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Lawrence Reed Columnist

Published Thursday, October 04, 2012

The income tax – 99 years later

This column was written before Wednesday night’s presidential debate, but it’s safe to assume that taxes — income taxes in particular — were part of the circus. Rates are set to rise painfully in January if Congress doesn’t act beforehand so we’ll all be talking a lot about taxes in the next few months. A little history could be useful.

The federal income tax started small just 99 years ago (in 1913), but grew quickly in size and scope. The top rate was first set at a mere 7 percent — and married couples were only taxed on income over $4,000 (about $90,000 in today’s dollars). During the tax debate, Congressman William Shelton of Georgia supported the income tax “because none of us here have $4,000 incomes, and somebody else will have to pay the tax.” Sounds just like that famous line, “Don’t tax you, don’t tax me, tax that man behind the tree.”

Some people scoffed at the notion that the income tax would ever take as much as 10 percent of anybody’s money, but it took the politicians barely 20 years to sharply increase the rates and expand the base of those who had to pay it. Presidents Herbert Hoover and Franklin Roosevelt, using the excuses of depression and war, permanently enlarged the income tax. Under Hoover, the top rate was hiked from 24 to 63 percent. Under Roosevelt, the top rate was again raised—first to 79 percent and later to 90 percent.

In 1941, in fact, FDR proposed a 99.5 percent marginal rate on all incomes over $100,000. After that proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the rate of 100 percent. He also promoted the lowering of personal exemptions to only $600, a tactic that pushed most Americans onto the tax rolls. Congress rescinded Roosevelt’s executive order, but it approved the personal exemption reduction.

The progressive income tax allows politicians to protect friends, punish enemies and to tax one small group to give benefits to larger targeted groups. In the 1920s, Sen. James Couzens of Michigan said, “Give me control of the Bureau of Internal Revenue, and I will run the politics of the country.”

When President Nixon discussed who he wanted as Commissioner of Internal Revenue, he said, “I want to be sure that he is ruthless, that he will do what he is told, that every income-tax return I want to see, I see; that he will go after our enemies and not go after our friends. It’s as simple as that.”

Today, though rates are lower than their all-time highs, the paperwork is massive and incomprehensible. Add the value of the time we spend on filing it all and worrying that we got it right and you know why Ronald Reagan once defined what a taxpayer was this way: “Someone who works for the federal government but doesn’t have to take the civil service examination.”

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(Lawrence W. Reed, a resident of Newnan, is president of the Foundation for Economic Education in Irvington, N. Y., and Atlanta.)

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