as a result of the naval aspect of that war.  The reality was that the Treaty of Ghent ended the war before the tax went into effect, so it was never actually collected.  The White House was burned to the ground, and the only battle of any significance that we won in that war we won after it was technically over already, the Battle of New Orleans. The war of 1812 was a war of a lot of mistimed things.

The U.S. went back to using tariffs as the main means to raise revenue, instead of the progressive income tax.  The problem with that was that tariffs are regressive - they disproportionately are a tax burden on poorer people than on richer people. The more modern equivalent of that is the regressive burden of sales taxes, another regressive tax that hits middle income and poor people disproportionately.  This is important in the history of the income tax.

The next time the U.S. enacted an income tax was the Civil War, in 1861, which was repealed and redone in 1862; pretty much up to this point, income taxation was something that the government relied on to raise additional funds during time of war and to offset that loss of tariff revenue that tended to occur during war time disruption of normal trade, and it tended to continue until those costs were paid, and then we would return to that regressive tariff basis for revenue.

Then we have the first change in that taxation pattern when in 1894 a peace time income tax was established.  It only applied to the income of the top 10% of people, and the rate of that income tax on the top 10% of wealthy people was a tiny 2%.  Although not because of war this time, the intention was the same - to make up for tariff revenues, because reducing tariffs was helpful for trade rather than because of a lack of tariff money coming in due to war.

But in 1895 the SCOTUS decided that income taxation was suddenly unconstitutional after not having a problem with it previously -  taxation which btw, applied to a broader range of income than our modern income tax. So the country passed the 16th amendment to make the income tax legal, just ahead of the next time war would screw up tariff revenue.  It was ratified in 1913, and here is the actual wording, from a time when Congress could keep things short and simple:
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.
That specific wording about apportionment and the census was in there, because the SCOTUS threw out income tax based on how the taxation was divided up, because they decided that an income tax was really a kind of property tax.......which is one of the many ways our tax code is kind of screwy.  Fortunately, since there are no quiz questions with this post, I'm not going into any other details about apportionment arguments.

I will point out in connection with the 16th amendment however that there has been a certain amount of bad history and bogus bullshit perpetuated around it, especially among the fringies and conspiracy theory crowds (you know who you are).  I'm going to be lazy, and give you the wikipedia thumbnail version:
Some tax protesters and others opposed to income taxes cite what they contend is evidence that the Sixteenth Amendment was never properly ratified, based in large part on materials sold by William J. Benson. In December 2007, Benson's "Defense Reliance Package" containing his non-ratification argument which he offered for sale on the Internet, was ruled by a Federal court to be a "fraud perpetrated by Benson" that had "caused needless confusion and a waste of the customers' and the IRS' time and resources."[23] The court stated: "Benson has failed to point to evidence that would create a genuinely disputed fact regarding whether the Sixteenth Amendment was properly ratified or whether United States Citizens are legally obligated to pay Federal taxes."[24]
The upshot of all this is that there have been a lot of court challenges, all the way up to the Supreme Court in some cases, and income tax has held up under the challenges.  Some of the more interesting legal decisions include that income tax can apply to gross income, but where it starts getting juicy is where both the courts and Congress start parsing out what is income, what is earnings, and what are other financial gains that are or are not taxable.  So for example, they have argued over taxing insurance payments for a loss, because it was not a 'gain', it was making up a loss, but not getting more money for something that was compensation.  This gets to a key subject, a sometimes sticky subject,  in income taxation, because of the way some very lucrative executive compensation manages to avoid taxation or is taxed at a very reduced rate compared to the rate at which plain old wages are taxed for less well compensated labor employment.

The key points to know about income taxation as it evolved in our history is that it was used to supplement other primary forms of tax revenue that were paid by everyone, and that is has ALWAYS been intended historically to apply far more to the wealthy than to lower economic individuals, dating back to the late 1700s.

That was because imposing an income tax on top of the other taxes paid by middle and lower income people would have been unfair and even destructive, because those people were ALREADY paying more of what they had through both tariffs, and the other main source of government revenue, excise taxes.  The tea tax/stamp act tax that prompted the Boston Tea Party was both, because tea was taxed as a foreign /imported 'good', AND because it was being taxed as a tax on a specific product that was in special demand or as a kind of luxury good, differently from other imported items.

