5. The Revolution of 1913

CHAPTER V

The Revolution of 1913

THE CIVIL WAR income-tax law, or laws, underwent several changes; but each change specified the same terminal date, 1870. Political promises being what they are, the last law was continued until 1872. This adherence to a terminal date is worth noting; it is a left-handed admission that the taxation of incomes was generally held to be obnoxious, perhaps unconstitutional, and was tolerated only as a temporary necessity. It was a war measure. Several Congressmen, from time to time, offered bills for the resumption of these taxes, but their efforts died a-borning. Two generations had to come and go, and two depressions had to be suffered, before Americans were ready to accept complacently the confiscation of their property. A quick look at the economic causes of this moral deterioration is in order.

The period after the Civil War was characterized by the customary boom followed by the inevitable bust. War stimulates productive activity, and the habit carries over into the peacetime. Everybody keeps on being busy. And everybody keeps on buying because everybody has a lot of the bogus money issued by the government during the war; also, everybody has bonds which can be cashed in or borrowed upon. The boom is on.

The post-Civil War boom was accelerated by the promise of the West; the prairie was being penetrated by miles and miles of railroad. It seemed that prosperity not only was here to stay, but that it would be a constantly expanding prosperity. Men gambled on it. They speculated on the future; they bought pieces of the future in the form of land and industrial securities, and paid prices that were based on the belief that people would grow richer and richer, forevermore.

In 1873 the inevitable depression set in. A depression is a halting of production. Production stops when people cut down on their consumption. They are compelled to curtail because they burdened themselves with obligations during the boom and now they are unable to meet the interest payments. Values did not rise as fast as they had expected; mortgages and other debts hang heavy on their necks, and in an effort to save their original investment they cut down on their consumption. Cutting down on consumption means putting people out of jobs, and so the whole house of cards collapses. Only when the false values are liquidated, the mortgages wiped out, can there be a resumption of production. The depression is a period of deflation following a period of inflation.

But hungry people are impatient. They cannot wait for deflation to wipe out the debris of their own orgy. A much quicker cure is called for, and the medicine that promises a quick cure is money. During the war, it was reasoned, the government printed greenbacks and there was prosperity; why not print more greenbacks and force prosperity to come back? And so, during the depression of 1873–76, and for twenty years after, there was a loud clamor for greenbacks, plus silver money to supplement the scarce gold. This was the principal recipe of the social doctors of the times, a loud-mouthed lot who acquired the generic name of Populists.

These do-gooders were most vocal in the new West, where the “hard times” hit hardest and held on for the longest time. The story of this area is the story of the railroads. In the light of later experience, we can describe the railroad expansion of the 1880’s as a make-work program, fostered by government subsidies and bounties. There was no economic need for most of these railroads. They were not built to serve an existing population, but to attract population from the eastern seaboard and from Europe. They amounted to a suburban land promotion. Even before they were built, when the companies had only pieces of paper giving them franchise rights, the bonanza that awaited prospective “empire builders” was advertised. All one needed to do to cash in on this promise was to buy a piece of land from the railroad companies, land which they had got for nothing from the government and which was still worthless and would continue to be worthless until settlers made them productive. With a gleam in their eyes, the settlers paid the companies’ price by pledging their future earnings on the land; they mortgaged themselves to the hilt. Of course, their earnings would prove for a long time to be insufficient to meet their living expenses as well as the interest on the mortgages. Add to this sad picture the high freight rates which the monopolistic railroads charged them, and you have a panorama of gloom.

The plight of these farmers was made worse by the protective-tariff policy of the government. The best they could get for their products was the competitive world price, while the manufactures they bought, from the East, were loaded down with duties. Next to their demand for more money, the Populists clamored for lower tariffs.

It is not difficult to see that the boom and the bust were stimulated, if not caused, by acts of government, aided and abetted by the natural cupidity of people. But a people who feel a sense of hurt are not likely to look for basic causes, and are surely not inclined to blame themselves. They must have a “villain” on whom to vent their spleen; just as a child is satisfied when the mother spanks the wall against which the child has struck its head.

