by Jesse Eisinger
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In his Rose Garden speech launching a global trade war by announcing the most sweeping tariffs in modern history, President Donald Trump bestowed a history lesson on his audience that diverged from the factual record:
“Then in 1913, for reasons unknown to mankind, they established the income tax so that citizens, rather than foreign countries, would start paying the money necessary to run our government. Then in 1929, it all came to a very abrupt end with the Great Depression, and it would have never happened if they had stayed with the tariff policy; it would have been a much different story.”
So why did we institute an income tax? Were there any humans who knew what the reasoning was? And did the actions of 1913 lead to the Great Depression in 1929?
There is a clear consensus among historians on these points. No, the income tax was not a mistake.
But it was something stranger: both a 40-year struggle and an accident.
In 1913, the states ratified the 16th Amendment, which gave the federal government the power to “collect taxes on incomes, from whatever source derived.”
This was not the first income tax effort, however.
For a few short years during and after the Civil War, the United States imposed its first tax on income to help fund the massive costs of the war. Placed on relatively high incomes but only collecting a modest percentage, it was cast as both a way to generate needed revenue and a way to maintain fairness.
Yes, that’s right, one of the chief selling points of taxing income was that it was a way of achieving “equity” in the burdens of the war. Responding to allegations that only poor men were fighting and dying, President Abraham Lincoln and his Republican Party made sure the law required that the taxes people paid would be publicly disclosed. Unsurprisingly, the wealthy men of the dawning Gilded Age did not like seeing their tax information in the pages of The New York Times. Wealthy interests forced a repeal of the income tax in 1871, and the federal government returned to funding itself with proceeds from user fees and tariffs.
Efforts to rein in the rich persisted, however. Congress moved in 1894 to reintroduce an income tax. The populist Kansan politician William Jennings Bryan gave a famous speech on the floor of Congress. Responding to the argument that the wealthy would leave America if they had to pay such a tax, then proposed as 2% on the top incomes, he said:
“Of all the mean men I have ever known, I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 per cent deep. … If ‘some of our best people’ prefer to leave the country rather than pay a tax of 2 per cent, God pity the worst.”
Congress passed the law. One year later, however, the Supreme Court controversially rejected it, 5-4, in the case of Pollock v. Farmers’ Loan and Trust Company. The party of Lincoln, now dominated by wealthy Northeastern interests, celebrated. Its 1894 platform had declared that an income tax “will bring odium on any party blind enough to support it” and predicted that party’s “funeral.”
Populists like Bryan didn’t give up. A young Democratic congressman from Tennessee named Cordell Hull said in his maiden speech on the floor in 1908, in which he proposed passing another income tax, that he was willing to risk the “odium and the funeral.”
Hull’s effort didn’t gather much momentum that time, but he didn’t give up. He obsessively talked with anyone and everyone about an income tax, so much so that when leaders of his own party saw him approaching, they “would turn and walk in another direction,” he later recalled.
Soon he would succeed, but only thanks to the help of the party that was against the income tax — the Republicans.
In 1909, the country was facing a severe drop in federal revenue and a widening deficit after the financial panic of 1907, which had ended only thanks to a bailout led by J.P. Morgan, the most powerful banker of the age. At the same time, with new responsibilities like trying to keep food and medicines safe and maintaining a growing empire abroad, the federal government’s needs were exploding. A few years earlier, Congress had allocated $1 billion in spending for the first time ever (about $30 billion in today’s dollars).
To address these issues, the Republican party turned to tariffs. Tariffs not only remained the cornerstone of Republican economic policy, they were also the key to the party’s political power. Each time a new tariff bill came up for consideration was like “throwing bananas in a cage of monkeys,” economist Henry George said. Lobbyists from every corner of American industry descended on the capital to push for lower imposts on their companies and, if possible, to have them raised on someone else.
Tariffs and levies on things like tobacco and alcohol were deeply unpopular with the public. They were regressive, costing working people a far greater percentage of their income than the rich. In one of his speeches, Hull attacked the new dominant class of oligarchs: “The world has never seen such colossal fortunes as we behold in the present age … the Carnegies, the Vanderbilts, the Morgans, and the Rockefellers, with their aggregated billions of hoarded wealth.”
Hull said, “It would seem that this class of people consider themselves almost immune from any kind of taxation.” He closed a speech with a warning to his congressional colleagues: “Public sentiment is becoming aroused.”
In Washington, lawmakers had a bounty of novel ideas for raising funds. Some members of Congress suggested an inheritance tax, others a corporate profits tax, and still others wanted some version of a stamp tax on commercial documents. As president, Theodore Roosevelt supported an income tax, though he didn’t do much to push it legislatively. Most Republican senators, many of whom were millionaires themselves, had mild aversions to some of the proposals and a particular loathing for the income tax.
