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The Income Tax And How It Grew

June 2024
43min read

and grew, and grew, and grew

Sixty years ago the permanent individual income tax, with escalation built into its table of rates, came on gently and quietly, by no means ignored, yet not the object of any great furor, either.

There were a number of reasons why the majority of American people reacted with composure. First of all, the new statute was signed by President Wilson in October, 1913, but the taxpayers were not required to get up the money until March 1, 1914. This lag in time diffused the impact. Furthermore, the exaction fell upon a very small proportion of the population, estimated to be about one per cent including dependents. Actually the number turned out to be even smaller. The fortunate or unfortunate few, depending upon one’s point of view, were required to pay a modest one per cent on taxable income above three thousand dollars and up to a top of 7 per cent on incomes above $500,000. Certain deductions were allowed: business expenses, interest on indebtedness, other taxes, casualty losses not compensated for by insurance, bad debts, depreciation, dividends of corporations that had paid the corporation tax, and income upon which the tax had already been collected at the source.

Most Americans may have viewed the pangs and labors of those who were sweating over their first Form 1040 with a certain relish. No one dreamed in 1913 that the personal income tax would in a not distant day become a mass tax, the most golden of all the golden eggs, the major support of the federal government, and the biggest business in the United States. “Never since then,” as the New York Times observed forty-three years later, “has the taxpayer had it so good.”

This is not to say that dissidents were lacking. Or that they were silent. Those who took an apocalyptic view of the graduated feature of the tax reacted with cold hostility. In 1894 Ward McAllister, social leader of the four hundred, had threatened to leave the country if an income tax became law. (He was spared, dying early in 1895.) In 1913, with such a law actually in force, the idea of British citizenship became suddenly popular. Dr. Anna Howard Shaw, the women’srights advocate, raised the historic issue of taxation without representation, while Dr. Charles W. Eliot, president of Harvard University, publicly expressed the fear that the fiber of the American people would be weakened by the income tax and that they would “surely lose those sturdy, independent, honest and just qualities which alone befit free men.” He was right to a degree, since the first of many arrests and convictions for tax evasion came soon after he spoke.

Vigorous objections were registered by proponents of an economic theory highly regarded in Wall Street, in the great money-center banks, and in the executive suites of the country’s largest corporate enterprises, that the general welfare was best promoted when the possessors of large fortunes were lightly taxed. On the happiness of the few, ran the argument, hinged the happiness of all. The rich must be encouraged to save and invest or initiative would dry up and the economy wither. This durable ideology has often been eloquently articulated in the reports of the House Ways and Means Committee, where revenue bills originate, and printed at government expense.

It had taken twenty-five years of argument and debate, a bitter defeat in the Supreme Court during the second Cleveland administration, and an amendment to the United States Constitution to clear the way for the income-tax statute. When it finally came, the feeling about it was generally positive. It was contended and widely believed that the new law would put some restraint upon the concentration of wealth in the hands of the richest 1.6 per cent of families in the United States, who between 1890 and 1910 had nearly doubled their share of the national income, from 10.8 per cent to 19 per cent, chiefly at the expense of the middle class. And it was further believed, as a matter of equity or fairness, that the personal income tax would place the burden of supporting the federal government in some reasonable relationship to benefits received and the ability to pay. The Committee on Ways and Means did not think the task of filling out the income-tax blanks would prove to be onerous. In recommending the bill to the House the committee declared that “those citizens required to do so can well afford to devote a brief time during some one day in each year to the making out of a personal return … willingly and cheerfully.”

There were side effects over the years to come—unexpected, ironic, comic, tragic, or merely spectacular. A Detroit man earned one cent too much to escape the levy and found himself in debt to the revenue. His liability: one cent. A Georgia farmer, subject to a four-cent assessment, paid in one-cent installments to uphold his legal right to make a quarterly remittance. A retired banker who also composed music found that the instructions to taxpayers began to arrange themselves for him in the melodic pattern of a five-part choral work beginning with the portentous phrase “Who must file,” followed by the incantation “Why you must file a return,” with a consolatory conclusion in madrigal form. At Buffalo, New York, a woman overcome with worry that the government would confiscate her grocery store because of reporting errors went out of her mind and was committed to the state hospital for the insane. A happier story came from nearby Dunkirk, New York, where a Navy seaman, eighteen, who expected a twenty-three-dollar tax refund received a check for $555,555.

Bogus tax agents added a new page to the world’s encyclopedia of confidence games. A native of Scotland on his way home to Glasgow, approaching Pier 64 in New York, carrying his grip and humming ” ‘Twas Your Voice, My Gentle Mary,” was stopped by a well-dressed youth who said crisply, “Your ticket and incometax receipt, please,” and relieved the Scot of ninety dollars. Within the bureau itself problems connected with human depravity surfaced, such as the case of the precocious tax trainee who learned to pad his expense account even before completing the course, and the enterprising first deputy collector at Newark, New Jersey, who went into business for himself selling the names of Jersey taxpayers for three cents each to a New York concern dealing in mailing lists.


The 1913 act defined income as including proceeds from “any lawful business carried on for gain or profit.” But three years later, with “Preparedness” in the air and a sense of impending fiscal crisis, Congress passed a new revenue law that dropped the limiting word “lawful.” Thus for the first time the Treasury skimmed the crock for the cream arising from commercial extortion, bribery, the rackets, referrals to abortionists, gambling, moonshining, and housebreaking. Several burglars, indeed, inquired anxiously about the confidentiality of their tax reports. They need not have worried. The income-tax statute explicitly barred revealing such information, however attractive it might have been to other agencies of government. Shunning the domain of morals, the tax law required of the ordinary man only that he pay his tax on his taxable income. “The law,” declared Senator John Sharp Williams of Mississippi, a ranking member of the Senate Finance Committee, “does not care where he got it from.”

After the passage of the National Prohibition Act bootleggers and “alky” cookers learned in an opinion delivered by Supreme Court Justice Oliver Wendell Holmes that even the Fifth Amendment does not save the recipient of unlawful income from the necessity of making a return. But with exquisite tact the Bureau of Internal Revenue permitted the wages of sin to be reported as “other income,” without disclosure of the source.

A vast accumulation of administrative and tax-court decisions comes down to us through the years, adding more than a touch of whimsy to contemporary life. Nobel Prize money, for example, is exempt from taxation. Guggenheim scholarships are not. A policeman can take the cost of his uniform out of his adjusted gross income, but a fireman is taxed for meals eaten at the firehouse because the tax court has ruled that it is his “home.” We are all subject to the ambiguities and caprices of the income-tax laws in one way or another—actors who take dancing lessons to increase their skills, farmers, ex-husbands, ex-wives, widows of Presidents of the United States, rentiers, railroad commuters, pets (medical expenses not deductible), and Ute Indians owning oil royalties.

The income tax as we know it is a modern fiscal device associated with the industrial age, a money economy, and the formation of large private fortunes. But the germ of the idea can be found in Europe reaching back as far as the Middle Ages. The chief reliance for centuries was the tax on land, such as the French taille réelle . The concept of the income tax is recognizable, however, in the taille personnelle levied upon artisans, laborers, state officials, and others whose earnings came from services and skills rather than property.