So, during the latter part of the nineteenth century, Americans took to the class-war doctrine recently imported by the socialists; here was a plausible cause of all their misfortunes, a logical scapegoat for their dissatisfaction. And the words that hung on the lips of the country were “plutocracy” and “robber barons” and “bloated rich” and “money bags,” with suitable overtones. Also, since the opulence of the country was concentrated in the East, sectionalism added fire to the class-war doctrine, and “Wall Street” became the ultimate cause of all the economic ills of the country.¹

The socialists had also imported the idea of a graduated income tax. Their prophet had written that this is the ideal instrument for destroying the hated capitalistic system, and they were in duty bound to promote it. It took Americans a long time to see eye-to-eye with the socialists on this matter of abolishing capitalism, for the tradition of private property was too strongly imbedded in their culture; but the income tax appealed to them as a means of wreaking their vengeance on those they hated—that is, those who had more than they had. By 1891, the Populists, who had by that time coagulated into the People’s Party, included an income-tax plank in their platform; the Democratic Party later appropriated it.

Lots of learned treatises have been written on income taxation, and a wealth of erudition has been expended in its support. But when one looks to bottom causes one finds them quite simple:

Income taxation appeals to the governing class because in its everlasting urgency for power it needs money.

Income taxation appeals to the mass of people because it gives expression to their envy; it salves their sense of hurt.

The only beneficiaries of income taxation are the politicians, for it not only gives them the means by which they can increase their emoluments but it also enables them to improve their importance. The have-nots who support the politicians in the demand for income taxation do so only because they hate the haves; although they delude themselves with the thought that they might get some of the pelt the fact is that the taxing of incomes cannot in any way improve their economic condition. So that, the sum of all the arguments for income taxation comes to political ambition and the sin of covetousness.

In 1893 the country had a new depression and a new president. Grover Cleveland, though endowed with more integrity than the run-of-the-mill politician, nevertheless had to “do something” to satisfy the dissident elements. He asked Congress to lower tariffs and to make up this loss of government revenue with a tax on corporation incomes. Congress, heeding the screams of the Populists and the bombast of William Jennings Bryan, put through a bill calling for a two-percent tax on all incomes, with variations, and a deeper cut in tariffs than the president requested. This bill (which became law without Cleveland’s signature) was declared unconstitutional by the Supreme Court before it became effective. The arguments for and against the bill, and some comments by the Court, are worth noting in the light of our later experience. But we might digress for a moment to examine the use of a demand for tariff reduction to introduce income taxation.

A tariff duty is a tax on consumption, and it is a tax from which the protected manufacturers derive a profit. The Populists, representing areas that had no manufactures quite soundly denounced tariffs as an imposition on farmers and wage earners and as a special privilege conferred upon a small class in the East. The argument had too much weight to be easily ignored. Yet, the fact was that the government depended on tariffs for nearly half its revenue, and a cut in tariffs was a threat to the United States Treasury. For this argument the Populists were prepared with their cherished “soak the rich” proposal, the income tax Hence, the bill of 1894 and the several income-tax bills introduced later, linked tariff reduction with income taxation. Not until the constitutional amendment was passed by Congress was the fiction dropped that tariff reduction and income taxation are related.

The Populists, as do all reformers, assumed that social good can be achieved through political action. They ignored the age-old fact that whenever the government does “good” it acts in the interests of some at the expense of others, meanwhile acquiring power for itself. The end product of government intervention in the economy of the country is more power for government. It never gives up power; it never abdicates.

Hence, the idea that the government would give up tariff revenue in exchange for income-tax revenue was contrary to all experience. It promised to make the swap, and perhaps its leaders believed the promise, but the nature of government is such that it cannot give up one power for another; not permanently, at any rate.

