Over the long Pax Europeana that stretched from Napoleon’s defeat in 1815 to the First World War in 1914, the main form of taxation on the western side of the Atlantic was the tariff. The timing sure was right. The United States was able to take advantage of the fact that war in Europe was rarer during that 99 years than any time since antiquity. Attention focused on the activities of production, enrichment, and exchange. Britain basked in its status as the home of the “industrial revolution,” France coined that term as it successfully imitated the productive leaps from across the Channel, and Germany industrialized faster than any nation in history.
On the eastern shores of the Atlantic, the major countries were, for once, busy at peace, and they shipped a profusion of high-quality goods across the sea to the U.S. market. The Americans benefitted, taxing the foreign bounty that called at U.S. ports and relieving the domestic economy of much further imposition. It was quite a time.
It ended with a thud. When the Great War began in 1914, the American revenue model became obsolete. The European powers shifted production toward their need for military materiel, and trolled the seas to hassle neutral trade. As these portentous changes shaped up, the United States reversed its fiscal course. Late in 1913, the federal government reduced its “external” means of taxation, the tariff, and started a new “internal” means of taxation, the income tax. Several months later, as the Guns of August rang out, the U.S. government was assured of financing itself because it had made the switch in the nick of time.
This general and not widely contested sequence of events is given essentially no space in an influential book published not too long ago on the origins of the income tax: Ajay K. Mehrotra’s Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929 (Cambridge, 2013). Mehrotra’s book is settling into the disciplines of history and law as the definitive account of how the income tax came to be.
The interpretation presented by the professor of law at the Northwestern Pritzker School of Law centers on a group of American intellectuals (“defunct” scribblers, in the words of John Maynard Keynes cited by Mehrotra) who over a 30-year period made social justice-based arguments for the income tax so cogently that these arguments won out. In their view, the received form of taxation in America created a class-fairness problem; a theory arose at their hands to deal with the problem; and this judicious theory was put into practice.
By proceeding in this way, the book embraces a “traditional” approach to history, one stressing the rationality of change. First comes the problem, then thinking about how to solve it, then an application of the solutions proposed, and finally a healthy new status quo. Here is Mehrotra, for example, on the “remarkable persistence and resiliency” of the income tax in the 1920s and beyond:
The durability of the new fiscal era [of the income tax] was rooted . . . in a much broader and deeper lineage of reform—a lineage that could be traced back to growing social antagonism toward the late-nineteenth century tax regime, to the intellectual revolution advanced by an earlier generation of progressive political economists, and to the lawmakers who absorbed these new economic ideas to create the legal foundations of the emerging fiscal polity.
This approach is traditional in another sense as well. It declines to fall in with an au courant academic mandate, which is to say that there isn’t much here on globalization—despite the low-hanging fruit of the connection between the income tax and the Great War. Mehrotra’s is a twofold traditionalism, serving an unmistakably left-of-center cause: the revelation of the enlightened origins of that high social-democratic good, the income tax.
Making the Modern American Fiscal State, let it be perfectly clear, is a useful book. Its account of the general tax atmosphere of 1880 to 1910 is lucid and thorough. On the federal side, there was the dominant tariff, which after 1865 was supplemented with a list of excise taxes (particularly on “sin” products such as tobacco and alcohol). On the state side, there were property taxes, which hit not only land but, in theory, holdings of all kinds, from farm implements to buildings to financial paper.
Mehrotra laces into the post-1865 tariff, detailing how average Americans saw precious income siphoned away in their daily purchases because manufacturers had influence in Washington to keep out less expensive goods from abroad. He uncovers the incompetence and corruption that dogged state and local property tax-collection, revealing how assessors collected insufficiently from those who appointed them to office and were clueless about assaying intangible property, such as the financial assets owned by the rich. He uses the word “hidden” a dozen times to speak of how tariff duties and excise taxes were represented in the final price of product, which typically gave no indication of the tax markup.
And he expresses exasperation at the “benefits” theory of taxation which, he contends, prevailed prior to the income tax. This is the idea that the amount of taxes people pay corresponds to the degree of improvement in their lives brought by government. Mehrotra finds no evidence of such a correspondence in the tax hodgepodge of the 19th century.
Each of these central points is, however, incomplete or misleading on some key count.
To begin with, that there was good reason for the tariff to enrage Americans is the furthest thing from news to any student of antebellum history; yet the comments Mehrotra reserves for the antebellum tariff are clipped and lack the verve of his onslaughts against the tariff of the post-1865 period. His main point concerning the tariff prior to 1861 is that it “stoked sectional tensions”—even though every one of the intolerable aspects of the tariff stressed at length in this book in the 48 years prior to 1913 (from the markups on average consumables to the cronyism and influence-peddling that the tariff engendered) was fully at issue before the Civil War.