In the American colonies ruled by the British Crown, government assumed limited responsibilities, consisting chiefly of defense and the protection of commerce: no social welfare and only minimal expenditures for public improvements. Taxes collected by the colonies themselves varied by regions, but their impact in any case was light. The South, for example, controlled politically by a class of large estate holders, was not hospitable to taxes on land. There the emphasis was placed upon export and import duties. The middle colonies employed at various times both the property tax and the poll or head tax, fixed at so much for each adult male regardless of his circumstances or income. Democratic New England used the general real-estate tax and in the eighteenth century collected excise taxes on such luxuries as wines, spirits, carriages and chaises, coffee, and snuff. To this was added a kind of income tax, or, in the language of the seventeenth century, a “faculty tax,” meaning a levy upon the “returns and gains” of the arts, trades, professions, and handicrafts. The payment was not assessed on actual earnings, however, but on assumed earnings set at an arbitrary figure according to the occupation—so much for a butcher, any butcher; so much for a baker, or a barber, or an artificer like a blacksmith.

The United States, functioning under the hastily improvised Articles of Confederation from 1781 to 1787, was not the federal nation we know, but rather a loosely drawn league of sovereign states that jealously withheld essential powers from the Congress, including the power to levy taxes. The central government, therefore, had to rely upon a voluntary contribution from the states, which “came finally,” according to the late dean of tax experts, Randolph E. Paul, “to be regarded as a romantically honorable act, or even as a sort of amiable and quixotic manifestation of eccentricity.”

The authority to tax is necessarily coupled with the power to coerce. A tax is not a contribution. It is an exaction. As our friends on the right never tire of reminding us, in Chief Justice Marshall’s words of doom, “The power to tax involves the power to destroy.” Yet a government lacking this power, which is essential to sovereignty, cannot long endure. This explains the sense of urgency that spurred the delegates to the Constitutional Convention to produce the framework for a genuine federal union in which the taxing power was central to all other powers. The Federalists, gentlemen of principle and property, could breathe easier after June 21, 1788, when the president of the Continental Congress, Cyrus Griffin, announced that the Constitution had been ratified by the requisite nine states, including the provision that direct taxes were to be proportional to population in each state, a figure arrived at by counting slaves as three-fifths of a person and not counting Indians at all. The precise meanings of “direct” and “proportional” were later fought out in two titanic battles over the graduated income tax. But the principles of justice, represented by uniformity and universality, were safely if somewhat ambiguously enshrined in the Constitution and with the clarification provided by the income-tax amendment (the sixteenth) made possible the successful financing of American participation in this century’s wars.

The War of 1812 a very nearly brought on an income tax, but the taxpayers were saved by the Treaty of Ghent. During the decades that followed, the national government was financed chiefly by tariff duties, sale of public lands, and various temporary excises and internal taxes. The situation regarding revenues was far from satisfactory. The state of the Treasury fluctuated wildly between windfall surpluses and politically embarrassing deficits; and sometimes Congress, being human, went on spending sprees because the money was there.

With the beginning of the Civil War there came a strong popular demand for adequate taxation. The tax package put together in Washington, after foot dragging by a reluctant Congress, included a stiff protective tariff hiked higher and higher with the war as an excuse, excise duties on practically all luxuries and articles of daily consumption, and a modestly escalating tax on individual incomes. The income-tax provision introduced the novel doctrine of ability to pay and had the effect of shifting a greater proportion of the war’s costs than would otherwise have been the case from the West and middle South to the eastern part of the United States. The first enactment, of August 5, 1861, levied a uniform tax of 3 per cent on all incomes above eight hundred dollars. But before any money was collected, a new measure was passed in 1862 that lowered the base to six hundred dollars and scaled the rate upward to 5 per cent above ten thousand dollars. The law granted the Secretary of the Treasury the power to hire employees to detect fraud and provided for the establishment of a permanent tax-collecting agency, the Bureau of Internal Revenue, since 1952 known as the Internal Revenue Service. The Civil War tax gatherers were paid a commission on the dollars they brought in, which assured their constructive interest in the figures that appeared on the bottom line.

Important innovations included withholding at the source, the sliding scale of rates, and the publication of the names of taxpayers. During a debate on the principle of escalation a representative from Illinois suggested that the tax should go up to a 5 per cent on incomes above sixty thousand dollars, which moved Justin S. Morrill of Vermont, chairman of the Ways and Means Committee, to declare that such a requisition could “only be defended on the same ground that the highwayman defends his acts.” The Vermont Republican accepted the tax law as a wartime necessity, including its authority to pry, but sensed trouble ahead for the publicity provision, observing drily that “Americans, like people elsewhere, though not averse to a knowledge of the secrets of others, are quite unwilling to disclose their own.” James A. Garfield, then a member of Congress, joined in denouncing the publicity feature of the tax as “very odious” and indeed considered the whole bill unjust and unconstitutional.

Schuyler Colfax, on the contrary, declared that he could not go back to Indiana and say he had voted for a bill that would excuse the millionaire from assuming his proportional share of the tax burden while the small farmer paid his. Roscoe Conkling of New York spoke in the same vein, and Charles Sumner quoted Adam Smith and the French economists in defending the principle of graduation. Those opposed seldom argued against the justice of the tax. But they bore down heavily on the points that it was a war tax, hateful in peacetime, inquisitorial in nature, and likely to turn Americans into a nation of liars. After the war ended, when patriotic fervor had subsided, cordial feelings toward the income tax evaporated. There was a broad consensus that succeeding generations should assume as much of the war debt as possible. The public recalled with embarrassment that the tax had a socialistic tendency, and the New York Times , said Randolph Paul, “made the less than startling discovery that the tax had never been popular with persons with high incomes.” The rates were rapidly scaled down. In the spring of 1872 Congress jettisoned the levy. It had plainly become a political liability to the Cirant administration, though it was, the historian Allan Nevins has written, “the fairest single element in the revenue system. …”

The individual income tax scarcely figured in the fiscal arrangements of the Confederate States of America. The Richmond government, hampered by the States’-rights tradition and an unrealistic belief in a short war, followed the primrose path, finding it less painful to borrow or issue printing-press money than to tax incomes. George Cary Eggleston, who had fought under Colonel J. E. B. Stuart, General FitzHugh Lee, and General James Longstreet, described in his History of the Confederate War the approach of the government to finance as having “all the flavor of the Princess Scheherezade’s romances, with the additional merit of being historically true.” By the time the Confederate Congress passed its first adequate tax act, the Treasury was in a state of collapse, the Lost Cause was lost, and with it the social structure of the South.

With the postwar industrialization the Republican Party became the guardian of the interests of banking, industry, the railroads, and the export trade. No income or inheritance taxes were collected. The central government looked to tobacco, alcoholic beverages, and the protective tariff to provide the money for running the government. Business boomed on easy credit until speculation got out of hand in the Panic of 1873. There followed six years of distress with industrial warfare in the cities, drought and crop failures on the western plains. When wheat fell below fifty cents a bushel and corn was worth more as fuel than as feed, thousands of neopioneers backtracked eastward with legends of defeat lettered on their covered wagons, such as the bitter “Going back to our wife’s folks.”


