Saturday, August 25, 2007

Early U.S. income tax

I'm in the process of reading Akhil Reed Amar's America's Constitution: A Biography, and just came to the portion about the 16th Amendment, which instituted a federal income tax. I had already known that the tax was a very low percentage, but I hadn't realized that only the top 1% of income earners paid any income tax. It would be a nice model to go back to, but not possible without dramatically reducing federal spending--the wealthiest Americans wouldn't tolerate an extortionate percentage of taxation that would be required on the current level of spending, and given the huge amounts of money that are now a part of political campaigning, nobody gets elected without the support of at least some of the wealthiest Americans. (And those levels of spending are tied together--there's huge money riding on political campaigns because there's huge money and power in the hands of the federal government. The only way to reduce the former is to reduce the latter.)

Here are the two paragraphs where Amar describes pre-Civil War and post-16th Amendment income taxes in the United States:
Prior to the Civil War, at least seven states had adopted income taxes. High exemptions and graduated rates--the basic features of a progressive tax structure--were commonplace in these states. Congress followed this pattern when introducing a federal income tax in the 1860s. For instance, the 1865 federal tax code exempted all persons who made less than $600, taxed income between $600 and $5,000 at 5 percent, and subjected all income above $5,000 to a steeper 10 percent rate. Later federal laws tweaked the specifics but preserved the basic structure, under which more than three-quarters of federal revenue came from the seven wealthiest states: New York (which itself generated more than 30 percent of the total national intake), Massachusetts, Pennsylvania, Ohio, Illinois, New Jersey, and Connecticut. Under the law struck down in Pollock, incomes over $4,000 were taxed at 2 percent, all others were exempt. According to Treasury Department estimates, less than 1 percent of the population had been subject to this levy.
In the first income-tax statute enacted after the new amendment was in place, Congress once again opted for a progressive tax structure that exempted a large swath of low- and middle-income persons and taxed the rest at a sloping rate, beginning at 1 percent for an individual making $3,000 and topping out at 7 percent for income over $500,000. The $3,000 minimum threshold effectively limited the tax to the top 1 percent of the economic order. In 1916 the Supreme Court unanimously upheld the new tax law, expressly rejecting the notion that the "progressive feature" of the tax somehow rendered it unconstitutional. The American People had spoken and--this time, at least--the Court listened.

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