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Thu March 22, 2012
From Abe Lincoln To Donald Duck: History Of The Income Tax
Originally published on Fri March 23, 2012 8:02 am
The story of how the U.S. wound up with the income tax is the story of two wars, a Supreme Court justice on his death bed, and Donald Duck.
It's also the story of how the government overcame three obstacles.
Obstacle No. 1: Logistics
How do you make sure people pay?
Before the Civil War, the government received most of it revenue through tariffs — taxing goods as they came into the ports. This had its limits, though.
"Tariff duties are a great way to raise money as long as [you're] not fighting a war," says Joe Thorndike, co-author of the book War and Taxes.
In the 19th century, war meant blockaded ports, sunk ships — and almost no revenue from tariffs.
So during the Civil War, Congress decided it had to try an income tax. It devised a really clever plan to get people to pay. It made the tax returns public.
"Your neighbor would see you driving around on a brand new plow and he'd say, 'Wait a minute,' " Thorndike says. " 'I'm going to see how much he reported on his income tax.' "
Even the president's tax returns were public. Here is a tax assessor's list from 1864. Note the entry for "Lincoln Abraham" right there below "Linney Edward."
President Lincoln paid $1,296 in taxes. The list also includes a retail liquor dealer and an eating house owner.
Obstacle No. 2: The Constitution
In the 19th century, the income tax fell almost exclusively on the rich — who, as it turns out, had some pretty good lawyers.
They argued that a "direct tax" had to be divvied up among the states according to their populations. The income tax didn't work that way.
In 1895, the case went all the way to the Supreme Court. One justice was on his death bed, and the remaining eight split evenly. The dying justice came back, and the court re-heard the case.
By a 5-4 vote, the court found the income tax unconstitutional.
It wasn't until 1913, when Congress and the states amended the Constitution to allow for the income tax, that the tax became legal again.
Obsacle No. 3: The Love
Until World War II, the income tax was levied only on the rich. But wartime spending meant the government needed money, and ordinary folks are now asked to pay.
"There was a lot of concern that Americans just wouldn't do it," Thorndike says. "Or that they wouldn't understand that they were supposed to ... or even just how to do it."
The government needed to get the word out. It needed a spokesperson. Someone credible, and easy to understand.
The government needed Donald Duck.
The movie at the top of this post is from 1943. In it, Donald Duck marches around his house, listening to the radio and filling out his tax form. Occupation: actor. Dependents: three (Huey, Dewey and Louie).
This wartime patriotic motivation campaign worked. Maybe we didn't love the income tax. But we paid it.
DAVID GREENE, HOST:
Get ready, because tax day is fast approaching. It seems like the appropriate time to note that the income tax is the major source of revenue for the U.S. government. But that was not always the case. In fact, the story of how we got the income tax is the story of several wars, a Supreme Court justice on his death bed and a duck.
David Kestenbaum with our Planet Money team has a brief history.
DAVID KESTENBAUM, BYLINE: Before you can have an income tax, you have to overcome three basic obstacles. The first, logistics. Like, how do you make sure people pay? In the early days, the government got most of its revenue a simpler way. Taxing stuff that came into the ports. Though, that had its limits.
JOE THORNDIKE: Tariff duties are a great way to raise money as long as you're not fighting a war.
KESTENBAUM: Yeah, because someone's blocking your port, right?
THORNDIKE: Or sinking your ships on the way across the ocean.
KESTENBAUM: That's Joe Thorndike, who co-authored a book called "War and Taxes." During the Civil War, he says, Congress decided it had to try an income tax. And the government does this really very clever thing to get people to pay it. It makes tax returns public.
THORNDIKE: During the Civil War, anyone could go in and look up your income tax return or at least your report of how much you earned. And the idea was that this would help improve compliance, because your neighbor would see you driving around on your brand new plow and he'd say wait a minute. That guy, how did he get all that money? I'm going to see how much he reported on his income tax.