The six-year depression, the increasing drift toward plutocracy in a race for wealth that appeared to be fixed, and in the West the enduring memory of “The Crime of ’73” (dropping the silver dollar from the monetary standard) all helped to keep the income-tax issue alive. Congressmen with agrarian constituencies regularly introduced bills favoring railroad regulation, cheap money, free silver, trust-busting, and income and inheritance taxes. All were referred to the Committee on Ways and Means, where they had a persistent tendency to disappear. The public debate on the tax question was accompanied by mordant denunciation and bloodletting adjectives. All the elements—farmers, trade unionists, small businessmen, and Greenbackers—that were soon to coalesce into the Populist Party lined up against the official leadership in the House of Representatives, which continued to prefer financing the government out of taxes on consumption.

Both major parties played politics on the income-tax issue. But hard times came again in the nineties, and the then Democratic Congress, having lowered the tariff in the second Cleveland administration, in 1893 hitched an income tax to the tariff act. The rate was low—2 per cent—and not graduated, but the personal exemption was high—four thousand dollars—which proved to the East that this was a sectional tax, the burden to fall on New England, New York, New Jersey, and Pennsylvania. “The Democratic hen,” said the New York Daily Tribune , “has hatched a Populist chicken at last.” And in the Brooklyn Eagle words were not minced. There the supporters of the personal income tax were harshly categorized as “Western repudiators and Southern exrebels. …”

Money to balance the budget had to come from somewhere. There was a replay of all the arguments in opposition to the income tax. It was socialism. The tax penalized thrift. It was a tax of tyrants. It encouraged dishonesty and perjury, bringing on spies and informers, setting class against class. Much of the dialogue was carried on by epithet. As the Washington tax expert Louis Eisenstein has tolerantly remarked, “Taxation is a political process, and we should not expect the clichés to be more illuminating than they are in other areas of political contention.”

The income tax carried the day—briefly. In 1894 such a tax was provided for in a section of the WilsonGorman tariff bill, though President Cleveland considered the bill so inadequate as a tariff-reform measure that he was unwilling to approve it, and it became law without his signature. The tax was received with popular approval, especially in the West. In a lyrical mood a Democratic congressman from Missouri predicted that there would be surprising improvements under the Wilson-Gorman Act: “The passage of the bill will mark the dawn of a brighter day, with more of sunshine, more of the songs of birds, more of that sweetest music, the laughter of children well fed, well clothed, well housed.”

But certain receivers of large incomes thought otherwise and rushed several cases to the Supreme Court, which reviewed them at the October, 1894, term. There followed one of the most celebrated legal battles in American history. The issue depended upon the interpretation of the clauses in the Constitution relating to federal taxation, especially the clause requiring uniformity (Article 1, Section 8, Clause 1) and the provision forbidding the laying of a direct tax (Article 1, Section 9, Clause 4) unless in proportion to the census.

The government claimed that uniformity meant only geographic uniformity and that the Constitution did not bar a graduated tax. This position was upheld. The question remained as to what the words “direct tax” meant. In 1815, in Civil War days, and later in various cases, the Supreme Court had held that “direct taxes” as used in the Constitution applied only to land and poll taxes. In April, 1895, however, on a rehearing, the Court by the barest of margins, 5 to 4, declared the whole income-tax law unconstitutional on the ground that it was a direct tax. The 1894 law was substantially the same as the Civil War measure that had been reviewed and sustained. But the social climate had changed. The law of ’94 was not passed under the duress of national peril. It was, rather, the result of egalitarian pressures, representing a clash between opposing economic and political philosophies.

The justices of the Supreme Court faced a particularly difficult task in that they had to guess what the shapers of the Constitution would have thought about the personal income tax—if they had thought about it. This placed their verdict on the frontiers of psychology and social philosophy. It was a notably conservative Court during the years of the Mauve Decade, with an extraordinary tendresse toward personal property. But the justices must have felt the guiding spirit of Chief Justice Marshall in the courtroom as tall, handsome Joseph H. Choate, perhaps the nineteenth century’s greatest jury lawyer, told them that if this “communistic march” was not summarily halted, there was nothing to prevent action by Congress to increase “the exemption from $4,000 to $10,000 or to $40,000, and increasing the tax from two percent to ten percent, or to twenty percent. …”

And Choate led the justices up to the top of a high mountain and showed them a Beulah land for the well-to-do in which everyone, including John Jacob Astor, paid taxes at the same rate in the good old Federalist tiewig way. And he painted images of the poor coercing the rich through the power of Congress to levy taxes, and he frightened them with his conclusion: “protection now or never.” Mr. Justice Field shuddered and was put in mind of a historical parallel, an English statute of 1691 that taxed Protestants at a certain rate, Catholics at double rate, and Jews “at another and separate rate”; and Chief Justice Fuller, thoroughly aroused, got off some rather uncharitable remarks in delivering the Court’s opinion about “the speculative views of … revenue reformers.” So the Court put aside all interpretative doubts and found persuasive the argument advanced by Choate and associated counsel that taxation on personal income was contrary to the fundamental law of the land. The decision left the matter in this position: the income tax was a direct tax and could not be levied except on a basis proportional to the population of each state.

Men of large means felt that the republic had been saved. Mr. Choate received a well-earned fee, reputed to have been $200,000, and the 4,047 known millionaires in the United States rejoiced as the bridegroom rejoiceth over the bride. Among the public at large there was consternation, discontent, and alienation, for the outcome of the issue convinced the middle class, small businessmen, trade unionists, and the agricultural West that they had no voice in their government. For a time the issue appeared to be dead. But the Spanish-American War, bringing new needs for revenue, revived the criticism of the way the 1894 income-tax issue was handled as an example of judges’ making social policy under the guise of interpreting the law. The option of amending the Constitution remained open. But that was a slow procedure. It took, in fact, twenty years to get the amendment, pass the necessary enabling legislation, and make the first assessment. And when the income tax finally arrived, it was indeed discriminatory against the rich. Yet communism did not follow as the prophets of gloom had promised. In fact, as Professor Elmer Ellis has noted, “nor were all comforts and riches quite lost.”

The Populist surge had reached its high-water mark in 1892 under such colorful leaders as Jerry Simpson, the “Sockless Socrates” of the prairies; the white-maned orator from Iowa, General James B. Weaver; Mary Ellen Lease, the “Kansas Pythoness”; and the political and literary theorist Ignatius Donnelly of Minnesota, who insisted that Plato’s lost isle of Atlantis had actually existed and that Bacon wrote Shakespeare’s plays. No less idiosyncratic was the southern agrarian Populist Benjamin R. Tillman, governor of South Carolina and United States senator, who yelled at frantic mobs, “Send me to Washington and I’ll stick my pitchfork into his [Cleveland’s] old ribs!”

Bryan’s brilliant 1896 campaign for the Presidency drew all the scattered Angries into the Democratic Party. The canvass reflected the metrophobia of the fast-fading small town, the malaise of the Nebraskans who had chanted at the formation of the People’s Party of the United States: “What is Home without a mortgage?” Sharply felt, also, was anger at the defeat of the income tax, the hope of both fiscal and moral redemption through free silver, the fear of abstractions such as “the money power,” a sense of being victimized by a vaguely defined conspiracy. These are only a few of the complex factors that produced disenchantment in the 1890’s. Yet when the votes were counted in the campaign of ’96, it was clear that Bryan had not been able to convince the country as a whole that his millenium would be as prosperous as McKinley’s here and now. Even the shaggy farmer of the middle border, as William Allen White (at that time a Republican stalwart) phrased it, took off his faded overalls and dusty boots, shaved, washed his shirt, and put on a derby.

