Boiling Frogs and Creeping Income Taxation

  The United States Constitution provides for routine funding of government. A pretty smart Constitutional design supplies national revenue, makes normal taxes voluntary, and limits revenue to non-confiscatory levels. For a century, tariffs funded duties assigned to the federal government, supplemented by direct taxes of finite amounts for a finite time in rare situations. Autocrats who wanted to remain autocrats needed to undermined funding constraints. In 1913, they did.

The 1913 income tax has many variables. All are easily changed. Tax rate, tax base,  deductions, bracket graduation &c. Rapid manipulation of these adjustments quickly abandoned political fictions spun to sell the original legislation. As a result, the new tax blurred, then effectively removed, the most important Constitution constraints on government. Limits imposed by voluntary tariffs and direct taxes vanished. “The tremendous expansion in the yield of this tax since 1913,” IRS wrote in 1968:  

 “has resulted chiefly from: 1) changes in law – increased rates, lower income requirements for filing returns, and lower personal exemptions enacted to defray part of unusual expenses for national defense emergencies, and 2) long-term growth of the economy resulted in larger tax yields in peace times – even though rates may have been reduced.” (emphasis in original) 

  Nearly unlimited income tax expansion became the norm. Nearly unlimited government followed. Warfare became permanent, and new wars demanded more taxes. As a result, expanded wartime-level income tax collections continued into peacetime, unchecked. Constitutionally-limited tariffs quietly retired in favor of a new cash cow – the seemingly permanent, seemingly bottomless, income tax.  

  It did not start that way. The small tax imposed on an even smaller number of people in October, 1913. While controversial, the new tax enjoyed popular support because it advertised to impose only on the very rich -- about one percent of people paid income tax in 1913. By 1945, absent any substantive change in the tax, almost all wage earners filed and paid.

  The 1913 top rate - seven percent – mushroomed to seventy-seven percent by 1918 and ninety-four percent by the close of World War II. With a one-hundred percent proposal by FDR in between! The 1913 bottom rate, one percent, grew twenty-three-fold by the end of that war. The 1913 bottom rate tax base, $20,000, decreased tenfold to $2000 by World War II. The minimum filing requirement in 1913, $3000, was more than triple the average wage of the time. By the end of World War II, a $500 floor required nearly everyone to file. The cash cow had become a golden calf.

  Of the factors that changed income tax receipts between 1913 and 1945, the most daunting turned out to be the seemingly harmless information return. The 1917 introduction of Form 1099 pressured payors to allege they paid Constitutionally-taxable income to recipients, even as the meaning of ‘income’ and ‘income derived’ for income tax purposes remained unsettled for years thereafter. As a result, no information return maker – not one -- had any idea what payments constituted income taxable under the Constitution. Still, allegations of income, without facts or law, became the conditioned routine.

  In 1944, the federal government leveraged the information return process. They decided to collect income tax on property as it was earned. The new Form W-2 caused Form 1040 filings to increase 845%, from just before World War II to war’s end. As a result, the individual income tax became government’s largest single source of revenue by 1944. Without any substantive tax changes, and with a population increase of only six percent, income tax revenues gsrew twelve-fold between 1940 and 1945. The W-2 revealed the autocrat’s worldview that government had first right to people’s property, and aimed to get that property before its true owners did. This could happen only if a nation focused on war overlooked liability, assessment and collection due process protections. They did.

  Meanwhile, courts who had opined piecemeal about the doubtful constitutionality of individual income taxes never did opine on the matter in para materia.  They never have. Narrowly crafted, off-point, and often conflicting decisions further fueled the controversy. Still unresolved, application of the income tax to people in the 21st century is accomplished only by threat, intimidation, custom, subterfuge and force.