"A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes.”
- Richard E. Byrd
Richard E. Byrd is not a quotable guy.
He thought the Northern states were mean to the Southern states when addressing the issue of slavery. Since he was on the wrong side of history on such an important issue as the Civil War, I’d rather forget him.
But his use of the phrase "complicated machinery” to describe his dread of the impending introduction of income tax somewhat rings a bell with me, especially since I had to pay a fine under fifty cents for going over on my Roth (described in Part 1).
Because of our convoluted tax system, one simple mistake cost me hours of my time while I tried to correct it and do "the right thing."
Enough said. Let’s forget him now.
A Time Before Income Tax?
The American tax system is one of the most complex tax systems in the history of the planet. It’s hard to imagine there was a time in the United States when income tax didn’t exist - when it’s very existence was argued about by committees. In fact, the most common source of federal revenue before 1913 was tariffs - (covering 95% of sourced money).
The above fact helps remind us that taxes themselves have been around for a long time - but gained increasing complexity over the years - with responsibility for management often placed on the earners themselves.
As you will see, some of the “complex machinery” we have in place is there almost by accident, by chance - by a close margin of warring facets.
In other words, it doesn’t have to be this way (but somehow it got this way) and there seems to be no going back.
Early Writing/Early Records Relate Back to Money
If you were a citizen of Ancient Egypt, you would have found yourself in the first “known” system of tax collection. This was around 3000 to 2800 BC and was done through the use of corvee labor (unpaid days of labor in place of paying taxes) and tithes (10% of earnings).
Scribes had an important job. They had to track you down for mere pennies or be severely punished themselves if records were off.
Let’s Skip Ahead to the Formation of the United States
The original colonies of the US were founded for several reasons; the search for freedom from religious persecution, the search for wealth, the search for the source of the color red (cochineal bugs launched more ships than we’ll ever know), and an eventual mob of people who didn’t want taxation without representation.
The fact the founding of this country is rooted so deeply on strong beliefs about taxation makes it no surprise that taxes were (and still are) a topic of opinionated rage.
Key Player Number 1: Lincoln
Abraham Lincoln was the first one to breach the subject of income tax when the North needed to raise funds for the Civil War in 1862. Lincoln proposed a 3% tax on anyone making over $800.
This was still only 10% of the population or less by the end of the Civil War, posing no mass uproar from the public. At 11,400 words, the document itself wasn’t too cumbersome yet either.
So how did income tax end up in the 16th amendment and become part of the constitution by 1913?
Why is it 4 million words today?
Key Player Number 2: The Surpreme Court
Between the Civil War and WWI, it appears the Supreme Court was the biggest enemy of income tax. One proposed version of it was slammed as unconstitutional in 1895.
However, many people in power (like the gent below) knew something progressive should be done with the overall exploding wealth in the US.
"It is important to this people to grapple with the problems connected with the amassing of enormous fortunes, and the use of those fortunes, both corporate and individual, in business. We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.”
- Theodore Roosevelt
Taft Makes a Random Decision
When Taft became president after Roosevelt in 1908, a reluctant group of Democrats and Republicans - who still shook in fear of the Supreme Court - joined together to push for individual income tax.
Taft was cautious and slightly wishy-washy in pushing for such an idea. While reaching for a tax compromise in 1909, he decided he would get behind an amendment authorizing federal income tax. He expected this bold move would slow everything down, delay any action on the issue, and possibly settle the question once and for all but take a looooong time.
I could be wrong, but I imagine Taft thinking the income tax situation would go down something like this:
"Rules were very hard to change. Sometimes, if it was a very important rule - unlike the one governing the age for bicycles - it would have to go, eventually, to The Receiver for a decision… But the committee would never bother The Receiver with a question about bicycles; they would simply fret and argue about it themselves for years, until the citizens forgot that it had ever gone to them for study.”
- The Giver, page 14
Unlike this text from The Giver, federal income tax didn’t get stuck in a committee as Taft had assumed. The idea took off (proving how the tides of history can be quite random).
Opposition to Income Tax Squashed!
Opponents to the tax (such as Byrd - the opening guy we’d like to forget about) and other conservatives couldn't stop the 16th amendment.
Both sides were surprised by just how quickly the states ratified the amendment and tacked it on to the ever growing Constitution.
Tariff rates were lowered. Wilson (now inheriting this move from Taft) signed the bill, declaring a 1% income tax on individual incomes over $3000 and over $4000 for married couples. (Some funny math calling into question what the government really thought about two income earning households and women's earning potential at the time.)
Also, a 1-6% surtax was present that could depend on income, setting the stage for the tax brackets we know today.
Not surprisingly, for a few years, this tax didn’t garner a significant amount of money for the government. However, WWI changed all of that because the United States needed money and needed it fast. Democrats and Republicans came together to put income tax at the very heart of federal finances, and quite frankly - they haven’t looked back since the 1920s.
Some Final Thoughts From Roosevelt
"I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is to be hoped that one may be devised which the Supreme Court will declare constitutional."
- December 7, 1907
I Learned a Lot: I Learned I Still Detest Taxes
As an overly complicated tax system bears down upon us (especially if you are self-employed, have a side-hustle, or have an interest in tax advantaged accounts), I am certainly not a proponent of “the flat tax” like many people looking for a quick solution. (I find it to be a ridiculously unfair idea.)
As with most of my research, I learned I have a lot left to learn before contributing to any intelligent conversations on tax reformation.
If you are interested in hating taxes less, consider checking out this Freakonomics podcast.
"The U.S. tax gap is considered quite large for a rich country; the I.R.S. says it’s around 15 to 20 percent of the total amount due. This adds up to $477 billion — nearly half a trillion dollars each year in unpaid taxes. But here’s the amazing thing. That is just a little bit more than the amount Americans donate each year to charities.”