The War Revenue Act of 1898, passed to finance the Spanish-American War, raised money through the sale of bonds, pushing part of the burden into the future, and through the imposition of nuisance taxes on institutions employed or enjoyed by the working classes, such as pawnbrokers, circuses and other shows, bowling alleys, and billiard rooms. The existing rates on tobacco and beer were nearly doubled. An income tax was discussed but not considered seriously. The Republican congressional majority had no desire to put the Supreme Court in an embarrassing position, even as their spokesmen talked of sacrifice for “one cause, one country, one flag.” And certainly the men at the levers of power did not wish to run the risk that an income tax might be continued by Congress in peacetime. One novelty did appear, a graduated tax on legacies, enacted as a concession to popular sentiment. Fortunately the hostilities were brief, which relieved the pressure.

When Theodore Roosevelt became President following the assassination of McKinley in September, 1901, he proceeded with a caution that has been largely overlooked because of his later reputation as tribune of the people. His position on such issues as the tariff, the inheritance tax, and the income tax failed to justify either the worst apprehensions of the bosses or the eager hopes of the party of reform. This is perhaps not surprising in view of the fact that his counselors at the time included the archconservative senator from Rhode Island, Nelson W. Aldrich, Ohio’s Mark Hanna, two partners in the House of Morgan, and the president of the Pennsylvania Railroad.

After Roosevelt was elected President in his own right in 1904, he began to show a new independence. But his New Nationalism could scarcely be termed radical except from the point of view of such standpatters as Aldrich or the troglodyte Speaker of the House, Joseph G. “Uncle Joe” Cannon. As a matter of fact Roosevelt was trying to reinvigorate the economic system, not radicalize it—to prune away excesses and remedy abuses but not upset the values of individualistic capitalism. Under the program of the New Nationalism even the misbehavior of the giant corporations, as Roosevelt saw it, did not invalidate the ancient maxim abusus non tollit tisam —”abuse is no argument against proper use.”

After the Panic of 1907 Roosevelt expressed the judgment that the United States, like most industrially advanced nations, should have an income tax and an inheritance tax. But he did not press for action, and indeed his power for action diminished with the approach of the end of his déclive term. There were rumors that the President wished to tamper with the tariff, ark of the Republican covenant. If so, wiser heads prevailed. Tariff revision and new taxation were left as dubious legacies for T. R.’s successor and political heir, William Howard Tait. Joseph Keppler, the trenchant political cartoonist of the period, caught the moment well when he cast Roosevelt in the role of Hamlet, seated in deep meditation and leaning heavily on the arm of his chair: “Thus the tariff does make cowards of us all.”


In 1908 the Republican platform pledged the party to a revision of the tariff. While the language used was somewhat delphic as to whether revision meant upward or downward, it was generally assumed by the public then struggling with the H.C.L. (High Cost of Living) that the revision would be downward. It was Taft’s understanding that this pledge was in the nature of a contract. Bryan, the Democratic standard-bearer and by now something of a toothless lion, tried to revive the spirit of ’96. But the Republicans reminded the electorate once more that they had freed the slaves and saved the Union. Furthermore, they endorsed the Ten Commandments, except possibly the fourth. Taft, easily if not enthusiastically elected, promptly called a special session of Congress to frame a new tariff law.

The bill thai emerged from the . House provided tor moderate reductions. But the Senate was firmly under the control of the powerful Aldrich, who saw nothing grotesque in the idea of “The Senator from Sugar,” “The Senator from Steel,” or “The Senator from Wool.” Some six hundred items went up in the Senate version of the bill. All were necessities of life, consumed by the people generally. The reductions were on items that needed no protection anyway.

Finley Peter Dunne’s Mr. Dooley explained the free list to his friend Mr. Hennessy: “Th’ Republican party has been thru to its promises. Look at th’ free list if ye don’t believe it. Practically ivrything nicessary to existence comes in free. Here it is. Curling stones, teeth, sea moss, newspapers, nux vomica, Pulu, canary bird seed, divvy-divvy, spunk, hog bristles, marshmallows, silk worm eggs, stilts, skeletons, an’ leeches. Th’ new tariff puts these familyar commodyties within th’ reach iv all.”

A friendlier estimate of the Payne-Aldrich Tariff Act came from Representative Asher C. Hinds of Maine: “Massachusetts,” he said, “never went away from Congress carrying more in her craw than she has got in that tariff bill.” But the new law was widelydenounced throughout the country as being, in the words of the New York Times , a “fine old farce … revised by its friends”; and The Financier , contemplating the schedules, recalled the Cheshire Cat of Alice’s Adventures in Wonderland —the longer you watch the bigger the grin becomes.

Reluctantly President Tail signed the Payne-Aldrich bill into law in August. 1909. He wrung a lew concessions from the Republican leadership, but they were minuscule, rather like eetting a fifty-dollar discount on a Pierce Arrow. A coalition of Republican insurgents and Democrats had attempted to include a provision for a graduated income tax. The Senate balked but compromised with President Taft to the extent of accepting a corporation tax and sponsoring a joint resolution submitting a constitutional amendment to the states. This, if approved, would make possible an income tax at some future time. It was the strategy of promising pie in the sweet—and distant—by and by.

Taft would have preferred an income tax at once. But since the Supreme Court had held such a tax to be unconstitutional only fourteen years earlier, his view was that the better course would be to accept the 1895 decision, avoid another court review, and remedy the constitutional infirmity. The corporation tax, one per cent on net above five thousand dollars, which was one-half of what the President had asked for, was called an excise tax on the privilege of doing business as an artificial entity. The Court reviewed it and sustained it. (In 1914 the corporation tax was merged into the income tax.)

The Republican Congress sponsored the resolution proposing the Sixteenth Amendment for a complex of reasons. First of all Aldrich, like President Taft, did not want the constitutionality of the income tax to be resubmitted to the Supreme Court, because the respect in which the Court was held might be severely damaged whichever way it decided. Both knew that the insurgent Republicans in association with the Democrats had the votes to put through the resolution. Also, they faced a Treasury deficit of a hundred million dollars’big money for those days. More elasticity had to be found somewhere. So the income-tax amendment was, in essence, the price that had to be paid to save the Payne-Aldrich tariff. Also operative was a sense that the government needed greater freedom to tax in times of national emergency. This consideration was strengthened by the still-vivid recollection of John Hay’s “Open Door” note in 1899, the imperialistic adventures of the Spanish-American War, Theodore Roosevelt’s interference in Colombia in 1903 to secure the independence of Panama and the Canal Zone, the new American presence on the world stage in mediating the Russo-Japanese War in 1905, and tension with Japan, known in the first decade of this century as “The Yellow Peril.” Finally, as already indicated, going the amendment route was appealing because it pushed the day of reckoning into the future.

As a spokesman for the conservative position, Sereno E. Payne, chairman of the House Ways and Means Committee and co-author of the tariff bill, supported the idea of submitting the income-tax question to the states because he wanted the United States to have “the longest pocketbook” in time of war. But he made abundantly clear his aversion to such an exaction in time of peace: “I believe with Gladstone,” he said, “that it tends to make a nation of liars. … [It is] a tax upon the income of honest men and an exemption, to a greater or lesser extent, of the income of the rascals.”

