The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power that Transformed the Nation - Book Review

Parameters, Winter, 2003 by Michael J. Fratantuono

By Steven R. Weisman. New York: Simon and Shuster, 2002. 419 pages. $27.00.

While there are many public policy issues that elicit passionate debate, none is more fundamental to the American experience than taxes. Taxes were central to the birth of our nation. Indeed, Article 1, Section 2 of the US Constitution stipulates that "direct taxes" on citizens "shall be apportioned among the several states ... according to their respective numbers [of people]." Furthermore, they embody the interdependence between citizens and the state and they reflect important social categories, such as status and affluence, and social institutions, such as property rights and legal identity.

In flowing journalistic style, Steven R. Weisman traces the evolution of the progressive income tax, the cornerstone of today's US tax system, from the years 1860 to 1920--an extraordinary period of history in which the United States overcame internal divisions and financial crises, matured as a nation, consolidated power in a strong central government, emerged as the world's foremost economic power, and reluctantly became enmeshed in a global conflict. He skillfully relates the struggles over taxes to general historical developments, to the economic and political interests of groups of citizens, and to the philosophical and personal views of leading actors.

In those six decades, the US Congress actually legislated a progressive federal income tax on three occasions. In 1863, it created the first such tax to help finance the costs of the Civil War. To circumvent the language of Article 1, legislators referred to taxes on income as "indirect" taxes. While the debate over taxes was intense, given the plight of the country, no party in the North challenged the constitutionality of the legislation. Following the war, opponents gained the upper hand and Congress repealed the tax in 1872. (In contrast, the Confederate Congress primarily relied on borrowing and printing money to finance the South's war efforts.)

In 1894, Congress resurrected the income tax. Legislators were swayed by the devastating economic hardships and federal deficits associated with the Panic of 1893 and the increasing political influence of the Populist Movement. This time, however, opponents of the income tax argued that since the wealthiest citizens were concentrated in a few states, the tax violated the notion of proportionality found in Article 1. The Supreme Court upheld this interpretation and in 1895 struck down the Tax Act of 1893.

Over the next 18 years, the American public became increasingly wary of large concentrations of political, economic, and financial power, and eager for greater degrees of social equality. Those changing sentiments were given expression in the Progressive Movement, and culminated in 1912 with the approval by a supermajority of state legislatures of Amendment XV of the Constitution, giving Congress "the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census enumeration." The Amendment cleared the way for the legislation in 1913 that established the foundation for the current US income tax.

The battles in each of these episodes were contentious, for a few reasons. First, in all the debates, the income tax as a source of revenue was inseparable from the tariff, which played a crucial role in government finances and US economic development. Tariffs, a duty imposed on imports entering the United States, accounted for about 90 percent of central government revenue for most of the pre-Civil War era, and roughly 50 percent of revenue from 1860 to 1912. Furthermore, tariffs-which raise the price not only of imports, but also, due to the dynamics of markets, the prices of similar domestically produced goods--were the device of choice of the federal government to protect domestic industries. By the latter half of the 19th century, protection for manufactured goods had been adopted as a key component of Republican Party ideology.

Second, much of the antagonism over the income tax was grounded in sectional differences. As the 19th century unfolded, the United States increasingly consisted of two different economies: the rural, land-based economy of the south and the west, where income generated by selling and exporting agricultural commodities was used to buy manufactured items; and the urban, capital-intensive, industrial and financial economy of the northeast, which had been energized by the Civil War and prospered behind protectionist walls. Although economic growth had generated rising real incomes for all participants for much of the 1800s, by the end of the century, while farmers and ranch workers were experiencing absolute declines in their standard of living, industrialists were enjoying rapidly increasing fortunes. To make matters worse, tariffs created a disproportionate burden on the common family, particularly when placed on basic necessities. Thus, farmers and workers were essentially an anti-tariff, pro-income-tax group. Predictably, industrialists were a pro-tariff and anti-income-tax lot.