The historic fact is that tariffs rose higher than ever after income taxation was ultimately constitutionalized.² The income tax so enriched the Treasury that the revenue from tariffs became unimportant, and the government could afford to give more and more protection to the manufacturers; not only did the government thus gain the political support of the manufacturers, but it also shared in their tariff-enlarged profits through the income tax. If the government did not have the income tax it could not have raised the tariffs so high as to make importations impossible except for luxury goods. For, in order to get revenue the government would have had to encourage importations by keeping tariffs low. It would have had to pursue a tariff-for-revenue policy rather than a protective policy. The effect of income taxation on tariffs can be seen when we reflect that in 1894 the government’s income from tariff duties amounted to 44 percent of its total revenues, while in 1950 less than 2 percent came from that source.

However, the Wilson tariff bill of 1894, with income-tax attachment, was passed. It was passed for two reasons: first, it reflected the growing “soak the rich” enthusiasm of Americans; second, it catered to the socialistic idea that was getting hold, namely, that the government is the ideal agency for the economic redemption of mankind. How much headway this second notion had made can be guessed when one reads the following argument by Representative David De Armond, of Missouri:

“The passage of the [Wilson] bill will mark the dawn of a brighter day, with more sunshine, more of the songs of birds, more of that sweetest music, the laughter of children, well fed, well clothed, well housed. Can we doubt that in the bright, happier days to come, good, evenhanded Democracy shall be triumphant? God hasten the era of equality in taxation and in opportunity. And God prosper the Wilson bill, the first leaf in the book of reform in taxa tion, the promise of a brightening future for those whose genius and labor create the wealth of the land, and whose courage and patriotism are the only sure bulwark and defense of the Republic.”

The do-gooding promises of such bilge, with which the debate was liberally sprinkled, were not implemented with specific “social” legislation, the kind that came upon the country when income taxation attained fulfillment. But, they bespoke the secret desire for a golden calf to lead Americans to the promised land. They prepared the ground for Big Government.

It should be pointed out, however, that throughout the debate emphasis was placed on raising money only for the proper expense of government.³ None of the advocates of income taxation spoke of expanding the functions of government, and while the opposition mentioned “socialism” it seems doubtful that they had any idea of a New Deal. The American mind of the nineteenth century was incapable of comprehending paternalism, regulation, and control; it was too strongly rooted in the past for that. Even those who advocated the tax method of undermining private property were not aware of what they were doing, and would probably have stopped in their tracks if they could have foreseen the consequences of their proposal. It was not any urgency for Big Government—which they could not even have understood—that prompted them to advocate income taxation. It was simply an urgency to “soak the rich”—the very common sin of envy.

The debate is heavily spiced with the desire to pare down fortunes, and for further relish there was a generous dash of sectionalism. For the fortunes that irritated their envy were located in the East; they were after “foreigners,” not neighbors. For example, Senator William A. Peffer, of Kansas, who, by the way, was even more “advanced” than the bill in that he advocated a graduated income tax, expostulated thus:

“The point to be made is that because wealth is accumulated in New York, and not because those men are more industrious than we are, not because they are wiser or better, but because they trade, because they buy and sell, because they deal in usury, because they reap in what they never earned, because they take in and live off what other men earn, they shall be exempt from taxation, and that we who are hewing wood and carrying water shall continue to bear the burdens of government.”

William Jennings Bryan, of Nebraska, spoke for the impoverished West when he said:

” Gentlemen have denounced the income tax as class legis lation because it will affect more people in one section of the country than in another. Because the wealth of the country is, to a large extent, centered in certain cities and states does not make a bill sectional which imposes a tax in proportion to wealth. If New York and Massachusetts pay more tax under this law than other states, it will be because they have more taxable incomes within their borders. And why should not those sections pay most which enjoy most?”