If the Payne-Aldrich tariff cemented the alliance between politics and Big Business, it also produced public discontent among the voters and contributed substantially to the Democratic capture of the House of Representatives in the fall of 1910. On February 3, 1913, Wyoming became the thirty-sixth state to ratify the Sixteenth Amendment, providing the necessary approval of three-fourths of the states. Connecticut, Florida, Rhode Island, and Utah rejected the proposal, and Pennsylvania and Virginia failed to act. The Secretary of State, Philander C. Knox, affixed the Great Seal of the United States to the document on February 25. It was the first modification of the Constitution to be adopted in forty-three years and expressly authorized the collection of income taxes not apportioned according to the population test. Brooks, the White House valet, was already packing up President Taft’s personal baggage, and Woodrow Wilson took the oath of office a week later under overcast skies on a temporary stand erected on the east portico of the Capitol.

It is one of those fascinating paradoxes in which history abounds that our permanent income tax, made possible by the action of one of the most reactionary Congresses ever to control the machinery of government, was now about to be shaped into law according to progressive Democratic ideas. With the Democratic Party firmly in control of both the executive and legislative branches of government as the result of the 1912 election, the Ways and Means Committee reported out a tariff bill that reduced the duties on all schedules, greatly extended the free list, raised the deficit to an estimated seventy million dollars, and imposed an income tax to make good the losses. The act, known as the Underwood-Simmons Tariff, with sections explaining and justifying the income tax drafted by Cordell Hull, was approved on October 3, and the money meter began to tick retroactively from March 1, 1913.

The Ways and Means Committee described the bill as the answer to a long-standing need for an elastic and productive system of revenue and declared hopefully that “all good citizens … will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes. …” Those who constitute the present generation may look back with astonishment to that February long ago when the newspapers gave only an inch or so of space to the tax law as the last states raced to ratify. Much more important, it seemed, was the fighting before Adrianople or the death of the explorer Robert Falcon Scott after reaching the South Pole.

The rates established in the 1913 act ranged from one per cent of the first twenty thousand dollars in excess of three thousand dollars for singles and four thousand dollars for married couples with a surtax rising to an additional 6 per cent for those with taxable income above $500,000. This percentage, the professor of public finance at Harvard warned, approached a dangerous limit for direct taxation on large incomes. Many people today will be startled to learn that capital gains were taxed as ordinary income through 1921, which included a period of high wartime rates, with no allowance for capital losses until after 1916. The theoretical ground for this conception of income was that any form of realized wealth increased one’s power to satisfy his wants. The Sixteenth Amendment permits this. It confers upon Congress the power “to lay and collect taxes on incomes, from whatever source derived ” (emphasis added). Since 1921 capital gains have been subject to lower rates than ordinary income, and since 1923 capital losses have been offset against ordinary income, with varying limitations. The current theory seems to be that appreciation of principal is an exceptionally virtuous way to get rich.

Gently ascending though these schedules seem to us now, a new era had indubitably opened in the history of American finance. “It is probable,” wrote E. R. A. Seligman, the Columbia University economist, in 1914, “that the income tax has come to stay” and “will play its important part in bringing about greater justice in American taxation.” The liberal historian Charles A. Beard, also of Columbia, who interpreted American history in terms of economic forces and who did not believe the Rockefellers had become billionaires through the operation of some inexorable law of nature, also welcomed the social consequences of an attempt to redistribute the burden of taxation—which recalls an anecdote regarding Nicholas Murray Butler, Columbia’s president, a tough old Hamiltonian strayed into the twentieth century:

“Have you read Beard’s last book?” an associate asked.

“I hope so,” Butler replied.

Now that the Sixteenth Amendment had sanctified what a bare majority of the Supreme Court of 1895 had said the Constitution condemned, those hostile to the tax could no longer call upon the Constitution as a friend in time of need. It was freely predicted that men of talent, energy, and capital would cease to exert themselves, that the national wealth would be dissipated, that even such oddball types as artists and writers would desert their studios to go to work for the government or enter the ministry. These melancholy forecasts were not fulfilled. But evidence to that effect was not available when American taxpayers faced their first Form 1040. The last gasp of constitutional objection to the tax occurred in 1916 after the Supreme Court sustained the Sixteenth Amendment in Brushaber v. Union Pacific Railroad Company , a decision that made the principle of graduation forever immune from attack on constitutional grounds.

“Don’t get excited,” the New York Times said helpfully when the time for filing approached. “Look blank 1040 squarely in the face. … Read carefully the Instructions on Page 4.” The numbered lines provided a guide to line 7 on page 1, “which is the fateful entry of your taxable income.”

Though the first Internal Revenue Code ran to about fifteen pages, as against today’s twelve hundred, the collection of the tax generated a good deal of taxpayer irritation. The law was not explicit on many points. There were no administrative rulings to fall back on, and the implicit levelling social philosophy made the calculating and the paying especially detestable to those who held the belief that the good things of life trickled down to the lower levels when the affluent were secure and happy. Many individuals, it turned out when tax time came to America, had not kept their accounts so as to show net income. Intimidating financial problems often arose, with philosophic overtones. What was gross income? What was net? What constitutes property? Mr. Hull, the architect of the act, an Undersecretary of the Treasury once reminisced, “must have had some idea in his own mind of what he regarded as income.” It became evident, but only gradually and over a long period of time, that income is whatever the Supreme Court at a particular point in history thinks it is. But the question was hard to resolve in those first, disordered days of the 1040. One congressman, not oversympathetic with the law, noted with amusement that some of the income tax’s staunchest friends in Congress gave up in despair on filling out their own returns and had the sergeant at arms do the job for them. That functionary thus became a pioneer among a host of income-tax preparers “other than taxpayer,” as the modern 1040 puts it.


The same kind of pressure that persuaded the conservative Republicans to support the income-tax amendment in 1909 developed as a consequence of the outbreak of the European war in 1914. By 1916 Germany’s unrestricted submarine warfare and the fantastic Zimmermann telegram, in which the Berlin foreign office generously offered Texas, New Mexico, and Arizona to Mexico [see “Tales from the Black Chambers,” AMERICAN HERITAGE , April, 1973], clearly pointed toward American involvement. By 1916, too, the “Preparedness” campaign reflected the trend of sentiment and policy in this country, with President Wilson’s stubborn hope for peace tied to the idea of “adequate national defense.” Wilson won reelection in the 1916 canvass on the promise—well, the implied promise- that he could keep America out of the war. But by April, 1917, fast-breaking events forced the administration’s hand. Preparedness and loans to the Allies were financed through excise taxes at first, but with the Emergency Revenue Act of 1916 the income-tax schedules began to rise, scaling up after twenty thousand dollars to a surtax of 13 per cent on incomes of over two million dollars. There was also a further tightening up accomplished by various technical changes. At this time the first permanent inheritance tax was added to the federal revenue system.

The act of 1916 was quickly found to be inadequate and was followed by the War Revenue Act of 1917, a sweeping measure that lowered the exemptions and raised the rates in an almost vertical ascent to a top of 67 per cent. Under the Revenue Act of 1918 the total tax on income over one million reached 77 per cent. This law also contained a provision making a public record of the names and addresses of everyone who had filed a return. This publicity feature was enacted again in 1921, and a revision of 1924 added more fascinating information—the amount paid, which could be published in newspapers. The release of names and payments was an accomplishment especially dear to the hearts of Senator Robert La Follette and “country” Democrats, who believed that passing the information around would help to make men honest and were perfectly willing to run the risk of a kidnapper or a bond salesman combing the returns for his prospect list.

