The Perils of Income Inequality

The Sixteenth Amendment to the Constitution, which authorized the federal government to impose an income tax on individuals, will turn 100 years old on February 3. It is unlikely that many corks will pop in celebration. But they should, because the income tax plays a central role in ensuring American democracy. More to the point of contemporary politics, the Sixteenth Amendment was designed precisely to protect the 47 percent of Americans Mitt Romney has reviled.

Before passage of the Sixteenth Amendment, the federal government obtained its funds primarily from tariffs on imported goods. The effect of these tariffs was to artificially raise the price of foreign products and thus to protect American manufacturers from international competition. American workers and farmers paid more for their purchases, while the moguls of industry (whom we would today recognize as "the 1 percent") reaped the benefit.

By the mid-1890s, in the midst of a devastating depression, tariff reform leapt to the front of electoral politics. In order to lower artificially-inflated prices, Populists and Democrats demanded tariff reform. To make up for lost revenue to the government, they proposed a federal income tax. In 1894, congressional Democrats succeeded in enacting such a tax.

But the Supreme Court, then -- as now -- controlled by a coterie of very conservative justices, wasted no time in holding the income tax unconstitutional, thus halting what the majority decried as a "communistic" assault on the sacred right of private property. In an impassioned dissent, Justice Henry Billings Brown castigated the majority's decision as "nothing less than the surrender of the taxing power to the moneyed class."

Adding insult to injury, conservative Republicans in a Senate dominated by a cadre of men representing the boardrooms of corporate America, enacted an even more aggressive tariff. This led to a bitter dispute that eventually split the Republican Party, paving the way for the Democratic Party's capture of the White House by Woodrow Wilson in 1912.

Wilson made tariff reform his first priority. He denounced high tariffs as a hidden subsidy to industrialists, characterizing them as "class legislation"designed to benefit a class that needed no extra help. In 1913, the Underwood Tariff Act, which was supported by a coalition of Democrats and progressive Republicans, cut tariff rates by more than a quarter. To make up for the reduction in federal revenue, Congress once again turned to the idea of a federal income tax.

Because the Supreme Court had ruled a legislated income tax unconstitutional, Congress proposed the Sixteenth Amendmennt, which was enthusiastically ratified by the states. Congress then enacted an income tax that left most workers and farmers untaxed, but focused primarily on corporations and the wealthiest Americans.

The Sixteenth Amendment was therefore not only about raising revenue. In targeting excessively concentrated wealth, the income tax addressed broader concerns about gross income inequality, which Americans rightly considered a menace to democracy.

As Louis D. Brandeis explained at the time, "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." Theodore Roosevelt agreed. American civilization, he insisted, must not be "the civilization of a mere plutocracy, a banking-house, Wall-Street-syndicate civilization." Roosevelt openly attacked the "malefactors of great wealth" who imperiled the Republic through their outsize economic and political influence.

The Sixteenth Amendment also laid a vital foundation for the social safety net begun under the Progressives and elaborated upon throughout the twentieth century. The tax on wealth articulated the nation's dedication to a limit on economic inequality. The definition of those limits would change over time, but the role of the federal government in policing them in the interest of a healthy national political community would endure.

It was this community that lay behind Supreme Court justice Oliver Wendell Holmes' applause for the new income tax. "I like to pay taxes," he announced. "With them I buy civilization." By "civilization," Holmes did not mean museums and public libraries, although he enjoyed both. He meant the civic peace and sense of national community and responsibility necessary for American civilization, with its unmatched dedication to political equality, to flourish.

Unfortunately, over the past half-century a succession of Republican administrations, representing the same constituents as those who opposed the income tax a century ago, has lowered the marginal tax rate on the wealthiest Americans from 90 percent under President Eisenhower, to 70 percent under President Nixon, to 50 percent under President Reagan, to 35 percent under President George W. Bush. The consequent income inequality, so celebrated today by Mitt Romney, once again represents a clear and present danger to American democracy.

This piece was co-authored with Jane Dailey, Associate Professor in the Department of History and the Law School at The University of Chicago.