What if there were no taxes?
The first federal income tax in the U.S. was implemented to support the Civil War, so what
was the government relying on before then?
And how would no federal income taxes affect the U.S. today?
If the old adage remains true and the only certain things in life are death and taxes,
then it's no wonder a lot of us feel like we're dying around April 15th.
But even though taxes have been a cornerstone of the United States (and prior to that the
colonies of the Americas) since its inception, federal income taxes weren't always a part
of that equation.
So for this episode, I wanted to dive into an alternative history that asked the question:
what would the U.S. look like if we didn't have a federal income tax?
So for the first part of this experiment we have to ask:
What preceded the federal income tax?
And how did it come into place?
Well as I mentioned before, taxes are even more American than your favorite flavor of pie.
There were colonial taxes imposed on the 13 colonies by Great Britain's Parliament but
they weren't based directly on the amount of income a person made per year.
Instead, they were focused on the indirect taxation of goods and services, like the the
Stamp Act of 1765 that taxed all paper goods.
Some of these were designed to collect revenue to enrich the Crown and pay for military defense
in the colonies.
But they weren't exactly popular, leading to cries of "no taxation without representation!"
and a bunch of tea getting tipped overboard into the Boston Harbor, among other things.
But once the 13 colonies became an independent nation, they didn't do away with taxes all together.
Because waging war and building a central government is kind of a spendy business.
So they looked to other ways of using indirect taxation to cover these new costs and also
to pay off some of the debts they had inherited from the Revolution.
This included the estate tax of 1797, which took a portion of wealth passed on to heirs
from deceased relatives.
And there was a consistent use of tariffs and taxes on certain goods like tobacco, liquor,
sugar, legal documents and whiskey (check out the info on the 1794 whiskey rebellion
to learn more).
Ok, so I bet you're thinking, "That's all well and good Danielle, but that was also
a pretty long time ago.
When did the federal government start taking home a huge chunk of change out of peoples'
paychecks?"
Well, the terrible thing about war (outside of death and devastation) is that it's expensive...and
it's pretty much always been expensive.
The first federal income tax in the U.S. was implemented by President Abraham Lincoln on
August 5th, 1861, in large part to help pay for the Civil War.
But this new tax didn't impact everyone immediately.
Instead, Lincoln and the Congress passed the Revenues Act which took a 3% tax on anyone
with an annual income of over $800.
And this law defined "income" relatively broadly to include income "derived from
any kind of property, or any professional trade, employment, or vocation carried on
in the United States or elsewhere or from any source whatever."
And while you gotta love a legal definition that ends in "whatever" like a teen from
Clueless, the law was eventually repealed in 1872.
There were a couple of subsequent attempts to get an income tax on the books but they
were generally unsuccessful and unsustainable
But we still weren't done with federal taxation.
In 1909, the federal income tax reared its head one more time in the form of the 16th
amendment which was later ratified in 1913.
And this marked a huge shift in the way the government was able to rake in the dough.
Prior to this, there was a sentiment that the government should not be aware of citizens'
private financial affairs, so a clause was added in 1916 to make sure that this information
on tax filings was kept confidential.
Also unlike today, most people weren't even paying taxes.
Less than 1% of Americans ended up having to fork over any money in those early income
tax days because of generous exemptions and the fact that it was only intended to tax
people making over $3,000 a year.
And the graduated rates started at 1% of income and were as high as 7% for those with an annual
income over $500,000.
But comparatively speaking that's still pretty low.
But war, what is it good for?
Definitely taxes (and sing it again y'all).
Because during World War I the federal government was in need of funds after declaring war on Germany.
Starting in 1917, congress passed a series of war revenue acts that did away with a lot
of prior exemptions and raised the tax rates.
This meant that about 5% of Americans had to start paying taxes.
And FDR's New Deal and the onset of WWII also saw the increase in federal income tax collection.
And although it's gone up and down, run at a surplus and a deficit, and remained a
point of contention among those who have to pay them, federal income taxes have in fact
remained as inescapable as death throughout the 20th and 21st centuries.
But that brings us to our third question and the hypothetical portion of the episode: What
would happen if there were never any federal income taxes?
Let's start with the Civil War: The Federal Government is denied the ability to create
direct taxes.
So if Lincoln and Congress' plan to establish a federal income tax had been denied, this
would have set an important historical precedent, essentially denying the federal government
the right to extract direct taxes from its citizens.