The publicity feature of the tax law was abolished in 1926, then tried again in 1934, when all taxpayers were required to file a special “pink slip,” disclosing much intriguing private information. But the resistance was so great that this section of the act was repealed before any public snooping occurred. Since that time personal tax returns continue to be defined as public records. But the right to inspect is restricted to those who have a legal rather than a dilettante interest in having a look. The trend away from exposing private affairs to the public gaze has presumably helped to maintain the kind of taxpayer morale that is essential to a self-assessment system.

Any reader searching for a handy rationale to explain the success of the income tax can conveniently find it in one word: war. The predominant reason for an income tax is just what Congress thought it was in 1913, the necessity of paying for wars past, present, or future. World War I built an acceptance for the income tax that would probably never have occurred otherwise, since paying soon became an act of patriotism. Speakers known as Four-Minute Men fanned out in churches, theatres, and lodges to explain how all persons liable should pay promptly, and movie houses threw “suggestive sentences” on their screens such as “Give till it hurts” and “No white feather in our family.”

Patriotic compliance was well publicized when John McCormack, the famous Irish lyric tenor, appeared at the office of the Collector of Internal Revenue for the Third District in New York City with a check for $75,000 and a broad smile as he paraphrased Scripture to say, “America gave and America taketh away. Blessed be the name of America”; and a few days later, from another level of society, a patriotic burglar surfaced, explaining that he worked hard and was a good family man. He wrote to the bureau: “I feel it my patriotic duty to make an honest income tax report so that the government can use the money to fight the biggest burglar in the world—the Kaiser.”


Meanwhile it became one of the established rites of spring for the Commissioner of Internal Revenue to issue dire warnings before the ides of March, citing the penalties available to the bureau. Tax slackers faced vigorous prosecution. Lawyers and accountants who helped their clients to fudge on their taxes would learn to their cost that the conspiracy laws applied handily to the situation. The bureau’s annual foray into psychological warfare made solemn reading, often heightened by the spectacular indictment and—or—conviction of some prominent citizen. Among those occupying an elevated station in American life who have been caught in the bureau’s net are a former dean of the Harvard Law School, a president of the National City Bank of New York, and the sometime chief of police of Providence, Rhode Island.

Such warnings between the two great wars were apropos. War weariness, the subsidence of patriotic emotion, the disillusionment with allies that always follows a coalition, bonuses for soldiers—all had an unfavorable influence upon compliance and produced a mood of “tax phobia,” as did also some of the uses the money was put to. Those opposed to Prohibition, for example, mourned not only the loss of their legal chalice but also the disappearance of alcoholicbeverage taxes that the income tax had to make up for. And they were infuriated by the use of income-tax money to penalize behavior that the Anti-Saloon League and its entourage regarded as undesirable.

Yet among the public as a whole, opinion had moved slowly to accept and endure, if not embrace, the graduated income tax. This more lenient sentiment was encouraged by the trimming back of the tax rates and other meliorist gestures through successive revisions of the internal revenue laws between 1918 and 1929. But with the appearance of a huge Treasury deficit during the early Depression years the rates were again stepped up sharply. The Revenue Act of 1932 also broadened the tax base and lowered the exemptions. This reverse trend continued throughout the decade, pushed upward by radical political pressures such as Father Coughlin’s League for Social Justice, the Townsend old-age pension plan, the New Deal economic programs, and Huey Long’s “Share-the-Wealth” movement. When President Franklin D. Roosevelt sent a surprise tax message to Congress in June, 1935, recommending a drastic overhaul of the tax system “to prevent an unjust concentration of wealth and economic power,” Huey Long leered and almost waltzed as he crossed in front of the rostrum while the clerk droned through the President’s message. Next day Will Rogers wrote: “I would sure liked to have seen Huey’s face when he was woke up in the middle of the night by the President who said, ‘Lay over, Huey. I want to get in with you.’” Ultimately the costs of World War II forced the tax rates back up to about the level reached during the war of 1914–1918.

By the end of the war the general character of the income tax was pretty well fixed, its hoped-for elasticity fully demonstrated, its fiscal adequacy triumphantly confirmed in financing two gigantic war machines. Further changes in the code will not be pursued here in chronological detail. One gets a sense of déjà vu in noting that each new Congress tinkers with the tax statutes in the name of justice and reform, an elusive goal that is never attained but pursued with a delicate awareness of current feelings, attitudes, and beliefs among the electorate.

“The underlying human reluctance to pay what Mr. Justice Holmes called the price of civilized society,” the tax expert Randolph Paul wrote, “remained in 1937 substantially what it was in 1894.” There is always the question of whether a particular taxpayer considers that he is transferring too much from the private purse to the public purse or whether he feels he is getting back enough civilization for his money. More painful still is the thought that others are shouldering less than their proper share of the general sacrifice. Thus a numerous corps of volunteer tax-collectors has been active ever since 1913, often including in its ranks disillusioned ex-wives, jealous mistresses, and business competitors. “We get floods of anonymous letters tipping us off to tax frauds,” the chief of the intelligence unit of the Bureau of Internal Revenue said in a newspaper interview in 1937. “The authors point out they are paying their taxes and don’t see why their neighbors and competitors shouldn’t pay, too.” The motivation may be spite, a highly developed sense of justice, or a candid interest in the cash rewards available to successful claimants who have filed on Form 211, the form for informers. Some enterprising bounty seekers have even copied names at random out of telephone books, hoping to make a lucky strike. The tipster’s best chance, by the way, is to cite unreasonable affluence. By an odd quirk of human nature, tax cheaters sometimes tell on themselves. “If a tax evader’s cup runneth over,” Gerald Krefetz wrote in a newspaper feature article, “so usually does his mouth,” and the same writer mentioned one volunteer treasurehunter who got into trouble when he forgot to include his own honorarium on his tax report.

Tax avoidance and tax evasion reached a high in 1937. But the terms, often used interchangeably, differ widely in application. Avoidance was (and still is) legal. Evasion was and is fraud. Lady Godiva’s famous ride was an act of tax avoidance, undertaken on behalf of the people of Coventry. Tax-free “expense allowances” that members of Congress have conferred upon themselves are a modern example. J. P. Morgan the Younger undoubtedly gave aid and comfort to tax avoiders when, returning from Europe in June, 1937, he told ship news reporters that taxation was a legal question, not a moral one. While he admitted, for example, that he and his partners had paid no income taxes for 1931 or 1932, he insisted that this had been achieved by perfectly legal maneuvering and observed that “when a taxpayer has complied with … the law, he should not be held up to obloquy for not having paid more than he owed.”

