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The Hidden Progressive History of Income Tax

The income tax was the most popular economic justice movement of the early 20th century. What happened?
 
 
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Imagine a United States with enormous and growing levels of income inequality. An America with long-term unemployment and people giving up hope for the future. An America where corporations buy politicians and ignore the desires of everyday people. An America where a lack of regulation leads to a boom-and-bust economy that allows the 1% to get even more wealthy while throwing millions of Americans out of work.

That I could be talking about today or the Gilded Age is telling. The end of the 19th century saw corporations at their height of influence and power, with plutocrats literally buying off legislatures to elect their men to the U.S. Senate and individuals like John D. Rockefeller and J.P. Morgan having more money than the entire federal government.

Americans fixed a lot of these problems in the 20th century. The mid-20th century was a period when more Americans had a larger share of the pie, with a growing middle-class, high rates of unionization, an expanding consumer economy leading to home ownership, working-class people going to college without much debt, and a better life for all, even if too often minorities were denied inclusion in this society.

This America is slipping from us daily. The Romney campaign has committed itself to serving the interests of the rich. Paul Ryan’s economic plan will eviscerate Medicare and Medicaid, a Romney presidency would overturn environmental regulations and continue the war on unions that threatens the survival of the American middle-class.

In order to fight this, we have to understand the ways our ancestors fought to even the playing field. How did they take power from the rich in the early 20th century, a time when the plutocrats had even more power than the present? After much debate, they settled on a solution that went a long way toward making the United States a more fair country.

Income taxes.

Today, we are supposed to hate paying taxes. They are our “tax burden.” We vote for politicians who will reduce our taxes, even if that means destroying the welfare state. Conservatives’ century-long war against taxes has paid off by convincing everyday Americans to think taxes are a horrible thing that pays for government waste.

Our ancestors knew this was not true. The income tax was the most popular economic justice movement of the late 19th and early 20th century. This truly grassroots movement forced politicians to act in order to stay in office, leading to the 16th Amendment to the Constitution in 1913. That’s right, the income tax was so popular that the nation passed a constitutional amendment so that the right-wing Supreme Court couldn’t overturn it.

Income and Tax Inequality in the Late 19th Century

Everyday Americans hated the tax system of the Gilded Age. The federal government gathered taxes in two ways. First, it placed high tariff rates on imports. These import taxes protected American industries from competition. This allowed companies to charge high prices on products that the working class needed to survive while also protecting the monopolies that controlled their everyday lives. Second, the government had high excise taxes on tobacco and alcohol, two products used heavily by the American working class.

These forms of indirect taxes meant that almost the entirety of federal tax revenue came from the poor while the rich paid virtually nothing. This spawned enormous outrage. The poor had a model in creating an income tax—President Abraham Lincoln, who instituted the nation’s first income tax to pay for the Civil War. Lincoln’s Revenue Act of 1861 created a graduated tax on everyone who made at least $800 a year, allowing him to pay for the war. Although a grand success, Republicans pulled away from it as they backed off of racial equality in the late 1860s and it was overturned in 1872.

At first, Americans did not protest much against the end of the income tax, but with skyrocketing income inequality of the Gilded Age, grassroots movements sprung up to find solutions. Many Americans were attracted to simple one-size-fits-all ideas like Henry George’s Single Tax, intended to pay for all government expenditures by taxes on land transactions that supporters also hoped would draw urban dwellers back to the farms.

Others supported taxing the rich directly. As historian Ajay K. Mehrotra has shown, grassroots organizations across the country began organizing around replacing the tariff with the income tax. He tells the story of Merlinda Sisins of Pickleville, Michigan, a mother of 16 who, despite a lack of education and poor spelling, began writing letters to the Journal of United Labor, where she demanded that working people nominate their own to Congress in order to pass legislation that would destroy the tariff and the monopolies.

