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Special Interests and the Adoption of the Income Tax in the United States

Published online by Cambridge University Press:  03 March 2009

Bennett D. Baack  and
Edward John Ray
Bennett D. Baack
Affiliation:
Associate Professor and Professor of Economics at Ohio State University, Columbus, Ohio 43210.
Edward John Ray
Affiliation:
Associate Professor and Professor of Economics at Ohio State University, Columbus, Ohio 43210.
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Abstract

Perhaps no single element involved with the rapid assumption of economic power by the federal government was more important than the passage of the income tax, the means by which the increasing role of government was financed. We explain the political and economic interests that came together to successfully pass the income tax, and we provide extensive empirical evidence regarding the determinants of the passage of the Sixteenth Amendment to the Constitution of the United States.

Type
Articles
Information
The Journal of Economic History , Volume 45 , Issue 3 , September 1985 , pp. 607 - 625
Copyright
Copyright © The Economic History Association 1985

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References

We wish to thank this JOURNAL's editor and anonymous referees for their helpful comments. Earlier versions were given at the Public Choice Conference and the Western Economic Association Conference in 1983. We also want to thank Randy Olsen for econometrics counseling and Joe Denekamp for tireless research assistance.Google Scholar

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2 For an in-depth discussion of these problems see Smith, Harry E., The United Slates Federal Internal Tax History From 1861 to 1871 (Boston, 1914), chap. 3.Google Scholar

3 Report of the Commissioner of Internal Revenue (Washington, D.C. 1872), p. 115.Google Scholar

4 Hicks, John D., The Populist Revolt (Minneapolis, 1931), pp. 97, 124, 428–29.Google Scholar

5 Hicks, Populist Revolt, pp. 223–29, 435–39.Google Scholar

6 Congressional Record, 04 29 session (Washington, D.C., 1898), pp. 4457–59.Google Scholar

7 The 1894 bill stipulated a 2 percent tax of income in excess of $4,000. The 1898 bill stipulated a 3 percent tax on income in excess of $3,000. The 1909 vote was, of course, on the Sixteenth Amendment to the Constitution. The first tax bill passed after the adoption of the amendment in 1913 set forth the following: 1 percent $50,000 to $75,000 4 percent $75,000 to $100,000 5 percent $100,000 to $250,000 6 percent $250,000 to $500,000 7 percent $500,000. Congressional Record, 02 1 session, (Washington, D.C., 1894); April 29 session, (1898); July 12 session, (1909); and 1st session (1913).Google Scholar

8 For a detailed account of the American military build-up, see Weigley, Russell, The American Way of War (Bloomington, Ind. 1977).Google Scholar

9 Department of the Treasury Annual Report of the Secretary of the Treasury (Washington, D.C., 1947); andGoogle ScholarStatistical Appendix to Annual Report of the Secretary of the Treasury (Washington, D.C., 1971).Google Scholar

10 Studenski, Paul and Krooss, Herman, Financial History of the United States (New York, 1952), p. 215.Google Scholar

11 For a summary of the congressional debates on naval matters see Seager, Robert, “Ten Years Before Mahan: The Unofficial Case for the New Navy,” Mississippi Valley Historical Review (12 1953), pp. 491–512.Google Scholar

12 U.S. Congress, Annual Report of the Secretary of the Navy (Washington, D.C., 1885), p. xvii.Google Scholar

13 Studenski and Krooss, Financial History, p. 214.Google Scholar

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15 Studenski and Krooss, Financial History, p. 205.Google Scholar

16 Baack, Ben and Ray, Edward John, “The Political Economy of the Origins of the US. Military Industrial Complex,” this JOURNAL, 45 (06 1985), pp. 369–75.Google Scholar

17 Congressional Record, 07 12 session, (Washington, D.C., 1909).Google Scholar

18 To estimate the extent to which state pensions per capita in 1910 were biased toward low probability of support states, we estimated the following relationship: State pension per capita in 1910 = 1.712 - 0.331 (Congressional income-tax support 1894–1898) (11.65) (2.16) Absolute value of t-statistics are in parentheses; R2 = 0.0921.Google Scholar

19 Brassey, T. A., ed., The Naval Annual (Portsmouth, N.H., 1902); Annual Report of the Secretary of the Navy (1883–1913).Google Scholar

20 One referee pointed out that the labor movement represented a source of support for the income tax. Therefore, we tried to test for union effects. The 1890s marked a turning point for union membership in the United States. During the early years of the decade membership experienced a general decline. Among the hardest hit were the unions for steel workers, carpenters, and bricklayers. Moreover, the membership of the Knights of Labor which had been over a half million in 1887 declined to less than 75,000 by 1893. Therefore, we did not expect labor-union interests significantly to affect the vote on the income-tax law of 1894.Google ScholarDuring the later years of the 1890s, however, union membership underwent a rapid expansion. What had been a total union membership of 447,000 in 1897 reached 2,184,200 by 1910. A major beneficiary of this expansion was the American Federation of Labor (AFL). Unfortunately, we lack labor-union data at the state level. Therefore, we used the number of labor strikes in states between 1901 and 1905 as a proxy for union strength across states at the time of the vote on the amendment. Union activity in target states was positive but insignificant in explaining approval of the income-tax amendment at the state level.Google Scholar

21 Congressional Record, 61st Cong., 1st sess. (Washington, D.C., 1909), p. 3929.Google Scholar