This was the era in which an army of clever attorneys and accountants emerged to circumvent the law through such devices as hobby businesses and the incorporation of yachts and country estates. Their expertise was often gained in the bureau itself, at public expense, as the Joint Committee on Tax Evasion and Avoidance must have reflected in 1937 as it viewed photographs of shacks maintained in the Bahama Islands as the headquarters of fictitious corporations. This decade, too, was high noon for notorious violators of other laws who seemed to be beyond the reach of authority but were successfully brought to book on tax charges. The most spectacular instance of what the Treasury men could do with subpoena, gun, and camera was the termination of the career in crime of “Scarface Al” Capone, the Chicago racketeer who committed murder with impunity but came to grief when he failed to file his Form 1040. The latter omission proved to be fatal, and the sharp dresser who once rode to the theatre in an armored limousine accompanied by eighteen sharpshooters in tuxedos ended up in a federal prison cutting out overalls.

The anguished cry of the taxpayer for an income-tax form that he can understand is as old as the income tax itself. The pea in the shoe was the technical jargon and the complexity of the blanks. As an article in the New York Times recently observed, it was and is a singularly bleak employment for the pencil-biting citizen not only to have to levy against himself but to wrestle with such brainteasers as he confronts in completing Schedule A, transferring his total itemized deductions shown on line 40 over to line 52 on page 2, entering on line 51 the adjusted gross income previously calculated on line 17 on page 1, subtrading line 52, and entering the remainder on line 53. At line 54 he or she subtracts from the figure on line 53 the appropriate number of exemptions ($750 each at the present time), and there it is on line 55—the grand figure of taxable income. Yet it’s really child’s play, the IRS says, to figure the tax. See instructions.

Today one cannot pay a doctor’s bill, receive a bonus, win a prize, buy or sell property, take a customer to see a show, sign an alimony agreement, draw up a lease, establish a trust, mingle business and pleasure in foreign travel, exterminate termites, or die without setting in train certain consequences of professional interest to the IRS accountants and auditors. Why is it, one may ask, that the branch of law which touches human activities at more points than any other is such a rough trip? For one thing, our tax laws resemble an old inner tube that has survived many a blowout and puncture and has become a thing of shreds and patches. For another, the law has to grapple with the accumulated decisions of the courts and the revenue services’s own rulings. For still another, the law must be armed against the machinations, not of the average citizen, but of the cleverest adversary the law schools can produce. It is with justice that the latest taxreform act—that of 1969—has been called, jocularly of course, the Lawyers’ and Accountants’ Relief Bill. For as long as the tax laws are as complicated as they are, and that promises to be forever, the unemployment figure for these professionals will be zero.

Several years ago Senator Arthur V. Watkins came upon a 212-word, brain-boggling sentence in the Internal Revenue Code. He read it several times, but all he got out of it, he explained later, was an aggravated thirst. He tried it out on several senatorial colleagues, no strangers to windy sentences, but they, too, ended up confused and dehydrated. Whereupon Senator Watkins offered a prize to the public at large, consisting of a book on “simplified English” and a copy of the Bible, a literary work with a high reputation for lucid prose. The competition was open to any American who could recast the sentence in clear, understandable words. The contest was administered by a distinguished committee from the School of Commerce of New York University. There were hundreds of entries. But—surprise—the committee rejected them all and in effect awarded the prize to the IRS . “Brevity,” the committee concluded, “is not necessarily a virtue in official documents; precision is.”

To some, probably the majority of, taxpayers, simplicity continues to mean the use of language that the ordinary man can understand. To others it has to do with fairness. They are giving their time as well as money to the government, they argue, so why does the task have to be so difficult? Unfortunately, in tax matters what is simple may not be equitable, and what is equitable may not be simple. Fairness is applauded by all men in theory. But abstract justice becomes hard to discern in the dense thicket of income-tax deductions, exemptions, capital gains and losses, depletion allowances, and other fine, threadlike distinctions that presumably got into the code for the noblest of reasons—to make sure that persons of equal income pay equal taxes.

Yet, for all the hairsplitting, arbitary discriminations do exist, mostly of little benefit to lower-bracket taxpayers. For instance, the cost of regular transportation to and from work is not an allowed deduction, though it weighs heavily in the family budget. A taxpayer, however, has been permitted to deduct the cost of clarinet lessons for a child whose orthodontist recommended them. Certain minerals, notably oil and gas, are called wasting assets and enjoy extraordinary tax favors. But when a group of twenty-five photographers’ models, known as Shy, Inc., citing the section of the revenue code that deals with the depletion of natural resources, pointed out that they too possessed assets that got used up and therefore requested “reasonable allowance for obsolescence,” the bureau gave them a dusty answer. “American beauty,” it said, “never becomes obsolete.”

The fundamental doctrine of fairness is only intermittently honored by Congress. Frequently the taxing power is used to achieve aims of a remote and miscellaneous character. During the world wars the excessprofits tax was levied in part to strengthen the war spirit of labor and the armed forces. Oleomargarine was long taxed (1886–1950) not for revenue but to favor the dairy industry, and tobacco and beverage alcohol are heavily taxed, in part at least, as an instrument of social discipline. The Revenue Act of 1918 included a tax provision (later declared unconstitutional) aimed at discouraging the use of child labor, and in recent times Paul R. Ehrlich, the population biologist, and Vice Admiral Hyman G. Rickover have each advocated taxation to help control population.

The income tax itself, and the spending programs it largely pays for, generates a continual flow of protests, some responsible, some idealistic, some self-serving, some highly imaginative, some governed by the comic muse. Various elites from within the Standing Order, such as the American Bar Association, the National Association of Manufacturers, and the National Small Business Association, have propagandized for a constitutional amendment that would fix a top limit, such as 25 per cent or 35 per cent, on personal and corporation income taxes. Right wingers such as the John Birch Society have advocated outright repeal of the Sixteenth Amendment. One woman went to jail rather than see her money used for foreign aid, and a group of college students invoked history by re-enacting the Boston Tea Party. Dressed as Indians, they boarded a schooner in Boston Harbor and tossed tea chests overboard bearing such legends as “Government Waste,” “Inefficiency in Government,” and “Tax Duplication.”

Two women, blooded in battle, stand out like modern Molly Pitchers in the fight against the income tax. Miss Vivien Kellems for over two decades has devoted her not inconsiderable talents to an assault on the whole concept of a graduated tax on incomes as being un-American and, in fact, thoroughly communistic. Included in her credits for leadership have been the fact that she did graduate work in economics at Columbia University and was eligible for membership in the Daughters of the American Revolution eleven times over. For a decade or more she eagerly but unsuccessfully sought martyrdom. But when she refused to collect the withholding tax from the employees of her cable-grip plant in Westport, Connecticut, the wily Treasury men refused to seize her body but attached her bank account under an obscure provision found in Section 2707(a) of the Internal Revenue Code of 1939, dealing with the tax on pistols.

A movie actress of similar metal, Corinne Griffith, smart and pretty though she refers to herself unconvincingly as ”… plain little ole me,” organized the Crusade for the Abolition of the Individual Income Tax in Beverly Hills, California. She opposed the funding of senators’ travel junkets and federal expenditures for studying the psychology of the octopus. In support of her adversary position regarding military expenditures Corinne explained that she had never been in “an actual shooting war,” although she had been married most of her life.

