Tax Reform Simplified

With tax day here, there have been a lot of calls by politicians for reform and simplification of the tax structure. Following strict constructionists who stress looking at the original document to guide our current path, the introduction of the income tax provides ideas for how to proceed today.

This came about with the 16th Amendment, passed by Congress on July 2, 1909, and ratified February 3, 1913. As background, the principal idea generating this measure was the widespread belief, as John Buenker, author of the leading article on passage of this amendment put it, "a growing conviction among people from all walks of life that the existing tax system failed to reach the great fortunes that had been amassed as a result of industrialization." At this time, the top 4 percent of income receivers took in about one-third of national income, while the highest 1 percent received nearly 15 percent.

The sentiment was expressed in many quarters, but especially the South and West, regions which felt the country was dominated by an East Coast elite, just as activists do now. The South, for example, had one-fifth of the nation's land and population, but received just 10% of its income; only 214 persons in that entire region made $100,000 or more in a year. Kansas Populist Senator William Peffer rallied voters with the appeal "we are going to make you men of the East bear your burden of taxation." The major opposition to the income tax came from the nation's industrial, commercial, and financial leaders, with strenuous disapproval from such organs as the Wall Street Journal, Financial Age, and the Proceedings of the National Association of Manufacturers.

Thus, the measure that passed served as a clear reflection of liberal and Populist beliefs. The most important feature was not the initial rate (1%), but that it applied only to incomes of $3,000 and up, raised to 2% for incomes over $20,000, till it reached a maximum of 7% for those at the very top with yearly income of $500,000 or more.

In addition, Congress clearly meant this to apply to a very small segment of the population. According to the 1910 Census the average wage of workers in industry was $574 a year. Public school teachers, on average, made $492 for twelve months work. Medical and health services workers brought in $338. Even professionals remained untouched: only the top 19% of the country's lawyers earned sufficient incomes to pay any tax at all in 1913, as did but 11 percent of engineers, 21 percent of bankers, 18 percent of mine owners, 10 percent of manufacturers, and about 5 percent of real estate operators and merchants.

Thus, for the citizens and legislators who lobbied for and passed the income tax amendment, the foremost concept of simplification was to tax the top segments of the American wage structure while leaving the bulk of Americans untouched. This measure's founding generation, as with the creators of the larger Constitution, left lessons for our era.