KESTENBAUM: A tax assessors list from 1864 shows a Mr. Abraham Lincoln, address: White House, taxes paid: $1,296. Also entries for restaurant owners and liquor dealers. The income tax - people paid it.
The income tax faced a second obstacle though, a legal obstacle. The income tax at this point taxed mainly the rich. The rich didn't like it and the rich, have lawyers. In 1895, the case reaches the U.S. Supreme Court.
JOHN STEELE GORDON: My great, great uncle was one of the lead lawyers in that case. And guess which side he was on?
KESTENBAUM: Trying to shoot down income tax.
GORDON: You got it. He was a Morgan partner five years later.
(SOUNDBITE OF LAUGHTER)
KESTENBAUM: This is economic historian John Steele Gordon. The argument his great, great uncle made in court was that the income tax violated the U.S. Constitution, which said any direct tax had to be divvied up among the states according to their populations. And the income tax wasn't taxing according to population, it was taxing according to income.
GORDON: A very interesting thing happened in the Supreme Court. One justice was ill - in fact, he was dying, Justice Jackson from Tennessee. It was argued before eight justices, split four-four.
KESTENBAUM: That's why we have an odd number of justices, so you can't have a tie.
KESTENBAUM: The court decides to haul Justice Jackson out of his death bed and rehear the case. Jackson is a supporter of the income tax. So, he is going to break the tie in favor of the income tax. And the tie is broken, but it's five-four the other way, against. Income tax is ruled unconstitutional.
GORDON: One of the other justices, we don't know who because the opinion was unsigned, switched his vote.
(SOUNDBITE OF LAUGHTER)
GORDON: And so, the tax was unconstitutional, no income tax.
KESTENBAUM: The legal problem is finally overcome in 1913 with a constitutional amendment. So, logistics, check. Legality, check. The income tax needs one more thing - love.
The income tax up to this point has been a tax on the rich. Everyone else was exempt. This changes with World War II. The government needs money and now ordinary folks are asked to pay.
THORNDIKE: There was a lot of concern that Americans just wouldn't do it.
KESTENBAUM: Again, Joseph Thorndike.
THORNDIKE: That they wouldn't understand that they were supposed to, or that they had to, or even just how to do it.
KESTENBAUM: The government needs to get the word out. It needs a spokesperson for the income tax. Someone with credibility, someone who's instantly recognizable, someone who's easy to understand.
(SOUNDBITE OF DONALD DUCK)
KESTENBAUM: Donald Duck.
(SOUNDBITE OF MUSIC)
KESTENBAUM: This film is from 1943. In it, Donald Duck is marching around his house patriotically listening to the radio and talking back to it.
(SOUNDBITE OF MOVIE, "SPIRIT OF '43")
UNIDENTIFIED MAN #1: Are you a patriotic American?
CLARENCE NASH: (as Donald Duck) Yes, sir.
UNIDENTIFIED MAN #1: Eager to do your part?
NASH: (as Donald Duck) Yes, sir.
KESTENBAUM: Donald Duck runs and gets a gun and a sword and boxing gloves.
(SOUNDBITE OF MOVIE, "SPIRIT OF '43)
UNIDENTIFIED MAN #1: Then there's something important you can do.
NASH: (as Donald Duck) Oh, boy. Oh, boy. Oh, boy.
UNIDENTIFIED MAN #1: Your income tax.
NASH: (as Donald Duck) Income tax?
UNIDENTIFIED MAN #1: Yes, your income tax.
NASH: (as Donald Duck) (Unintelligible) income tax.
KESTENBAUM: The film walks Donald Duck through filling out his tax form. Occupation, he writes actor. Dependents: Three - Huey, Duey and Louie.
And this wartime patriotic motivation campaign, it worked. Maybe we didn't love the income tax. But we paid it. And it's still around today.
David Kestenbaum, NPR News.
(SOUNDBITE OF MUSIC)
GREENE: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.