Happy Birthday To Income Taxes
JACKI LYDEN, HOST:
Well, it may not be the happiest of anniversaries, but get out the candles anyway. This month marks the 100th anniversary of the American income tax.
Joining us to talk about a century of the tax we all love to hate is Joe Thorndike. He has a pretty exotic job: tax historian. He's just written a book called "Their Fair Share: Taking the Rich in the Age of FDR." He's also the director of the Tax History Project. Joe, thanks for joining us.
JOE THORNDIKE: Thanks for having me.
LYDEN: Are you the guy that everyone wants to sit next to at a dinner party?
THORNDIKE: You know, that's very funny because I tell people it's the worst career to have for a dinner party.
THORNDIKE: It's the worst combination of that high school class that you really hated and April 15th. You know, it's just not good.
LYDEN: You know, it's been said that some of what we think about in terms of the income tax today, even at the inception of the income tax back in 1861 that it was born of war and inequality.
THORNDIKE: What's driving the income tax when it first appears in the U.S. is a quest for two things, for money. Wars have a way of making that pressing. But it's also born of a desire to make the tax system more fair.
LYDEN: Then, of course, taxes were considered to be temporary, and it wasn't until 1913 the 16th Amendment is passed and the income tax is permanent.
THORNDIKE: Right. The one that they enact during the Civil War only lasts about 10 years and then they let it expire. And they go back to this revenue system that's all based on import taxes and then on a couple of taxes on, you know, sin products, on alcohol and tobacco and that sort of thing. And that's the only way they really raised money up until 1913.
LYDEN: So in 1913, what was the tax law? It wasn't necessarily to bring in a ton of money, I guess.
THORNDIKE: It was really driven by this existing tax structure with all of these taxes on consumption, that this was unfair, that these were regressive and they fell most heavily on poor people. And there was a growing movement that said we've got to find a new tax that'll sort of balance the scales a little more effectively. That was the income tax.
LYDEN: The high tax rate for most of the 1950s after World War II was over 90 percent. Who was paying this very high tax?
THORNDIKE: The history of the top rate is really very interesting. You know, the first top rate in 1913 is 7 percent. But only five years later, the top rate was 77 percent, thanks to World War I. Well, much the same thing happens again. During the war, it tops at 94 percent. And I think what I think was really surprising about that number, not just that it's so high, but it's so durable.
So you think, OK, that's the Democrats. But what's amazing is that, you know, numbers over 90 percent lasts all the way through the 1950s, all the way through Eisenhower's presidency, all the way through a Republican Congress in the 1950s for a couple of years.
LYDEN: Why were the taxes so high, by the way?
THORNDIKE: They're high during World War II because they need a lot of money quickly. They stay high in the 1950s because Dwight Eisenhower really is a fiscal conservative, really does want to limit deficits and then even retire debt. And so he's unwilling to compromise too much. But at the same time, you had the Democrats who have a fondness for high rates, then as now. And those two things combined kept the rates pretty high.
What's interesting again in a sort of surprising turn of events is it takes a Democrat to actually lower the rates, and that happens in the 1960s under John Kennedy who comes in and says, wow, you know, these rates, they really are ridiculous. We got to bring them down. And that'll encourage growth and make for a healthy economy. And so in the early '60s, they do bring them down to, you know, about 70 percent.
LYDEN: At its onset, were Americans tolerant to the notion of income tax? Has our mentality about the tax changed?
THORNDIKE: We say we don't like it now and we say we don't like it for all the same reasons they didn't like it in 1913 either. Very quickly, the tax got the bad rap that it has today of being complicated and intrusive and unfair. Those same complaints were being made in the 19 teens. So I think the real puzzle here is, well, we hate it now theoretically, we hated it then. Why do we still have it 100 years later?
The tax does two things really quite well. It does the most important thing that a tax has to do. It raises money. It raises money pretty efficiently and pretty quickly. The second thing it does well is that it comports with our notion of what's fair. You look at what people say about the income tax. They're not thrilled with it, but they do believe that progressive income taxes are reasonably fair. The fairness of this tax combined with its productivity as a revenue device, those two things really make for a tax that lasts 100 years.
LYDEN: At the risk of being characterized as a Washington (unintelligible), I think you would be a fascinating dinner party companion.
THORNDIKE: Well, I'm glad you think so.
LYDEN: Joe Thorndike is the director of the Tax History Project and the author of "Their Fair Share: Taxing the Rich in the Age of FDR." We're talking about the 100th anniversary of the American income tax. Joe Thorndike, thank you.
THORNDIKE: Thank you.
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