In reading these speeches one wonders whether there ever would have been an income tax in this country if the advocates of it could have held off until Chicago was able to stand up to New York, and Nebraska farmers, sporting limousines, became the envy of Boston workers. Even the opponents of the bill seemed little aware of the concentration of political power that income taxation would generate, and directed their arguments mostly to the principle of private property, to the unconstitutionality of the bill, to the doctrine of class legislation. Bourke Cockran, Representative from New York, almost touched on the vital subject when he said:

“…to persuade a majority to oppress a minority is not to serve the people but to injure them; it is not to vindicate popular power, but to discredit it; it is not to conserve free institutions, but to undermine republican government.”

After the bill was passed, and it came to the Supreme Court, some references to the subject of individual rights and limited government were made; there seemed to be no awareness that income taxation might destroy the American tradition of freedom.⁴ Thus, Justice Field, in a brilliant argument supporting the majority opinion declaring the bill unconstitutional, quotes approvingly the point brought up by counsel:

“There is no such thing in the theory of our national government as unlimited power of taxation in Congress. There are limits of its powers arising out of the essential nature of all free governments; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations.”

The seed of class hatred that had been planted during the Civil War proved fertile. Its sprout was merely stunted by the 1895 decision of the Supreme Court. In the years following, it continued to send forth shoots that circumvented the Constitution, for under the guise of “excise” taxation, levies were laid on some corporation incomes and on inheritances. The Spanish-American War created a climate favorable to these taxes, and the Supreme Court, in 1900, did some major logic-chopping to justify the legislation; in fact, the decision of 1900, which was a piece of legislation in itself, was of great help later to those who wanted general income taxation.

The drumfire of “soak the rich” was having its effect. Even the rich began to join in the chorus. The wealthy are of course no more motivated by principle than the poor; expediency and convenience shape the thoughts and guide the behavior of the millionaire as well as the worker’s. Even as “Park Avenue,” in our times, mouths communistic phrases in order to appear “advanced,” so in the early part of the century some of the wealthy assumed a “democratic” pose and spoke nice words about income taxation.⁵ Professors of economics would not be left behind; the “progressive” thing to do was to write erudite articles in support of ability-to-pay. The mob had captured the intelligentsia, even as it led the politicians; the aristocratic champion of the masses, Theodore Roosevelt, advocated progressive inheritance taxation in 1906, and in his 1908 message to Congress he urged an income tax.

When William Howard Taft became president, not only the Democrats but also an “insurgent” segment of the Republicans had been captured by the Populist philosophy, and the combination worked strenuously to put over the “great reform.” As usual, an income-tax amendment to a tariff bill was proposed. Mr. Taft, a former judge, opposed this amendment because he was solicitous for the reputation of the Supreme Court, which would be compromised whether it upheld or reversed the decision of 1895. A political deal was put over; the tariff bill was passed with a rider taxing corporation incomes, and the opposition was promised a bill for a constitutional amendment. This promise was later kept by the Republican leadership, which was opposed to income taxation; they were sure that not enough states would ratify the bill. By 1913, forty-two states did ratify it, and the Sixteenth Amendment became part of the Constitution.

In name, it was a tax reform. In point of fact, it was a revolution.

For the Sixteenth Amendment corroded the American concept of natural rights; ultimately reduced the American citizen to a status of subject, so much so that he is not aware of it; enhanced Executive power to the point of reducing Congress to innocuity; and enabled the central government to bribe the states, once independent units, into subservience. No kingship in the history of the world ever exercised more power than our Presidency, or had more of the people’s wealth at its disposal. We have retained the forms and phrases of a republic, but in reality we are living under an oligarchy, not of courtesans, but of bureaucrats.

It had to come to that. The theory of republican government is that sovereignty resides in the citizen, who lends it to his elected representative for a specified time. But a people whose wealth is siphoned into the coffers of its government is in no position to stand up to it; with its wealth goes its sovereignty, its sense of dignity. People still vote, of course, but their judgment in the ballot booth is unduly influenced by handouts from their government, whether these be in the form of “relief,” parity prices, or orders for battleships. Though it is not exactly an over-the-counter transaction, the citizen’s conscience is bought. Nor are voters immune to the propaganda issued by the bureaucrats, in their own behalf, and paid for by the voters themselves.

