The surprising origins of the income tax

It’s tax time again in the United States. The AHA will not be advising you about home offices or the deductibility of book purchases. Given the April 18 deadline, it’s too late for that anyway. But some of us actually write about the history of taxation around the world and, in my case, in the United States.

American tax politics is usually treated as a clash of ideologies about the role of government in a democracy. Should taxes be increased to finance more and better public services? Should they be cut so that people can keep more of their earnings? Should taxes redistribute income through the use of progressive tax rates? Or should they be designed to protect capital accumulation in order to encourage investment?

It is tempting to read these questions backward into American history, as many historians have, particularly the one about redistributing income through a progressive income tax. In this story, the modern federal income tax—adopted in 1913, soon after the ratification of the Sixteenth Amendment—gets cast as the triumph of Populist and then Progressive demands for a government that could discipline the robber baron elites and protect the nation’s workers and farmers. This story of class struggle and democratic triumph is the one told in Sidney Ratner’s classic American Taxation: Its History as a Social Force in Democracy (1942) and retold more recently in Steven R. Weisman’s The Great Tax Wars, Lincoln to Wilson: The Fierce Battles over Money and Power That Transformed the Nation (2002). It also appears, in abbreviated forms, in most standard treatments of Populism and Progressivism.

But what if this story is wrong, or at least seriously misleading? What if class struggle was not really the central story of the income tax? My research is suggesting as much. In fact, the best way to understand the history of the income tax may well be geographical—or “sectional” in the traditional American sense.

The income tax inaugurated an epochal shift in the geographical distribution of federal tax burdens. In the 19th century, the federal government relied mainly on the tariffs it levied on imported goods. The only federal tax between the War of 1812 and the Civil War, the tariff continued to be a major source of federal tax revenue, raising about half of the total in the late 19th century. The key to tariff politics, however, was the policy’s double function. The tariff worked simultaneously as a tax and as an industrial development policy that “protected” American businesses against foreign competition by increasing the prices of imported goods. Tariff politics was always sharply sectional, mainly because the United States did not import anything that competed with the major southern products such as cotton. Protection made manufactured goods more expensive by raising the prices of imports and, in particular, by allowing domestic (chiefly northern) firms to sell their products at higher prices. As a result, the tariff generally subsidized the things that northerners sold by taxing the things that southerners bought. The political economy of protectionism was a little more complicated than this, of course, not least because of the role of the West, but the crucial point is that, in the age of the tariff, the federal tax system took from the South and gave to the North. ...