President Bush’s unfolding of a massive tax-reduction plan for Americans has sparked a political fight as has every such presidential effort in the past.
In the old days, the federal government taxed Americans with a light hand. Under President Washington, there were excise taxes (on liquor for example) and the indirect taxes of tariff duties on foreign goods, which protected American business from outside competition while raising revenue.
But other than these two levies, Americans rich or poor were tax-free as far as the federal government was concerned. Revenues from tariffs and excise taxes, as well as from the sale of federal land, were more than enough to pay the government’s bills, with years of surpluses and some of the money turned over to the states for use for whatever projects they desired.
Still, controversies raged. By the early 19th century, farmers were crying foul, arguing that they were selling their goods worldwide in markets that gave them no government protection, but that they were buying their farm implements from American businesses protected by tariffs from foreign competition.
Yet tariffs continued to rise, reaching a level in 1828 that critics called the “Tariff of Abominations” and leading Vice President John C. Calhoun to resign in 1832, go back to South Carolina and run for the Senate to assist in defeating such political maneuvering.
But high tariffs continued well into the 20th century, with permanent reductions not surfacing until the 1930s.
In the interim, anti-tariff forces, mostly farmers and factory workers, advocated federal income taxes for the wealthy, which Congress enacted but the Supreme Court declared unconstitutional in 1895.
A federal income tax was made legal by the ratification of the 16th Amendment to the Constitution in 1913, but this brought more controversy.
The first income taxes on the wealthy were modest, with the top rate only 6 percent, scarcely enough to “soak” the rich and big business. Even when rates rose during World War I under Woodrow Wilson, they fell back during three successive administrations in the 1920s Warren G. Harding, Calvin Coolidge and Herbert Hoover.
Income-tax rates rose during the administration of Franklin D. Roosevelt, but the upward scale was accompanied by regulations or “loopholes” that permitted people and businesses to lower their tax bills by engaging in socially responsible activities such as giving money to charity.
About the only time virtually all Americans were pleased with income-tax increases was in 1943, when the United States, in the words of FDR, was engaged in “the greatest war this nation has ever faced.”
The size of the war required that the income-tax system, originally geared to high-rollers, undergo democratization. But because there was no withholding system, GI Joe and Rosie the Riveter would have to come up with all the tax money at once.
Congress and the president were in a political pickle. After five months of debate, Congress compromised: Withholding for 1943 taxes would begin on July 1, and 1942 taxes would be forgiven on a sliding scale 100 percent for those with a tax liability of $50 or less; $50 for those owing between $50 and $66.67; 75 percent for everyone else.
Taxpayers were elated but not for long. As withholding began to take a bite out of weekly pay envelopes, the compromise didn’t look so great. In 1944, Congress tinkered again with the tax code, and the result was a bill so complicated that Roosevelt vetoed it.
“It is squarely the fault of the U.S. Congress,” he said, “in drafting the law which not even a dictionary or a thesaurus can make clear.”
Congress reacted quickly to FDR’s quest for tax simplification. It overrode the veto.
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