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  “Let’s face it, Clitus, we live in a tax era. Everything’s taxes,” one lawyer says to another in Louis Auchincloss’s book of short stories called “Powers of Attorney,” and the second lawyer, a traditionalist, can enter only a token demurrer. Considering the omnipresence of the income tax in American life, however, it is odd how rarely one encounters references to it in American fiction. This omission probably reflects the subject’s lack of literary elegance, but it may also reflect a national uneasiness about the income tax—a sense that we have willed into existence, and cannot will out of existence, a presence not wholly good or wholly bad but, rather, so immense, outrageous, and morally ambiguous that it cannot be encompassed by the imagination. How in the world, one may ask, did it all happen?

  AN income tax can be truly effective only in an industrial country where there are many wage and salary earners, and the annals of income taxation up to the present century are comparatively short and simple. The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution. The rate of the ancien-régime tax, which was enacted by Louis XIV in 1710, was 10 per cent, a figure that was cut in half later, but not in time; the revolutionary regime eliminated the tax along with its perpetrators. In the face of this cautionary example, Britain enacted an income tax in 1798 to help finance her participation in the French revolutionary wars, and this was, in several respects, the first modern income tax; for one thing, it had graduated rates, progressing from zero, on annual incomes under sixty pounds, to 10 per cent, on incomes of two hundred pounds or more, and, for another, it was complicated, containing a hundred and twenty-four sections, which took up a hundred and fifty-two pages. Its unpopularity was general and instantaneous, and a spate of pamphlets denouncing it soon appeared; one pamphleteer, who purported to be looking back at ancient barbarities from the year 2000, spoke of the income-tax collectors of old as “merciless mercenaries” and “brutes … with all the rudeness that insolence and self-important ignorance could suggest.” After yielding only about six million pounds a year for three years—in large part because of widespread evasion—it was repealed in 1802, after the Treaty of Amiens, but the following year, when the British treasury again found itself in straitened circumstances, Parliament enacted a new income-tax law. This one was extraordinarily far ahead of its time, in that it included a provision for the withholding of income at the source, and, perhaps for that reason, it was hated even more than the earlier tax had been, even though its top rate was only half as high. At a protest meeting held in the City of London in July, 1803, several speakers made what, for Britons, must surely have been the ultimate commitment of enmity toward the income tax. If such a measure were necessary to save the country, they said, then they would reluctantly have to choose to let the country go.

  Yet gradually, despite repeated setbacks, and even extended periods of total oblivion, the British income tax began to flourish. This may have been, as much as anything else, a matter of simple habituation, for a common thread runs through the history of income taxes everywhere: Opposition is always at its most reckless and strident at the very outset; with every year that passes, the tax tends to become stronger and the voices of its enemies more muted. Britain’s income tax was repealed the year after the victory at Waterloo, was revived in a halfhearted way in 1832, was sponsored with enthusiasm by Sir Robert Peel a decade later, and remained in effect thereafter. The basic rate during the second half of the nineteenth century varied between 5 per cent and less than 1 per cent, and it was only 2½ per cent, with a modest surtax on high incomes, as late as 1913. The American idea of very high rates on high incomes eventually caught on in Britain, though, and by the middle 1960’s the top British bracket was over 90 per cent.

  Elsewhere in the world—or at least in the economically developed world—country after country took the cue from Britain and instituted an income tax at one time or another during the nineteenth century. Post-revolutionary France soon enacted an income tax, but then repealed it and managed to get along without one for a number of years in the second half of the century; eventually, though, the loss of revenue proved to be intolerable, and the tax returned, to become a fixture of the French economy. An income tax was one of the first, if not one of the sweetest, fruits of Italian unity, while several of the separate states that were to combine into the German nation had income taxes even before they were united. By 1911, income taxes also existed in Austria, Spain, Belgium, Sweden, Norway, Denmark, Switzerland, Holland, Greece, Luxembourg, Finland, Australia, New Zealand, Japan, and India.

  As for the United States, the enormous size of whose income-tax collections and the apparent docility of whose taxpayers are now the envy of governments everywhere, it was a laggard in the matter of instituting an income tax and for years was an inveterate backslider in the matter of keeping one on its statute books. It is true that in Colonial times there were various revenue systems bearing some slight resemblance to income taxes—in Rhode Island at one point, for example, each citizen was supposed to guess the financial status of ten of his neighbors, in regard to both income and property, in order to provide a basis for tax assessments—but such schemes, being inefficient and subject to obvious opportunities for abuse, were short-lived. The first man to propose a federal income tax was President Madison’s Secretary of the Treasury, Alexander J. Dallas; he did so in 1814, but a few months later the War of 1812 ended, the demand for government revenue eased, and the Secretary was hooted down so decisively that the subject was not revived until the time of the Civil War, when both the Union and the Confederacy enacted income-tax bills. Before 1900, very few new income taxes appear to have been enacted anywhere without the stimulus of a war. National income taxes were—and until quite recently largely remained—war and defense measures. In June of 1862, prodded by public concern over a public debt that was increasing at the rate of two million dollars a day, Congress reluctantly passed a law providing for an income tax at progressive rates up to a maximum of 10 per cent, and on July 1st President Lincoln signed it into law, along with a bill to punish the practice of polygamy. (The next day, stocks on the New York Exchange took a dive, which was probably not attributable to the polygamy bill.)

