The Income Tax’s Progressive Roots
One argument against a tax shift is that the change would violate the spirit of the progressive income tax. It sounds plausible, but in reality the opposite is true. If Congress kept the income tax for higher incomes and shifted part of the rest to polluting natural resources, the result would be the kind of system that early advocates of the income tax intended.
The income tax grew out of decades of turmoil as the U.S. evolved from an agrarian economy to an urban one in the years before World War I. Robber barons still rode high. The gap between rich and poor was the widest in American history. And as the country prepared for the first time to enter a European war, a major new funding source was needed. President Woodrow Wilson proposed an income tax, but on whom would it fall?
Business interests and Republicans wanted a broad-based tax that fell heavily on the masses. This would “bring home to them the responsibilities of government,” and thus ensure less government, as one editorial writer put it. The Wilson administration basically shared this view. Populist Democrats, by contrast, thought ordinary Americans were already paying their fair share—and more—through excise taxes and tariffs. They saw the European war as a boondoggle for arms makers and big financial interests, who should pay for their own adventure.
“Jingoes should pay for jingoism,” said Warren Worth Bailey, congressman from Allentown, Pennsylvania and a former newspaper editor. If the wealthy had to pay for war, legislators like Bailey thought, there likely would be less of it.
A number of populist leaders were followers of homegrown economist Henry George, who argued passionately that the robber barons were exacting gain from resources nature had created for the common good. They were reaping what they did not sow, and this “unearned increment” is what government should tax.
The income tax that Congress enacted was pretty much in this populist mold. Along with an estate tax and a levy on munition makers, it aimed squarely at the highest incomes, and at corporate profits derived from land and natural resources. The new system continued more or less until World War II, when Congress dipped directly into the paychecks of working people for the first time.
It was Franklin Delano Roosevelt who imposed “precisely the kind of revenue system that business groups had sought from the Wilson administration in 1916,” says Professor Elliot Brownlee of the University of California at Santa Barbara. In broad outline, FDR’s system lives on today. Even if Congress were to restore high rates at the top, as progressives urge, the income tax burden on the working and middle classes would still be large. Given that history, shifting part of that burden from work to polluting industries can be seen as a kind of restoration, a return to something resembling what the populist framers of the income tax intended.