Not all working-class people jumped on board with the income tax immediately. Some worried it would give the government too much power. Many labor unions worried that lowering the tariff could cost them their jobs. The Knights of Labor, the nation’s most important labor union in the 1880s, tried to avoid the question because members in protected industries supported the tariff while other workers knew it made them poorer.

The Panic of 1893 and the Rise of the Graduated Income Tax

This all changed with the Panic of 1893. The nation’s greatest economic collapse before the Great Depression, the Panic started with a popped railroad bubble, leading to bank collapses. Nearly 20% of workers were unemployed by 1894. Outrage over the way greedy monopolists had sabotaged the economy and the government’s feeble response propelled the income tax to the center of American reform.

This dovetailed with the rise of the People’s Party, or Populists. These farmers, mostly located on the Great Plains and in the South, organized themselves during the 1880s and 1890s to take back control of the nation from corrupt urban monopolists. Their demands included government regulation of railroads and inflationary monetary policy that would help them pay their debts. They also supported the graduated income tax so the rich would finally pay their fair share. Their rise in the 1890s threatened the corrupt political consensus that gripped both parties during the Gilded Age. Organized labor now got on board with the income tax as well, as the turmoil of the Panic of 1893 convinced even many workers in tariff-protected industries of the need for the income tax.

The income tax became such an overwhelming political movement during the 1890s that Congress, despite so many members' close relationship with the plutocracy, passed an income tax law that would have forced the rich to begin paying income taxes for the first time since 1870. The Wilson-Gorman Tariff of 1894 placed a 2% tax on incomes over $4000 a year (approximately $88,000 today).

Corporations immediately organized against this. In a strategy we can recognize today, the Chamber of Commerce distorted the bill’s purpose, telling the public that the income tax would drive them into poverty, even though the bill did not affect working-class people. Yet the Chamber made little headway in the face of this overwhelmingly popular movement.

But the Supreme Court in 1895 declared the federal income tax unconstitutional in the case of Pollock v. Farmers’ Loan & Trust Company. This was the same set of judges who ruled segregation constitutional in the case of Plessy v. Ferguson and followed that up with a number of court cases that both concentrated wealth in the hands of the few and oppressed minority populations, including Mexican Americans in New Mexico and Native Americans.

Yet the income tax movement continued, now with the goal of a constitutional amendment to overcome a hostile Court. Over the next 15 years, a variety of reform movements, including farmers, organized labor, and, increasingly, middle-class reformers known as Progressives, pushed for the income tax to alleviate America’s stubborn inequality and to provide the government more money in order to function as modern 20th-century state. Despite continued corporate opposition, Congress presented a constitutional amendment to the states in 1909, which finally achieved ratification in 1913 as the 16th Amendment. Over the next century, income taxes played an enormous role in leveling the national playing field and creating the middle class.

Lessons for Today

So how did we become a nation where the working and middle classes have turned on progressive taxation? I argue for three major reasons. First, the great success of the 20th century state to create a middle class then allowed conservatives to claim that they represented everyday taxpayers, a claim the new middle class found all too believable once they started paying higher taxes.

Second, the growth of the social safety net combined with white backlash to the civil rights movement in the 1960s and 1970s to create a racial code around taxes that suggested white taxpayers subsidized, for instance, black mothers on welfare.

Third, the ability of the extreme rich like Mitt Romney to avoid paying taxes through creating loopholes and offshore accounts has created resentment toward the entire system: if Romney isn’t paying taxes, why should I?

Progressives need to reclaim income tax rates as an organizing issue. We need to press for an aggressive tax increase on the wealthy while lowering income taxes for those who can’t afford to pay them. We should also call for vigorous prosecution of tax cheats, the closing of tax loopholes, and a series of government programs directly paid for by the income taxes from the wealthy. This is a tall order in the face of the current anti-tax mentality. But until we reclaim the mantle of progressive taxation, we won’t have access to a primary tool to create a more just and equitable society.  

Erik Loomis is a professor of labor and environmental history and a blogger at Lawyers, Guns and Money.
 
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