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August 30, 2004
Joseph on Today's Tax Debate: Historical Intent Weighs In
By Dorothy Brady
Mention the words “income tax” to the average American Joe and you’re likely to get an earful. Everyone has an opinion, and many would say there has to be a better way.
For the last decade, tax scholars have tangled with the issue: backers of sweeping transformation promise postcard-sized filing forms and a structure that everyone can understand, while opponents caution that “easy” doesn’t necessarily mean “fair.”
Talk of tax reform has recently resounded in the halls of Congress as well. In August 2004, Speaker of the House Dennis Hastert said that the current tax code is “archaic and over-encumbered” and advocated radical tax overhaul that would include the elimination of the IRS.
It’s all eerily familiar to Richard Joseph, a tax expert at the McCombs School and author of a new book, The Origins of the American Income Tax: The Revenue Act of 1894 and Its Aftermath.
Today’s scholarly debates, he says, mirror those of the Congressional debates between 1894 and 1913. “The key issue in those debates was whether to shift from a consumption tax to an income tax, while those of the last decade focused on whether to shift from an income tax to a consumption tax,” he says. “Today's arguments in favor of, and against, both types of taxes are strikingly similar to those of the past.”
For Joseph, the crux of the matter is not what a new system should look like, but why we have the income tax in the first place. “If we want to proceed with radical tax reform, it would be wise to know the original intent behind the institution,” he says. Joseph’s book delineates the legislative process that sculpted our current tax system, providing policymakers, analysts, scholars and the average taxpayer fodder for their deliberations on the proposed changes.
Exploring Intent
Joseph began research for the book in the early 1990s when serious talk of
repealing the income tax in favor of a sales or consumption tax began. The
controversy piqued his curiosity about the intent behind the income tax as a
legislative measure.
He took the role of a historian, concentrating not on the theoretical implications of the individual provisions, but on the tax as an institution shaped by history and social forces. “You really can’t understand why the income tax was enacted without going back, looking at the legislative history, and understanding the social, economic, and political circumstances of the time,” he explains.
He began with a review of the proceedings of Congress between 1913 and 1915, focusing on the debates that preceded the enactment of the Sixteenth Amendment and the permanent tax on individual incomes.
In the course of his research, references to earlier debates drew him back in time to the voluminous records of the 53rd Congress (1893-1895) and the debates surrounding the Revenue Act of 1894. Before 1894, major governmental support came from import duties and excise taxes; as a result, the less affluent shouldered most of the tax burden. The Revenue Act provided for a $4,000 personal exemption and a two percent tax rate that was not graduated; less than two percent of the population paid taxes the following year.
Because the
measure did not raise substantial revenue, some scholars see it as merely a
symbolic means of silencing political discontent. Joseph disagrees. “I think
that is a disturbing argument because it challenges the credibility of not only
the legislators who enacted the income tax, but also the income tax itself,” he
says. Key was the origination of a tax system based on the ability to pay, he
emphasizes.
Shifting the Burden
Though in 1895, the Supreme Court ruled the 1894 Act unconstitutional on the
grounds that it was an unapportioned, direct tax, its passage introduced
Americans to the concept and therefore set the stage for the ratification of the
Sixteenth Amendment. “The question in 1913 was not whether to tax incomes, but
when and how much,” Joseph says. Congress adapted the 1894 model to the
circumstances of the early 20th Century because many aspects of the social and
political context of that epoch were very similar to those of the late 19th
Century.
“Both measures were enacted in the throes of U.S. industrialization, emergence
of the corporation as the nation’s principal mode of business association, rise
of the mercantile, industrial, and financial classes, and the inability of the
preexisting tax regime to reach income derived from intangibles,” he says.
Foremost among the various striking parallels between the 1894 and 1913 laws was
the intent not to redistribute wealth, but to shift the tax burden from the less
wealthy to the wealthy.
Informing the Debate
Some two thousand pages of tax code later, does the current system reflect the
original authors’ intent? Joseph says that tax advisors and analysts should
carefully consider what happened in 1894 before advocating massive changes in
the tax system.
Tax theorists at conservative “think-tanks” push for elimination of the income
tax in favor of a consumption or sales tax, but Joseph cautions, “Tax reform is
not a question of simply scrapping the entire system in favor of simplification
or postcard reporting, but of deinstitutionalization and disallocation and its
effects on various industries, individuals, and social groups.”
If the individual provisions of the income tax system do indeed reflect the
principle of ability to pay, Joseph says, “We need to see if we still agree
with, accept, and endorse that—or if we don’t, determine how to make the system
consistent with our current philosophy and values.”
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