The Mises Institute monthly, free with membership
Volume 13, Number 9
The Dangers of Tax Shifting
The income tax has become politically vulnerable. Some
politicians have said we should replace
it with a national sales tax. Yet, far from reducing the total
tax burden, this would merely shift
the burden around from individual filers to retailers.
Therein lies the danger in any discussion of new taxes, even
if they are billed as "replacements."
Historian Charles Adams sums up five thousand years of tax-reform
fiascoes in simple terms:
"how much of my taxes can I shift off on someone else?" If
history repeats itself, we'll eventually
suffer a national sales tax and an income tax, and total
taxes will continue going up.
The income tax began in an attempt to shift the tax burden. It
was supposed to replace the tariff.
Many of those who supported the income tax believed that this was
its primary virtue. But they
were approaching the taxing problem the wrong way. The focus
should not be on who is taxed
and how, but the total tax take and the size of the
government it funds.
Today both confiscatory income taxes and trade restrictions
(tariff and non-tariff) lower living
standards and depress the economy. The very people who supported
the income tax lived to
suffer its effects. The lesson: work to make existing burdens as
light as possible, diminish the
overall costs of government, and never shift taxes around from
group to group.
Throughout most of our history, the individual income tax was
considered contrary to American
values. It violated the rights of property and gave the
government a license to spy. The income
tax was regarded as a form of slavery in which the government
laid claim to part of our labor
time. That's why Marx and Engels, who wanted the "abolition of
private property," called for "a
heavy progressive or graduated income tax" as an appropriate
inroad "on the rights of property."
The Founders, having suffered more than a century of imperial
taxation, designed the U.S.
Constitution to limit the government's power to impose direct
taxes. Even the anti-federalists,
who believed that the Constitution created too big a central
government, doubted that "any
prudent congress," as one statesmen said, would try to collect
No prudent Congress did. During the wartime "emergency" of
1812, Secretary of the Treasury
A.J. Dallas proposed an income tax in a letter to the chairman of
the Ways and Means
Committee, but the proposal went no further.
Lincoln, who favored both tariffs and direct taxes, picked up
the cause when he took office in
1860. The debt sat at $75 million, and to raise money for another
war, the president issued bonds,
raised excise taxes, and doubled tariffs. At Lincoln's urging,
Congress passed an income tax of
3% on incomes over $800. The tax bill also contained the first
loophole to encourage bond sales:
the tax was cut in half for interest on government debt.
In the midst of anti-draft riots, Treasury Secretary Salmon P.
Chase was reluctant to attempt to
collect the tax. By 1862, with the war stepped up and the debt
passing $500 million, the Northern
Congress passed a second tax bill. It imposed a 3% tax on incomes
of $600+, 5% on $10,000+,
and 7.5% on incomes over $50,000.
Wartime "patriotism" made it possible to collect the 1862 tax,
and Lincoln became the first
president to tax incomes. Predictably, Congress increased the
rates two years later. But the
income tax had not achieved political legitimacy in peacetime.
After the war, a falling deficit
allowed the anti-tax forces to win the day. Rates fell, and,
after much debate, the entire tax was
scrapped in 1872--two years before it was statutorily set to
Yet the popular image of the income tax had undergone a
permanent shift. Rather than a form of
slavery, people began to think of the income tax as a possible
replacement for the tariff. The
tariff had long contributed to sectional division. Northern
industry favored the tariff as a means
of protection from foreign competition. The South considered it
exploitation, injuring trading
relationships and forcing Southerners to pay high prices for
manufactured goods. The tariff led to
the nullification crisis and ultimately to the secession of the
For that reason, people in the South and West were anxious to
lower tariffs and pass an income
tax that would strike back at the North. The relatively pro-South
President Andrew Johnson favored the income tax. He argued that
it was the fairest way to
collect revenue because it balanced the economic interests of the
regions. (Note that the
egalitarian argument was not part of the debate: progressive
rates were seen as raising more
revenue, not that they were more "fair.")
From 1874 to 1894, Congressional proponents of the income tax
submitted 68 bills to restore it.
All came from representatives of the South or the West who were
determined that their regions
should not bear the entire revenue burden. None of the bills made
it to the House floor.
Underneath the surface of American politics, however, forces
were at work that eventually broke
down the resistance to the income tax. Northern business
interests, faced with economic slumps,
lobbied for more protection. Meanwhile, tariff revenue began to
fall, causing a growth in federal
In response to these budget trends, Congress raised
tariffs after 1874. In 1890, the McKinley
Tariff Act was signed by pro-tariff, anti-income tax president
Benjamin Harrison. It increased the
average rate on dutiable imports to an unconscionable 48%.