Nelson Aldrich, the Senate majority leader from Rhode Island, a millionaire and the father-in-law of John D. Rockefeller Jr., was arguably the most powerful politician in the country at the time. Teddy Roosevelt nicknamed him the “King Pin.” In 1909, Aldrich was trying to pass a new tariff bill. Hull’s Democrats posed a problem for him, but not the only one. He also faced a rebellious faction within his own party, the progressive Republicans. These were largely Midwestern and Western leaders who argued for what they described as working people’s interests, as well as reforms to improve public safety and the strengthening of labor unions. They also supported an income tax.
Aldrich tried a series of legislative maneuvers to delay votes on anything about the income tax. The proponents were undeterred, and, as a next step, he and then-President William Taft put their weight behind a corporate income tax, contending that it would be a lesser evil than a personal income tax. The wealthy did not like it, but it passed surprisingly easily, leaving Republicans hopeful the income tax was dead. In a private letter to a friend, the president explained, “A good many people who are attacking [the corporate income tax] now will be glad to use it as a means of preventing the income tax later on.”
Taft proved to be overly optimistic. Supporters of the income tax kept pushing, seeking to raise money directly from the wealthy. A debate ensued about whether Congress could simply pass an income tax law or, since the Supreme Court had struck one down recently, whether a constitutional amendment was needed. Hull pointed out that the makeup of the court had changed and argued that a law could now pass muster with the justices.
Then, one progressive Republican proposed an income tax amendment.
Aldrich pounced on what he perceived as his opponents’ misstep. He threw his support to the measure as a means of placating the advocates for a national income tax. In exchange, enough lawmakers agreed to back Aldrich’s tariff bill.
Aldrich, of course, did not support the income tax amendment, but he believed it was too radical to be ratified by three-fourths of the states, the minimum required by the Constitution. Leading politicians assumed that the defeat of the amendment would likely kill the income tax for years, if not a generation.
Hull agreed with that analysis and was despondent. “It has long been understood that the Republicans never support a worthy cause until forced by public sentiment. Too stupid to devise and enact wholesome laws and to formulate and execute sound administrative policies, this piratical organization is wont to wait until Democrats point the way,” he said in a speech on the floor.
And so Nelson Aldrich, the senator who had done more than almost any other American politician in history to protect the wealthy, introduced what would turn out to be an historic measure to amend the Constitution and explicitly allow income taxes on the rich. A few days later, with little fanfare, the amendment passed the Senate by a unanimous vote of 77-0.
Soon after, Congress passed the Payne-Aldrich Tariff bill, giving Aldrich his victory.
But Aldrich had miscalculated and Hull had been too gloomy. After a slow start for the ratification movement, political winds shifted and enough states came around. The amendment was ratified four years later. Then it fell to Hull to almost singlehandedly write what became the 1913 income tax law.
Hull’s plan proved prescient. He had foreseen that if the United States ever became entangled in a war that involved attacks on shipping, imports would dry up and tariff revenue would plummet. When the United States joined the war against Germany in 1917, Congress had to raise income tax rates to generate the money needed to pay for the expense of sending soldiers to Europe.
So no, President Trump, the origins of the income tax are not lost to history.
But did the tax cause the Great Depression 16 years after its enactment, as Trump has argued? No serious economist thinks so. Here’s one data point: In the 1920s, Republicans regained the presidency. Andrew Mellon, one of the richest men in the country, became Treasury secretary. One of the main causes he worked for was lowering income taxes, and the lead-up to the worst economic calamity of the 20th century was actually marked by a decline in those tax rates.
The evidence is similarly clear on Trump’s argument that continued reliance on tariffs to fund the government would have averted the Great Depression. In June of 1930, President Herbert Hoover signed into law the Smoot-Hawley Tariff Act, significantly raising taxes on imported goods in hopes of boosting American industries and increasing domestic employment. Hoover brushed aside the arguments of his own economists who warned that other nations would respond with their own tariffs, touching off a trade war in which every country would lose.
Economists now agree that Hoover’s tariffs deepened the economic downturn that had begun with the 1929 stockmarket crash. President Franklin Delano Roosevelt gradually reduced the tariffs during his presidency, and his Democratic and Republican successors continued that pattern well into the 21st century.
Today’s situation has similarities to the pre-income-tax years. The American economy is again marked by wealth inequality, with the largest gap between rich and poor we’ve seen since the Gilded Age. We are having debates about how to reduce the federal deficit, about how to fairly and adequately tax the rich and about what the appropriate size of government would be. Last week, Trump reached back in history to restore U.S. tariffs to the Smoot-Hawley levels, triggering a global selloff in stock markets around the world.