  “I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth. Annual revenue collections mounted from two million dollars in 1863 to seventy-three million in 1866, and then descended sharply. For two decades, beginning in the early eighteen-seventies, the very thought of an income tax did not enter the American mind, apart from rare occasions when some Populist or Socialist agitator would propose the establishment of such a tax designed specifically to soak the
urban rich. Then, in 1893, when it had become clear that the country was relying on an obsolete revenue system that put too little burden on businessmen and members of the professions, President Cleveland proposed an income tax. The outcry that followed was shrill. Senator John Sherman, of Ohio, the father of the Sherman Antitrust Act, called the proposal “socialism, communism, and devilism,” and another senator spoke darkly of “the professors with their books, the socialists with their schemes … [and] the anarchists with their bombs,” while over in the House a congressman from Pennsylvania laid his cards on the table in the following terms:

  An income tax! A tax so odious that no administration ever dared to impose it except in time of war.… It is unutterably distasteful both in its moral and material aspects. It does not belong to a free country. It is class legislation.… Do you desire to offer a reward to dishonesty and to encourage perjury? The imposition of the tax will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of officials with inquisitorial powers.… Mr. Chairman, pass this bill and the Democratic Party signs its death warrant.

  The proposal that gave rise to these fulminations was for a tax at a uniform rate of 2 per cent on income in excess of four thousand dollars, and it was enacted into law in 1894. The Democratic Party survived, but the new law did not. Before it could be put into force, it was thrown out by the Supreme Court, on the ground that it violated the Constitutional provision forbidding “direct” taxes unless they were apportioned among the states according to population (curiously, this point had not been raised in connection with the Civil War income tax), and the income-tax issue was dead again, this time for a decade and a half. In 1909, by what a tax authority named Jerome Hellerstein has called “one of the most ironic twists of political events in American history,” the Constitutional amendment (the sixteenth) that eventually gave Congress the power to levy taxes without apportionment among the states was put forward by the implacable opponents of the income tax, the Republicans, who took the step as a political move, confidently believing that the amendment would never be ratified by the states. To their dismay, it was ratified in 1913, and later that year Congress enacted a graduated tax on individuals at rates ranging from 1 per cent to 7 per cent, and also a flat tax of 1 per cent on the net profits of corporations. The income tax has been with us ever since.

  By and large, its history since 1913 has been one of rising rates and of the seasonable appearance of special provisions to save people in the upper brackets from the inconvenience of having to pay those rates. The first sharp rise took place during the First World War, and by 1918 the bottom rate was 6 per cent and the top one, applicable to taxable income in excess of a million dollars, was 77 per cent, or far more than any government had previously ventured to exact on income of any amount. But the end of the war and the “return to normalcy” brought a reversal of the trend, and there followed an era of low taxes for rich and poor alike. Rates were reduced by degrees until 1925, when the standard rate scale ran from 1½ per cent to an absolute top of 25 per cent, and, furthermore, a great majority of the country’s wage earners were relieved of paying any tax at all by being allowed personal exemptions of fifteen hundred dollars for a single person, thirty-five hundred dollars for a married couple, and four hundred dollars for each dependent. This was not the whole story, for it was during the twenties that special-interest provisions began to appear, stimulated into being by the complex of political forces that has accounted for their increase at intervals ever since. The first important one, adopted in 1922, established the principle of favored treatment for capital gains; this meant that money acquired through a rise in the value of investments was, for the first time, taxed at a lower rate than money earned in wages or for services—as, of course, it still is today. Then, in 1926, came the loophole that has undoubtedly caused more gnashing of teeth among those not in a position to profit by it than any other—the percentage depletion allowance on petroleum, which permits the owner of a producing oil well to deduct from his taxable income up to 27½ per cent of his gross annual income from the well and to keep deducting that much year after year, even though he has deducted the original cost of the well many times over. Whether or not the twenties were a golden age for the American people in general, they were assuredly a golden age for the American taxpayer.

  The depression and the New Deal brought with them a trend toward higher tax rates and lower exemptions, which led up to a truly revolutionary era in federal income taxation—that of the Second World War. By 1936, largely because of greatly increased public spending, rates in the higher brackets were roughly double what they had been in the late twenties, and the very top bracket was 79 per cent, while, at the low end of the scale, personal exemptions had been reduced to the point where a single person was required to pay a small tax even if his income was only twelve hundred dollars. (As a matter of fact, at that time most industrial workers’ incomes did not exceed twelve hundred dollars.) In 1944 and 1945, the rate scale for individuals reached its historic peak—23 per cent at the low end and 94 per cent at the high one—while income taxes on corporations, which had been creeping up gradually from the original 1913 rate of 1 per cent, reached the point where some companies were liable for 80 per cent. But the revolutionary thing about wartime taxation was not the very high rates on high incomes; indeed, in 1942, when this upward surge was approaching full flood, a new means of escape for high-bracket taxpayers appeared, or an old one widened, for the period during which stocks or other assets must be held in order to benefit from the capital-gains provision was reduced from eighteen months to six. What was revolutionary was the rise of industrial wages and the extension of substantial tax rates to the wage earner, making him, for the first time, an important contributor to government revenue. Abruptly, the income tax became a mass tax.