Southern and Western resentment
peaked, and catapulted the anti-tariff movement into the
The anti-tariff movement was now determined to shift the
burden of exploitation to the exploiters
themselves, the Northern money power. As the movement grew, for
the first time, class-warfare
populist rhetoric became part of the debate. The populist
movements viewed the wealthy classes
("robber barons," the "bloated rich," the "money bags") as
working with their minions in the
government to victimize them with tariffs.
Even if ideologically unfocused, the impulses of these groups
sprang from authentic grievances.
The country's pro-tariff lobby did consist of a regional elite in
league with government and
banking, and this elite wanted the tariff precisely because it
was all benefit and no cost. The
populists were right about their enemies. But they were wrong in
thinking the income tax would
solve their problems.
In 1892, Grover Cleveland won the presidency on an anti-tariff
platform, decrying it as "ruthless
extortion" and urging its repeal. His campaign lent unfortunate
weight to the cause of the income
tax. Adding to the pressure for new revenue, banking interests
were clamoring for more
government spending to bail out the victims of their
fractional-reserve policies after the panic of
An income tax bill was attached to the tariff bill of 1894,
and it easily passed the House. Fellow
Congressmen carried House Speaker William Wilson on their
shoulders in celebration. In an
ominous sign of things to come, the Senate version of the bill
also included an increase in the
tariff. Believing that he had been betrayed, Cleveland refused to
sign the bill, but it went into law
without his signature.
Ninety-eight percent of the population was exempt under the
1894 income tax. But the
momentum to raise it was growing because of a
socialist-egalitarian argument: the rich benefit
more from government, so they should also pay more. A year later,
the Supreme Court struck
down the income tax, on the Constitutional grounds that it was
direct and disproportionate.
Unlike today's tax debates, high philosophical arguments were
also part of the court's hearing.
Populist attorney James C. Carter argued that the tax was a
necessary weapon against the
plutocracy. The plaintiff's attorney Joseph Choate stressed the
sanctity of property rights.
The court predicted that "the present assault upon capital is
but the beginning. It will be but a
stepping stone to others, larger and more sweeping, till our
political contests will become a war
of the poor against the rich; a war constantly growing in
intensity and bitterness."
The income tax had died at the hands of the court. Theodore
Roosevelt revived the debate ten
years later by trumpeting the glories of the income tax.
Anti-tariff Democrats were jubilant. In
1909, William Howard Taft took office in the middle of the tariff
battle and a revenue shortfall.
The opportunity for a tax revolution was at hand. In an attempt
to defuse the tariff debate within
his party, Taft proposed a corporate "excise" tax (actually an
income tax under another name) of
To quiet the Democrats, Taft also proposed a Constitutional
amendment to get around the
Supreme Court. "The Congress," the amendment said, "shall have
the power to lay and collect
taxes on income, from whatever source derived, without
apportionment among the several States,
and without regard to any census or enumeration." But neither he
nor other members of his party
thought the amendment would ultimately pass.
The strength of the anti-tariff, pro-income tax movement in
the states had been drastically
underestimated. In 1913, the 36th state ratified it, and the
dreaded 16th amendment was put into
the Constitution. When tariff revenues and business profits fell
during World War I, the income
tax option proved too tempting. The 1916 Revenue Act legislated
income taxes separately from
tariffs, and we got the first excess profits tax to boot.
These were relatively small taxes by today's standards. But we
know what the future held. The
income tax would later become the major source of political and
economic coercion in American
life. At the same time, the income tax had given protectionists
cover to increase trade restrictions
even though they raised no additional revenue.
Today individual taxpayers have had it with a tax that
pillages as much as 40% of their income,
including other payroll taxes. But just as in the period between
1874 and 1916, politicians are
attempting to co-opt one anti-tax movement by suggesting we tax a
new class of citizens: retail
Anti-tax forces should stick to reducing and eliminating
existing burdens. Far more important
than how a tax is collected, or who bears the burden, is the
amount of the total tax collected. All
our efforts--intellectual and political--need to be devoted to
reducing and eliminating this
unbearable burden of the leviathan state.
Mark Brandly, the Murray N. Rothbard fellow at the Mises Institute, is completing his PhD at Auburn University