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Thorndike October 3 is the th anniversary of the Revenue Act of and with it, the first federal income tax of the 20th century. The law is often trotted out in tax reform discussions, especially by those convinced that the modern tax regime has strayed from its origins.
Keating in a article for The Freeman. In Congress enacted a top rate of 7 percent and a high exemption that spared all but 2 percent of households entirely.
But just five years later, the top rate was 11 times higher. Many of the same lawmakers who voted for the light and narrow tax of also voted for the heavy and much broader tax of Still, the act deserves some scrutiny because many of the arguments surrounding its enactment remain alive today.
If nothing else, history can remind us that issues of fiscal fairness were just as nettlesome then as they are now. A Dangerous Man President Wilson had some dangerous ideas, at least in the view of many business leaders. Wilson also insisted that politics made the tariff "one of the most colossal systems of deliberate patronage that has ever been conceived.
What law became legal in 1913
The 16th Amendment was ratified just a few weeks before his inauguration, and most observers expected the new president and his congressional allies to move quickly to enact a new tax on individual and corporate income. The world moved more slowly in than it does today, but eight months after Wilson arrived in the Oval Office, he signed the revenue act into law.
Most of the law was devoted to tariff reform, but many observers were fixated on the income tax. The new income levy took shape in the House of Representatives, and especially in the office of Rep. Cordell Hull, who provided an early draft. Like many Southern Democrats, Hull was a longtime champion of taxing income, and he sketched out a low, flat-rate levy on a small group of very rich taxpayers.
But some Democrats had other ideas. According to Randolph Paul -- one of the great fiscal historians of the 20th century, as well as a leading Treasury official in the s -- Rep. John Nance Garner led the drive for a graduated rate structure. Hull was reluctant, worried that progressive rates would leave the new tax vulnerable to judicial and political challenges. Eventually, however, he agreed to a modest amount of graduation. Rates in the House bill topped out at 4 percent.
Wilson specifically asked Hull to set the exemption high, because he was eager to "burden as small a number of persons as possible with the obligations involved in the administration of what will at best be an unpopular law. The Finance Committee resisted those changes, instead focusing on exemption levels. When the tariff bill reached the floor, insurgent Democrats and progressive Republicans teamed up to push for higher rates, with some amendments seeking to raise top rates as high as 20 percent.
John Sharp Williams, tried to beat back the insurgency. Wilson happily signed it on October 3, and the new income tax made retroactive to March 1 took effect immediately. Complaints Rates and exemptions were not the only contentious aspects of the new tax. As it moved through Congress, critics railed about its complexity. Elihu Root to a correspondent. We will have a merry, merry time, for all our friends will be there. It will be an intellectual center, for no one understands the Income Tax law except persons who have not sufficient intelligence to understand the questions that arise under it.
Withholding had been used during the Civil War to collect taxes on some kinds of income, but the act envisioned a more ambitious regime. In particular, the law required withholding on dividend and interest payments paid out by corporations, as well as rent, interest, wages, and salaries paid by both corporations and individuals. Eventually, critics would win the argument about withholding, persuading lawmakers in to repeal it.
It would not reappear until World War II. Another controversial aspect of the law was its geographic incidence. Observers understood that the new levy would fall most heavily on the Northeastern states as had the Civil War income tax.
But Hull, mustering well-rehearsed Southern arguments, insisted that the tax was sectional because "wealth first made itself sectional. In the Senate, Sen.
In response to complaints from Root that New Yorkers would be overpaying, Lewis was openly scornful.
Tax History Project -- Tax History -- Original Intent and the Revenue Act of 1913
I think it is fair, and I voted for the income tax amendment to the Constitution, and urged it upon my people. I have no fault to find with an income tax or a graded tax, but if you impose too great a tax upon the industrial States you will, to that extent, diminish their taxable resources for State or other local purposes.
Editorial critics objected to the high exemption as a form of class legislation. The New York Sun, for instance, called it "taxation of the few for the benefit of the many.
At the end of the day, such a tax would hurt the rich and the economy but do little to help the poor. Indeed, they have remained at the center of most political tax debates ever since. And as modern politicians wrangle over tax reform, many point nostalgically to the low, narrow tax of as some sort of object lesson.
The Higher Law (1914 film) - Wikipedia
In a presidential debate, for instance, Rep. By , the top rate was 70 percent. But, in fact, the rate had reached 77 percent by , just five years after Congress created its first, single-digit levy. World War I explains the rapid escalation in rates, of course. But the willingness of lawmakers to transform the income tax in the face of national emergency tells us something about the way they viewed that tax in the first place.
After all, lawmakers had other revenue options. But the income tax had several virtues. To begin with, it was already on the books, and its administrative machinery, while embryonic, was at least operational. But almost as important, the income tax struck many wartime lawmakers as fair. Which is no surprise, because many of those same lawmakers had voted for the tax -- and endorsed its fairness claims -- just five years before.
The low taxers of were the high taxers of Necessity may have forced their hand during the wartime emergency, but lawmakers of the late s were not somehow wed to the notion of low-rate income taxes. If the legislative majority was wed to anything, it was to the essential fairness of taxing income. And to taxing it progressively. Paul, Taxation in the United States Boston: Little Brown, , at A Study in American Politics Boston: Houghton Mifflin, , available at http: John Wiley and Sons, , at