As a result, regardless of the outcome of the Civil War, the idea of state's rights
would have become more important.
If the South had won, then there's a precedent for states having the right to self-autonomy
whenever they decide.
And if the North still won, there's a precedent that the federal government doesn't have
the right to collect income taxes in any situation, even when the U.S. was on the verge of implosion.
As a result the states would become more independent and the federal government would be weakened.
But to figure out the larger historical impact we have to figure out what most of your federal
income tax dollars are even paying for.
And the largest percentage of your tax dollars go towards military spending and defense.
And the debate about if the federal government even had the right to collect taxes was always
hottest when there were times of war and increased military activity.
Which brings us to our second big impact: Decreased Military Activity in the first half
of the 20th century.
In our alternate timeline, denying Lincoln the right to create a federal income tax sets
a legal precedent.
So there's no grounds for the 16th amendment, which means that the federal income tax isn't
a constant factor in the running of the government.
At crucial points in U.S. history the federal income tax was used to fund war efforts.
The first major war effort of the 20th century that capitalized on this tax was World War I.
So without the federal government's ability to raise funds quickly, this means there's
a continued isolationist approach leading to no U.S. military involvement in WWI.
Heck there may not have even been a WW2 without the completion of the first one.
So a result the U.S. never gets a taste for international military intervention at other
junctures in the 20th century, because they simply couldn't afford to on a unified national level.
Lastly without Federal Taxes the United States is a lot less...Unified.
Because federal income taxes are collected by the central government and redistributed
amongst the 50 states, there is a certain amount of collective and political logic that
goes into who gets what.
For example, in 2014 South Carolina got $7.87 for every $1 dollar its citizens paid in federal taxes.
But without the federal taxation, each state's economy would be much more independent.
And that's because state wealth varies wildly, with Mississippi, Arkansas, West Virginia,
Alabama, and Kentucky ranking on the tail end of poorest states in 2015, while Maryland,
Hawaii, Alaska, New Jersey, and Connecticut were on the high end based on median household
income.
So over the course of the 20th & 21st century federal income taxes that went towards paying
on the national debt would likely be eliminated in favor of taking on just state debts, and
the other categories like education and social programs would also vary based on the wealth
of the relative states.
So how does it all add up?
Well the federal income tax is strangely symmetrical: it was enacted at different points in U.S.
history to pay for war efforts and even today the biggest percentage of the money you pay
to the IRS goes towards military and defense.
But without this boost of money at various points in the historical timeline, the federal
government would likely be much weaker and we'd have more independent states.
But what do you think?
If federal income taxes hadn't been made into the permanent law of the land with 16th
amendment, how would that impact the timeline for the U.S.?
Would we have states ruling or would the federal government have survived?
Drop those comments below and we'll catch you next week.
Hey guys!
Thank you for all of your incredible comments and questions on last week's episode on
"Origins of Race," here's what some of you had to say.
So Michael Théodore-Robinson on Facebook asked a question about indenture, since he
believed that before 1662, all black laborers were indentured similar to their European
counterparts.
He also mentions the case of Anthony Johnson, an Angolan man, who is indentured and later
went on to become a landowner and to sue in court in order to enslave another black indentured
servant.
So this question is great because it opens up a lot of complexities in parts of the story
related to early American history.
Yes, there were black indentured servants in the early years of the colony of Virginia,
but not every black laborer was indentured, as many who were brought into the colonies
were actually enslaved.
As time went on and we pass the midpoint of the 17th century, the laws around chattel
slavery in the early colonies were solidified around black laborers in order to guarantee
perpetual slavery and to increase the personal profits of early capitalists.
So thanks for writing, Michael!
So Rebecca Hodges and Artieboy Ramirez, also on Facebook, both asked questions about resources
that focused on cultures outside of the U.S. and also why this episode was limited to the
U.S. only.
So for more reading drop down into the works cited, and there are a few things of interest
that cover a broader spectrum outside of U.S. context.
And I limited the episode in scope only because the histories of race around the world do
share things in common but also have divergent histories and specific context.
I wanted to give you a short episode that accurately trace just one of these genealogies
rather than conflating many global histories into one short timeline.
So thanks to you both for writing!
And this last shout out goes to Social Studies teacher, Danielle Ketterson, thanks for watching
and for commenting and say "hi" to all of your great students for me!
So that's it for now and we'll see you next week!
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