The reader alert to academic fashions may wonder if this author is squeamish about mentioning the injustices of the antebellum-era tariff, even though these injustices were no less acute compared with the later period. Pressing such a point, after all, could be seen, invidiously, as making common cause with the secessionists of 1860-61 and the votaries of the Lost Cause subsequently. Perhaps Mehrotra really goes for it in counting the tariff’s post-1865 outrages because the common cause one makes, in the latter case, is with the Progressive visionaries who gave us the income tax. In any event, the impression left is that only after 1865 did the tariff demonstrably become an issue of economic unfairness.
Mehrotra’s consideration of the economics of the tariff is casual. There is no direct discussion of the insights introduced by Abba P. Lerner’s work of the 1930s, one of which was that the tariff cost employers—indeed “the rich”—dearly. Wages paid had to rise to the degree that the tariff raised prices, in order for the supply of labor to meet demand, per Lerner’s “symmetries.” The developed views of scholarly economics about the “incidence” (a term of art referring to who really pays a given tax) of tariff taxation deserved dedicated treatment here, but they do not receive it.
When it comes to the tariff duties (and excise taxes) being “hidden” in the market price of goods, Mehrotra makes a category mistake of the first order. The income tax that largely displaced these levies supposedly represented a “dramatic shift from a regressive, hidden, disaggregated, and politicized tax system to a graduated, transparent, and centrally administered one”—an alleged improvement that he pronounces “a tremendous achievement.”
The income tax has been transparent all these years since its inception in 1913? This is a preposterous claim. As it developed in the early 20th century and in the decades since, the income tax is a schedule of rates setting what people of various income levels must pay to the government, coupled with a list of exceptions that dwarfs this schedule in both size and complexity. Today, the amount of text in the tax code not dedicated to the initial spelling out of rates and income levels exceeds this first section by a factor of probably 10,000.
The tariff was a curt published list of commodities, with corresponding quantities and dollar amounts. This was its essence, its entirety. Barrels of porter at $5 per, wool of Alpaca at 10 cents a pound, and so on, for a maximum of 60 pages. There was no taking with one hand on the front page and giving with the other in interminable back sections, as with the income tax code. There was just the announcement of the taking. Changes to the list of duties were printed, as is, in the thousands of newspapers published in the United States at the time, often 10 to a city, in the tax-“politicized” era prior to 1913.
Surely because the tariff was not hidden, but grossly open, it inspired effective revulsion. You could see where each captain of industry had influence in the halls of power. The sugar tariff—that one was from the sugar trust. The steel tariff—must be from the Carnegie people. And on down the list. Granted, the tariff did not announce precisely who in industry had bought off which congressman to get which commodity on the list, but the clues were obvious as to which industries were currying favor in Washington.
The tariff made no bones about being a favor-trading machine, so of course it was “politicized”—a fate Mehrotra, astonishingly, does not appear to believe is appropriate when it comes to the matter of taxation, of all things. He owes us an observation in this context that he does not make. In the era of the tariff and the excises, government spending (and revenue) never really exceeded 6 percent of national output. The politicization of these tax domains had to be a reason why neither spending nor revenue got large. Tariffs and excises were so infuriating, the public made sure they were held down.
Our “graduated, transparent, and centrally administered” income tax code, to repeat Mehrotra’s phrase, now anchors a fiscal system that regularly gathers in one third of national output. Its public face—its list of rates and income levels—bears little resemblance to the actual tax system it superintends. It is more than hidden; one might say that it exhibits the marks of prevarication. The income tax proposes that the more you make, the more you pay, warding off political opposition animated by a desire to correct unfairness. Then it sponsors a shadow tax system (the back pages of the tax code) that is impossible to characterize on grounds of progressivity or graduation, let alone fairness.
One could suggest that via the income tax, government confuses its adversaries so as to give it space to grow. Whereas the tariff’s corporate cronyism was utterly transparent, the income tax, which offers itself as a public service, reels in revenue far in excess of the tariff. The switch is ingenious. Since the income tax is ethically “better,” it is acceptable if it soaks up several times more of private output.
As for the labors of the 19th and early 20th century intellectuals which make up most of this book—the patient arguments in favor of adopting an income tax by the likes of Columbia University’s Edwin Seligman and Wisconsin’s Richard Ely—it is useful to have Mehrotra’s catalogue of their work. Seligman in particular exposed how the “benefits” theory of taxation was misplaced in the tariff world of his day, and surely he was right about that.
