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This is a multi-part series examining the worst year in American History: 1913.
The history of income tax in the United States is fairly complicated. Until the Civil War, there was no income tax. In fact, until the Civil War, there were no federal taxes except import duties.
The federal government managed for almost 45 years without any form of direct taxation whatsoever. It was the high cost of the war that lead Congress to levy excise taxes and an income tax.
The early income tax was graduated, had a standard deduction and allowed for other deductions, much like our tax system today. It also had the same key feature of employer withholding that we have in our system today. Relatively soon after the end of the Civil War, the income and some of the other taxes were repealed.
In 1894 a flat rate federal income tax was established and soon ruled unconstitutional. The federal government continued to rely on duties, excise taxes and land sales to finance itself.
This was a good thing - it limited income. With limited income, it was limited in its reach. Most Americans could live their life with little connection to the federal government. It didn't know how much money they made (or lost), and they didn't care.
The need for a Constitutional amendment shows that the Founding Fathers never intended an income tax. They could not imagine the government needing that much money. But they knew the federal government would need some money, so allowed for the taxation of imports and products (essentially, a consumption tax).
Their fears of a government run amok with too much money have proven to be well founded.
It's very interesting to observe that the government got hungry for more money fast. By 1917 the top income tax rate, for all those making over $1.5 million was 67%. Of course, this was viewed as fair - after all, the wealthy could afford to pay. A $40,000 income was taxed at 16%. A year later the top rate was raised to 77%.
Imagine making well over a million dollars ($24,061,987 in 2007 dollars) and being able to keep only $345,000 of it. There was little talk about the unfairness of the tax as only 5% of the population paid taxes on their income. Fortunately, World War One ended and Congress came to its senses, reducing income taxes drastically.
Then, Congress went on a yo-yo diet and with the stock market crash of 1929, it was time to hike those numbers up again. Except there wasn't a war. Nor was there an economic boom. Government took money out of the economy, making things even worse. But the government coffers were full!
The power that comes with large sums of money is a strong aphrodisiac. You get to tell people what to do, how to do it, where to do it. It was the income tax that really enabled Congress to amass power to itself. Before that, it didn't have enough money to really throw its weight around.
The story of Harold L. Ickes is a nightmare tale of how the power of money can distort reality. Ickes was given a ton of money and the power to spread it around.
Where did this money come from? Income taxes. Ickes was just redistributing wealth through the executive branch. The legislative branch hadn't even really got started yet (Medicaid, Medicare and Social Security were yet to come).
As head of Roosevelt's Public Works Administration, Ickes had the power to distribute an amount of money equal to half the entire Federal budget at that time, with the express purpose of getting local governments used to receiving Federal largess. And as a result, thousands of courthouses, schools, parks, and all sorts of things, which previously would have been funded by local taxpayers, appeared all across the country - and each clearly labeled as provided by "Harold L. Ickes, Secretary of the Interior."
But Harold L. Ickes didn't pay for these things. The taxpayers payed for it and Mr. Ickes took the credit.
This type of power also leads to a corruption of the tax system. Once the income tax was introduced, it was then possible to use the tax code to advance social and political agenda.
The second principle of the Communist Manifesto is a progressive or graduated income tax! Why? In order to use taxation to increase the division between the classes. It is this division between the classes that the communists wish to exploit to bring about their revolution. It also provides a source of income for the government to then use as it wishes... and it usually wishes to redistribute wealth to further ensure its own power.
While the Sixteenth Amendment didn't establish a progressive income tax system, it enabled the system to come into existence. We now have, enshrined in our tax code, the second principle of the Communist Manifesto. This is the legacy of the 16th Amendment.