Discussions of the income tax seldom proceed very far without recourse to the word “loopholes.” This useful term in its metaphoric sense is often applied to an ambiguity or omission in a statute that affords an opportunity for evading its intention. Sir Thomas Browne, John Dryden, and Andrew Marvell understood the word in this extended sense in the seventeenth century, Macaulay and Thomas Jefferson in the nineteenth. Loopholes may be inadvertent or intended. To make the subject more complicated, one year’s loophole may become another year’s honored principle of equity. In 1950, for example, the profits of inventors were regarded as a loophole by the Ways and Means Committee, but four years later the committee thought just the opposite. The word “loophole” is now so heavily charged with emotional overtones that those who are both enlightened and polite prefer gentle synonyms, such as differentials and preferentials, shelters and tax havens, exceptions and dispensations. Economists and students of finance who are not involved in the political process condemn all tax favors because they depart from the principle that the rates should be applied equitably.

Yet exception continues to be piled upon exception. Every correction of unfairness seems to create the need for new adjustments. And so we have anomalies and mysteries. An apple farmer is taxed at ordinary rates. A Christmas-tree farmer files under the much more favorable capital-gains schedule. Sometimes Congress extends special tax courtesies to very important people. What then emerges in the form of legislation has all the appearance of being a general law. Actually it is tailored to fit only the precise circumstances of one taxpayer who doesn’t even have to be named in the law that is drawn just for him. Such a bil! was put through in behalf of Louis B. Mayer when he retired from Metro-Goldwyn-Mayer. It saved Mayer roughly two million dollars in taxes.


Not all loopholes exist for the benefit of the upper income brackets. Exemptions made for the aged and the blind, veterans’ benefits, union membership dues, income splitting for married couples—these are all loopholes even though they may advance socially approved goals. But the ones that count big in the bottom line are those thought up by resourceful professionals who serve well-heeled clients and pore over the IRS code and the decisions of the tax court the way good souls used to apply themselves to the Bible. One such lawyer, who invented a collapsible corporation (a device for transforming ordinary income into a capital gain through early liquidation of the corporation) claimed that the idea for his gimmick came to him under the most agreeable circumstances imaginable—while dining with Miss Rosalind Russell at Antoine’s restaurant in New Orleans.

So where does the Man in the Street find himself in the struggle among contending interests that seek to relieve themselves of the burden of taxation? Among these polarities he represents the great unorganized constituency, with no access to Congress or topflight advice. Knowing nothing of the fiscal charms of vicarious cattleranching or equipment-leasing, of tax-deductible trips to the Kentucky Derby or the Rose Bowl games, of cozy trusts in Liechtenstein, or the Mexican vegetable roll-over (not a health food or a diet supplement but a fancy tax caper), the wage earners and middling classes dig down and pay what the tax schedule says is due. “Tax shelters,” Senator Edmund S. Muskie observed recently, “only help those who have income to shelter in the first place.”

And there is more to it than that. Those whose main source of income arrives in the shaçe of highly visible salaries and wages must also make up the shortfall resulting from the tax write-offs of those who are deft in exploiting the gray areas. For it is the way of the world that

The rain, it raineth all around , Upon the just and unjust fellas , But more upon the just because The unjust have the just’s umbrellas .

So although every citizen is entitled to equity, it seems that some are entitled to more equity than others.

Dr. Joseph A. Pechman, director of economic studies at the Brookings Institution in Washington, rejects the loophole as an appropriate figure of speech to describe faults in the tax code and suggests rather that it is more like a fishnet because of what he calls Congress’ “cute provisions.” Dr. Pechman’s point deserves emphasis. Picketing the Internal Revenue Service’s offices and writing nasty letters to the commissioner are poorly directed exercises because it is Congress that makes the tax laws. The IRS is responsible for carrying out the intent of Congress, difficult though that may be to discern.

True, the field agent can be tough enough when he slaps a taxpayer with a big deficiency claim set forth in the dreaded formal “thirty-day letter.” Tax auditors, skilled at spotting a scheme, have ample weaponry at their disposal in the form of assessments, liens, or suits, and the IRS sometimes appears to the beleaguered subject of a tax audit more the adversary than the detached administrator concerned only with evenhanded justice. Yet the IRS does try to cultivate good relations with the public and this year—1973—has reintroduced the short form, io4oA, after several years’ absence. No less a personage than the commissioner himself banned the word “spouse” from the instructions because he thought it sounded like a water fountain; and a committee of fifth-grade teachers was recruited to help work out simpler definitions of such arcane terms as “adjusted gross income,” “low-income allowance,” and “percentage standard deduction.”

The income-tax agency has also tried to raise the level of its dialogue with the citizenry by quoting what is undoubtedly its favorite aphorism, the remark of Justice Oliver Wendell Holmes, “Taxes are the price we pay for civilization.” Not everyone responded positively. One taxpayer from Lawrenceville, Georgia, replied: “If we didn’t have any more tax to pay than Mr. Holmes did, we’d be happy about it, too”; and a man from Kansas City suspected darkly that Holmes didn’t pay any income tax at all. Anyway, he added, very few people in his part of the country had ever heard of Holmes except for a few Harvard graduates.

Extensively computerized since 1967, the IRS does nevertheless occasionally indulge in a human gesture. To a taxpayer who credited himself with a loss because he had had a skunk in the cellar and couldn’t evict it for a week, a sympathetic district director wrote that the episode was evidently sudden, unexpected, the animal clearly not an invitee, all circumstances that met the criteria for an allowable casualty loss. And in Philadelphia the district director for eastern Pennsylvania, hard-nosed about taxes but an easy mark for little girls, was touched when Marcia Kessler, ten, a pretty fifth-grader at Rydal Elementary School, wrote to the IRS begging the tax gatherers to stop deducting from her father’s paycheck for a week so he could buy her a pony. The office could not grant the request, but the staff clubbed together to present an enraptured Marcia with a beautiful white Welsh pony named Cotton. But the district director warned that Marcia’s pony loophole was setting no precedent: “We’re not at the mink stole or sports car stage yet. Just at the pony stage.”

Theorists have devoted a great deal of intellectual effort to justify graduated taxes on logical grounds, but the idea appeals intuitively to most people as representing a program of equal sacrifice for the general welfare. Justice Robert H. Jackson considered that the system worked reasonably well on the whole, “a reassuring sign of the stability and vitality of our system of self-government.” Despite the frailties of human nature and the crudities of the political process, there is no evidence of widespread evasion. About nine-tenths of the adjusted gross income of American taxpayers is reported, while the expenses for collecting the money are moderate—less than 0.5 per cent of the amounts collected. So though the tax can be abused through legal manipulations and pressure groups do bend it to their special interests, these tensions are acceptable, since the relation of the sliding-scale income tax to American ideas of democracy is generally sensed.

The outlook is for continuing high income taxes as an accompanying aspect of urbanization, social change, and expanding government activities that appear destined to grow relatively and absolutely. There is little evidence, however, after sixty years of experience, to support the contention that income taxation has discouraged the wealth-formation process or has reduced the buying power that our dynamic capitalistic society has placed at the disposal of the haves. We shall never be certain, so long as congressmen, senators, lobbyists, the National Association of Manufacturers, George Meany and the AFL-CIO , the Chase Manhattan Bank, and the American Petroleum Institute, continue to weave through the stately figures of their tax minuet, that we are not paying too much and someone else too little.

That is what makes the cheese so binding for this year’s seventy-seven million personal income tax payers. That is why, as Edmund Burke reminded the British Parliament in his famous speech on taxing the colonies, “To tax and to please, no more than to love and be wise, is not given to men.”

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