When it came to the intellectuals, Mehrotra could have risked a little indulgence in the globalization fad from which he so consistently steers clear. Seligman and Ely studied at the graduate level in Germany, we learn, and were influenced by the “German historical school”—and that’s about all we get, with some further reading indicated in the notes. The connection to German intellectual history, palpably relevant to this subject, is not fleshed out in this book, meaning that questions are begged.
Mehrotra reveals that Seligman (the greatest of the income tax’s theoreticians) pondered whether there could be a one-size-fits-all solution to the income tax, or if each country and locality had to figure out which kind of income tax was right for it. This information suggests that Seligman may have been caught up, in some derivative fashion, in the profuse debate between the followers of Georg Wilhelm Friedrich Hegel and those of Leopold von Ranke that raged across the German academic world in the 19th century.
The author misses this association, content to accept (as his notes show) Richard Hofstadter’s interpretation from years ago that Seligman was “Whiggish.” Presumably this means that Seligman thought history moved progressively in the way outlined by optimistic Englishmen of the 19th century. Yet Mehrotra’s own summary of Seligman’s work, stressing “the historical evolution of centralized political power” and (quoting Seligman) “development [that] calls for uniform national regulation . . . not dreamed of by the founders” is suggestive of the Hegel-Ranke debate. To an American neophyte like Seligman (and Ely), it went something like this: On the Hegel side, “universals” were to be applied in particular contexts; the more one managed to adapt to the pureness of the universal, the more evolved one was. On the Ranke side, particularity was given more space as global society evolved by expressing universals more diversely.
Considering that the majority of this book’s 400–odd pages concern the late 19th and early 20th century intellectual history of the income tax, this conceptual background merited substantial examination in Making the Modern American Fiscal State. To be sure, if there had been such examination, it would have brought the book’s argument to an abrupt halt. The idea that the United States should have upended its tax system, just as that tax system was accompanying an economy pulling into the lead position in a global industrial revolution at its world-historical apex, simply because a philosophical debate in Germany pointed in that direction, would not have had the ring of plausibility. Surely America switched its tax system in 1913 for other, far more practical reasons—such as the general crisis stalking Europe.
Since Mehrotra does not fill in the intellectual context of the academic precursors of the income tax, no comprehensive case has been made that Seligman et al had much to do with the rise of the income tax. This point acquires force in consideration of the causes passed over in Making the Modern American Fiscal State. The exigency of government finance while maintaining neutrality during the Great War, to cite the major example, is too large and contemporaneous a problem not to explore.
As for the tariff, the attention Mehrotra trains on the outrageousness that at last made it replaceable is selective. Whether we today find it compelling (or expedient) to consider the tariff as a casus belli of the Civil War, Americans of a century and more ago may well have felt it was. Indisputably, the tariff was the most contentious issue in American politics over the 97 years following the institution of the big 1816 tariff that came with the peace that accompanied Napoleon’s downfall. The rise of the income tax in the early 20th century could have represented this nation’s exhaustion with having to tolerate the tariff over the longue durée, with the coming of the Great War providing the pretext for the coup de grâce.
Mehrotra gives us the short durée, the later life of the obnoxious tariff, with scarcely any reference to the “durability” of the tariff problem up to that point. This is an attenuation of history, a mistaking of epiphenomenal intellectual threads that accompanied large developments as the spur to those developments.
In the final section of the book, Mehrotra divulges that by the 1920s, the tax bar had discovered what a boon the income tax was to the profession. This is a welcome revelation, prompting the reader to ask why narrow self-interest on the part of the government and its functionaries was not considered in regard to the rise of the income tax in the first place, indeed to “making the modern American fiscal state.” After all, these officials were its first beneficiaries. With the transition from the tariff to the income tax, the governmental displacement of the economy went from 6 to 33 percent. Highly remunerative careers ministering to the government’s priorities were thereby financed.
The book’s folio of photographs includes a crystalline picture from 1920 showing a line of several dozen persons, of numerous races and both sexes in point of fact, standing bundled in winter hats and coats and visibly tired. These Americans were waiting to pay their income tax at a government office. Mehrotra writes that this photo, given the patient waiting in line, shows how “accepted” the “bold new ideas about the modern fiscal state articulated by reformers” had quickly become. He could as well have cited it as hard evidence that with the income tax came new impediments to the regular activities of daily life—impediments surely deleterious to this nation’s fortunes.