  And so it has remained. Although taxes on big and middle-sized businesses settled down to a flat rate of 52 per cent, rates on individual income did not change significantly between 1945 and 1964. (That is to say, the basic rates did not change significantly; there were temporary remissions, amounting to anywhere from 5 per cent to 17 per cent of the sums due under the basic rates, during the years 1946 through 1950.) The range was from 20 per cent to 91 per cent until 1950; there was a small rise during the Korean War, but it went right back there in 1954. In 1950, another important escape route, the so-called “restricted stock option,” opened up, enabling some corporate executives to be taxed on part of their compensation at low capital-gains rates. The significant change, invisible in the rate schedule, has been a continuation of the one begun in wartime; namely, the increase in the proportionate tax burden carried by the middle and lower income groups. Paradoxical as it may seem, the evolution of our income tax has been from a low-rate tax relying for revenue on the high income group to a high-rate tax relying on the middle and lower-middle income groups. The Civil War levy, which affected only one per cent of the population, was unmistakably a rich man’s tax, and the same was true of the 1913 levy. Even in 1918, at the height of the budget squeeze produced by the First World War, less than four and a half million Americans, of a total population of more than a hundred million, had to file income-tax returns at all. In 1933, in the depths of the depression, only three and three-quarters million returns were filed, and in 1939 an élite consisting of seven hundred thousand taxpayers, of a population of a hundred and thirty million, accounted for nine-tenths of all income-tax collections, while in 1960 it took some thirty-two million taxpayers—something over one-sixth of the population—to account for nine-tenths of all collections, and a whopping big nine-tenths it was, totalling some thirty-five and a half billion dollars, compared to less than a billion in 1939.

  The historian Seligman wrote in 1911 that the history of income taxation the world over consisted essentially of “evolution toward basing it on ability to pay.” One wonders what qualifications he might add, on the basis of the American experience since then, if he were s
till alive. Of course, one reason people with middle incomes pay far more in taxes than they used to is that there are far more of them. Changes in the country’s social and economic structure have been as big a factor in the shift as the structure of the income tax has. It remains probable, though, that, in actual practice, the aboriginal income tax of 1913 extracted money from citizens with stricter regard to their ability to pay than the present income tax does.

  WHATEVER the faults of our income-tax law, it is beyond question the best-obeyed income-tax law in the world, and income taxes are now ubiquitous, from the Orient to the Occident and from pole to pole. (Practically all of the dozens of new nations that have come into being over the past few years have adopted income-tax measures. Walter H. Diamond, the editor of a publication called Foreign Tax & Trade Briefs, has noted that as recently as 1955 he could rattle off the names of two dozen countries, large and small, that did not tax the individual, but that in 1965 the only names he could rattle off were those of a couple of British colonies, Bermuda and the Bahamas; a couple of tiny republics, San Marino and Andorra; three oil-rich Middle Eastern countries, the Sultanate of Muscat and Oman, Kuwait, and Qatar; and two rather inhospitable countries, Monaco and Saudi Arabia, which taxed the incomes of resident foreigners but not those of nationals. Even Communist countries have income taxes, though they count on them for only a small percentage of their total revenue; Russia applies different rates to different occupations, shopkeepers and ecclesiastics being in the high tax bracket, artists and writers near the middle, and laborers and artisans at the bottom.) Evidence of the superior efficiency of tax collecting in the United States is plentiful; for instance, our costs for administration and enforcement come to only about forty-four cents for every hundred dollars collected, as against a rate more than twice as high in Canada, more than three times as high in England, France, and Belgium, and many times as high in other places. This kind of American efficiency is the despair of foreign tax collectors. Toward the end of his term in office Mortimer M. Caplin, who was commissioner of Internal Revenue from January, 1961, until July, 1964, held consultations with the leading tax administrators of six Western European countries, and the question heard again and again was “How do you do it? Do they like to pay taxes over there?” Of course, they do not, but, as Caplin said at the time, “we have a lot going for us that the Europeans haven’t.” One thing we have going for us is tradition. American income taxes originated and developed not as a result of the efforts of monarchs to fill their coffers at the expense of their subjects but as a result of the efforts of an elected government to serve the general interest. A widely travelled tax lawyer observed not long ago, “In most countries, it’s impossible to engage in a serious discussion of income taxes, because they aren’t taken seriously.” They are taken seriously here, and part of the reason is the power and skill of our income-tax police force, the Internal Revenue Service.