Sunday, March 16, 2014

The Revolution of 1913: Federal Taxes

Isaac William Martin tells the tale of how the rich spent the twentieth century struggling to avoid sharing any of their wealth with their fellow citizens in his book Rich People’s Movements: Grassroots Campaigns to Untax the One Percent. He points out that the defining moment for the rich people’s campaigns occurred in 1913.

"The activists who campaigned to untax the rich in the twentieth-century United States told a common story about the origins of their crusades. It all started, they said, when a singular catastrophe befell the American polity in 1913. The story was handed down from generation to generation. Writing in 1938, J.A. ‘Pappy’ Arnold remembered it as ‘the greatest calamity in the evolution of government.’ In 1952, Frank Chodorov recalled it as ‘the revolution of 1913.’ In 1974, Robert Charlton published an article describing it as a ‘disaster’ that undermined the American republic. In 1989, Lewis Uhler characterized it as the beginning of big government in America, as the end of an era of freedom, and as the first step on the road to serfdom. In 1997, Larry Arnn and Grover Norquist portrayed it as a betrayal of the founding fathers and as the beginning of a new federal policy of ‘terror and torment’."

The catastrophe to which they referred was the insertion of a single sentence into the Constitution in the form of the Sixteenth Amendment.

"The Congress shall have the 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."

The income tax and the estate tax had been born and now the wealthy would face the prospect having their wealth fall into the hands of the undeserving masses. The initial concern was not that they would be burdened by large taxes, but that they would have to pay federal taxes at all.

Martin provides some interesting background on the condition of our nation at that time to explain why the income tax was required and how it came to be.

Income inequality in the years prior to World War I was thought to be greatest of any time in our history—before or since.

"….the limited available data suggest that the ownership of wealth on the eve of World War I was as unequal as it had ever been, and more unequal than it ever has been since,"

"….it is plain that what is now defined as absolute poverty in our official statistics was so widespread that it would have been seen as the normal condition of a majority of the population."

Prior to the federal income tax the existing taxes produced the perverse effect of falling most heavily on the poor. The main source of tax revenue for the federal government was tariffs and excise taxes on alcohol and tobacco. The distributors paid these duties and passed the cost on to the consumers. In yet another example of market failure, domestic competitors took the opportunity to charge the same high price for their products. As these products formed a larger component of low-income families’ expenses, the levy fell heaviest upon them.

State and local governments taxed wealth, but in practice, the taxes again fell most heavily on the poor.

"Most state and local governments supposedly taxed wealth, but in practice the general property tax was a tax on real estate only, because real estate was the only form of wealth that could not be hidden or carried over county lines when the assessor came calling. Almost no one reported their household effects to the tax assessor, and intangible wealth represented by stock and bond certificates generally escaped scot-free."

Even the real estate taxes were rigged to let the rich off easy. Absentee landlords could charge rents to poor city dwellers large enough to cover high urban property tax rates and earn a profit, while they built themselves mansions outside the city limit and used their resources to ensure that their property was taxed at the lower "rural" rate.

The system was so unfair that numerous groups found arguments in favor of a federal income tax. Laborers resented their low wages and the wealth of their employers. Unions saw the income tax as an issue that could be used to help in the organization of workers. Farmers paid a significant property tax, but the banks that held their mortgages paid none, and the railroads that charged them large fees to carry their produce to market managed to pay little if any. Prohibitionists were in favor because they wanted to eliminate the federal dependence on alcohol revenue. Women who demanded the right to vote wanted to be able to claim that they were tax payers so that they could protest over taxation without representation.

The wealthy found themselves in a precarious position. Martin tells us that it was actually the Republicans who gambled on a Constitutional amendment in order to fend off legislative actions that they feared they could not counter. The idea for the Sixteenth Amendment was said to belong to President William Howard Taft.

"Many Republicans in Congress voted for the amendment in hopes that the drive for ratification would fail and thereby kill the tax for good."

But the Sixteenth Amendment passed rather easily. It turned out that the pressure from organized special interest groups was more effective than the corruption that could be purchased with wealth. Rich people learned a lesson from this defeat.

Every revolution seems to incite a counterrevolution. In 1920, Warren G. Harding appointed the wealthy Andrew Mellon as secretary of the Treasury and the counterrevolution was begun.

"Mellon would remain secretary of the Treasury through twelve years and three presidencies. He would use his influence to push for the elimination of the estate tax….he would prove to be an influential ally and inspiration for rich men and women who protested against income taxes on the rich. As secretary he would encourage, advise, and support their protests."

"These activists protested against the progressive taxes on income and wealth. But in their organizational style, in their tactical choices, and even in their rhetoric, they copied the progressive social movements that put those taxes on the books."

More on Martin’s book can be found here. His description of the history of rich people’s movements culminates with the takeover of the Republican Party and its conversion to a political tool of the wealthy.

The federal income tax contributed to the winning of two world wars, survival of the Great Depression, and development of the strongest economy on earth. Apparently that is not good enough for some.

The rich shall always be among us—and they will be well organized.

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