WSJ.com - A Short History of the Income Tax

 

WSJ.com - Opinion: A Short History of the Income Tax

 

Before the modern era the federal tax system was manifestly unfair by any reasonable standard, grossly biased in favor of the well off. Ironically, attempting to fix that unfairness is what has brought us to the present moment, with a federal tax system that is grotesquely complex, often arbitrary, and corrupted by mutual back-scratching between members of Congress and influential lobbyists.

[After the Supreme Court rejected the 1894 income tax as unconstitutional, President Taft] came up with a brilliant, very lawyerly, alternative: He proposed a constitutional amendment to legalize a personal income tax, while meanwhile imposing a tax on corporate profits. In the early 20th century such a tax was, in effect, a tax on the rich. As the corporate income tax is technically an excise tax, there was no constitutional problem. Taft's solution was implemented and in 1913 the 16th Amendment was declared ratified, just as Taft was leaving office.

The new president, Woodrow Wilson, and the strongly Democratic Congress promptly passed a personal income tax. It kicked in at 1% on incomes above $3,000 (a comfortable upper middle-class income at the time) and reached 7% on incomes over $500,000. But there were many deductions, bringing the effective tax rates down sharply from the marginal ones—a feature of the tax system ever since.

Unfortunately the corporate income tax, originally intended as only a stopgap measure, was left in place unchanged. As a result, for the last 98 years we have had two completely separate and uncoordinated income taxes. It's a bit as if corporations were owned by Martians, otherwise untaxed, instead of by their very earthly—and taxed̵ 2;stockholders.

This has had two deeply pernicious effects. One, it allowed the very rich to avoid taxes by playing the two systems against each other.

The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their "fair share."

Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul.