The Income Tax And How It Grew


Both major parties played politics on the income-tax issue. But hard times came again in the nineties, and the then Democratic Congress, having lowered the tariff in the second Cleveland administration, in 1893 hitched an income tax to the tariff act. The rate was low—2 per cent—and not graduated, but the personal exemption was high—four thousand dollars—which proved to the East that this was a sectional tax, the burden to fall on New England, New York, New Jersey, and Pennsylvania. “The Democratic hen,” said the New York Daily Tribune , “has hatched a Populist chicken at last.” And in the Brooklyn Eagle words were not minced. There the supporters of the personal income tax were harshly categorized as “Western repudiators and Southern exrebels. …”

Money to balance the budget had to come from somewhere. There was a replay of all the arguments in opposition to the income tax. It was socialism. The tax penalized thrift. It was a tax of tyrants. It encouraged dishonesty and perjury, bringing on spies and informers, setting class against class. Much of the dialogue was carried on by epithet. As the Washington tax expert Louis Eisenstein has tolerantly remarked, “Taxation is a political process, and we should not expect the clichés to be more illuminating than they are in other areas of political contention.”

The income tax carried the day—briefly. In 1894 such a tax was provided for in a section of the WilsonGorman tariff bill, though President Cleveland considered the bill so inadequate as a tariff-reform measure that he was unwilling to approve it, and it became law without his signature. The tax was received with popular approval, especially in the West. In a lyrical mood a Democratic congressman from Missouri predicted that there would be surprising improvements under the Wilson-Gorman Act: “The passage of the bill will mark the dawn of a brighter day, with more of sunshine, more of the songs of birds, more of that sweetest music, the laughter of children well fed, well clothed, well housed.”

But certain receivers of large incomes thought otherwise and rushed several cases to the Supreme Court, which reviewed them at the October, 1894, term. There followed one of the most celebrated legal battles in American history. The issue depended upon the interpretation of the clauses in the Constitution relating to federal taxation, especially the clause requiring uniformity (Article 1, Section 8, Clause 1) and the provision forbidding the laying of a direct tax (Article 1, Section 9, Clause 4) unless in proportion to the census.

The government claimed that uniformity meant only geographic uniformity and that the Constitution did not bar a graduated tax. This position was upheld. The question remained as to what the words “direct tax” meant. In 1815, in Civil War days, and later in various cases, the Supreme Court had held that “direct taxes” as used in the Constitution applied only to land and poll taxes. In April, 1895, however, on a rehearing, the Court by the barest of margins, 5 to 4, declared the whole income-tax law unconstitutional on the ground that it was a direct tax. The 1894 law was substantially the same as the Civil War measure that had been reviewed and sustained. But the social climate had changed. The law of ’94 was not passed under the duress of national peril. It was, rather, the result of egalitarian pressures, representing a clash between opposing economic and political philosophies.

The justices of the Supreme Court faced a particularly difficult task in that they had to guess what the shapers of the Constitution would have thought about the personal income tax—if they had thought about it. This placed their verdict on the frontiers of psychology and social philosophy. It was a notably conservative Court during the years of the Mauve Decade, with an extraordinary tendresse toward personal property. But the justices must have felt the guiding spirit of Chief Justice Marshall in the courtroom as tall, handsome Joseph H. Choate, perhaps the nineteenth century’s greatest jury lawyer, told them that if this “communistic march” was not summarily halted, there was nothing to prevent action by Congress to increase “the exemption from $4,000 to $10,000 or to $40,000, and increasing the tax from two percent to ten percent, or to twenty percent. …”

And Choate led the justices up to the top of a high mountain and showed them a Beulah land for the well-to-do in which everyone, including John Jacob Astor, paid taxes at the same rate in the good old Federalist tiewig way. And he painted images of the poor coercing the rich through the power of Congress to levy taxes, and he frightened them with his conclusion: “protection now or never.” Mr. Justice Field shuddered and was put in mind of a historical parallel, an English statute of 1691 that taxed Protestants at a certain rate, Catholics at double rate, and Jews “at another and separate rate”; and Chief Justice Fuller, thoroughly aroused, got off some rather uncharitable remarks in delivering the Court’s opinion about “the speculative views of … revenue reformers.” So the Court put aside all interpretative doubts and found persuasive the argument advanced by Choate and associated counsel that taxation on personal income was contrary to the fundamental law of the land. The decision left the matter in this position: the income tax was a direct tax and could not be levied except on a basis proportional to the population of each state.