About.com has an excellent article on the history of the income tax that explains those two OTHER kinds of taxes, tariffs and excise taxes, and why when income taxation was imposed on top of those two kinds, it was made progressive BECAUSE those taxpayers were already making a disproportionate contribution to government revenue (bold type about regressive tax is my emphasis added-DG):

Since Ratification of the Constitution:
Even after ratification of the Constitution, most federal government revenue was generated through tariffs -- taxes on imported products -- and excise taxes -- taxes on the sale or use of specific products or transactions. Excise taxes were considered "regressive" taxes because people with lower incomes had to pay a higher percentage of their income than did people with higher incomes. The most recognized federal excise taxes still in existence today include those added to the sales of motor fuels, tobacco and alcohol. There are also excise taxes on activities, such as gambling, tanning or the use of highways by commercial trucks.

Income tax is just ONE of many forms of taxation, including effectively many fees, that people pay, in addition to excise taxes and tariffs to support government, and because people pay those other forms of taxation, which include sales tax, payroll taxes, and property taxes, dating back before the imposition of income tax, and because it has always been intended to be a taxation that applied more to the wealthiest as a progressive tax.  While it originated as a supplemental tax to tariffs during war time, that has not been the case for the past 99 years.

What should however be noted for purposes of discussion of taxation and fairness in the context of the 2012 election is that all of us pay taxes, and that those in the lower income brackets pay a LOT of taxes in a range of categories.  To assert that anyone NOT paying income taxes is somehow getting a free ride, or is a taker, or a getter, or a moocher, claiming people in those lower economic brackets benefit from government services without contributing, is a misrepresentation of U.S. taxation, historically, and NOW. Unfortunately, while it has always been intended to be a progressive form of taxation, the reality of income tax is not nearly as progressive as it appears superficially to be.

For a larger context, income tax rates on the top economic brackets have ranged from 2% to 94%.  Contrary to what is claimed by many conservatives regarding taxation, low taxation does not result in economic growth, and some of our highest periods of economic growth have occurred during higher rates of taxation, especially income tax rates.  We rate as lower than other countries comparatively (from wikipedia):
A 2008 OECD study ranked 24 OECD nations by progressiveness of taxes and separately by progressiveness of cash transfers, which include pensions, unemployment and other benefits. The United States had the highest concentration coefficient in income tax, a measure of progressiveness, before adjusting for income inequality. The United States was not at the top of either measure for cash transfers. Adjusting for income inequality, Ireland had the highest concentration coefficient for income taxes. Overall income tax rates for the US are below the OECD average.[48]
So 'endeth the lesson' from the 'educated liberal elite'.

This highlights why the Bush Tax CUts were such a disaster to our debt; they were grossly disproportionate in giving back money to the wealthiest, while giving very little to the middle and lower income brackets; AND instead they failed to help offset the costs of not one, but TWO wars. The premise was that they would encourage economic growth - which tax cuts haven't done historically. Growth was significantly SLOWER than during income taxation at higher rates AND revenue grew much more slowly as a result than levels without the Bush tax cuts. The Bush Tax cuts failed BOTH how income tax traditionally is supposed to work progressively, AND what it is supposed to do for debt, especially war debt.
 
It's hard to believe that Romney and Ryan want to bring back the same failed economic advisers and the same failed policies.  But given that they are lying about the 47% contributing to fund government, have a belligerant military policy, and an economic policy that would grossly and disproportionately give money to the top 1% while taking it out of the pockets of the 99%, especially the lower income brackets, maybe that isn't really such a surprise after all. It is simply incomprehensble why so many conservatives would support him, and vote against their own interests.
 
Clearly then, that's why Romney, Ryan and their supporters (or 'cohorts') have to lie about the 47%, in order to deceive the right wing about income taxes, at least those who don't know their history and economics.
 

2 comments:

  1. Wanting to help the "little people" is what leads to things like having the IRS disallow a deduction for the interest on credit card debt while allowing the interest on home mortgage to be deducted. Anybody who says that the working poor (which is becoming a larger %age of the "middle class" every month) is not paying THEIR share of taxes, while insisting that the Mittmoronimorons are is either an idiot or a cynical liar.

    ReplyDelete
  2. You are absolutely correct.

    I hope that most people find something in what I've written to take away from it that is new. But the most important thing is that those who are not paying income tax have mostly paid in, but through various deductions, like mortgage interest, end up getting some or most of that money back as their tax refund.

    The government gets to use that money up until the tax refund is issued as well.

    As Pen noted elsewhere, the 47% do NOT all vote for Obama, and plenty of the upper income 47% support him as well, because the Democratic economic policy, AND foreign policy, have been far better for the whole country, including them. The conservative policies have ONLY benefited the wealthy, and been disastrous for the rest of the country, and by extension, the rest of the world.

    When Joe says 'lets pretend...' he is correct in that the only world where what he posits IS a fantasy world; his scenario is not replicated in the real world even a little bit.

    ReplyDelete