With America’s immunity of property went the immunity of body. Notice that Mr. Lincoln had great difficulty in enforcing a moderate form of conscription, even in wartime; now we have peacetime conscription, apparently as a permanent policy. Mr. Lincoln had difficulty with his draft because he did not have the wherewithal to hire an army of enforcement agents. Thanks to the income tax, our present government is not so handicapped. Resistance is so dangerous that we have made a virtue of compliance; the conscript army is described as a “democratic” army, and the conscientious objector is often looked down upon as little better than a traitor. So completely have we become adjusted to this detestable practice of the Czars, that every mother is reconciled to the fact that her newborn son will be a soldier if, unfortunately, he grows up sound of mind and body.

While we are on this subject of immunity of the body, we should mention the fact that though we long ago abolished debtors’ prisons, we do have prisons for those who violate the income-tax laws. We can cheat one another with impunity, but not the government. So thorough and so ruthless is the machinery of tax collections that it is used to catch and incarcerate suspected criminals against whom legal evidence of criminality cannot be adduced. Professional gamblers, hoodlums, and racketeers of all sorts, aware of the swift and certain punishment dealt out by the minions of the income-tax law, are scrupulous in the making out of their tax reports. Thus, the Sixteenth Amendment, enacted to increase the government’s revenues, has spawned another police department, another means of forcing the citizen into line.

The third great immunity is that of the mind, the freedom to think as one wishes. The impairment of this immunity is not easy to detect, for the operation can be conducted in such a way that the victim is never aware of it. It is necessary to look at the methods employed by the government to shape thought, to know that the shaping is being done; when the job is completed it takes a keen observer to realize that people think differently from the way they used to think.

Thus, the farmer who receives checks for not planting does not realize that his grandfather would have thought the practice immoral; he accepts the taking of gratuities as the regular order of things, as quite proper, because government propaganda has got him into that frame of mind. Free school lunches do not strike the modern mother as an insult, as suggesting that she is unable and unwilling to carry out the responsibility of motherhood; the convenience of free lunches, plus the saving of expense, plus the government’s leaflets have changed her way of thinking. And so with every activity of government turned Santa Claus by the income tax: a mass of propaganda introduces the new practice and more propaganda justifies it, until the people think as the government wants them to think. Free judgment becomes next to impossible.

Not content with direct propaganda, the opulent government goes in for shaping the mind of the future by invading the educational machinery. In this it is aided by the very operation of the income tax. The rich cannot be as generous with their contributions to the colleges as they used to be, for the government has the money that they might have given. So the government comes to the rescue of these institutions with grants. It cannot be said with certainty that the government determines the curricula of the colleges as a condition of the grants. But the generosity cannot fail to impress the professors, particularly since the professors have learned to look forward to jobs in the ever-growing bureaucracy.

It is interesting to note that in nearly all the economics courses it is taught that the income tax is the proper instrument for the regulation of the country’s economy; that private property is not an inalienable right (in fact, there are no inalienable rights); that the economic ills of the country are traceable to the remnants of free enterprise; that the economy of the nation can be sound only when the government manages prices, controls wages, and regulates operations. This was not taught in the colleges before 1913. Is there a relationship between the results of the income tax and the thinking of the professors?

There is now a strong movement in this country to bring the publicschool system under federal domination. The movement could not have been thought of before the government had the means for carrying out the idea; that is, before income taxation. The question is, have those who plug for nationalization of the schools come to the idea by independent thought, or have they been influenced by the bureaucrats who see in nationalization a wider opportunity for themselves? We must lean to the latter conclusion, because among the leaders of the movement are many bureaucrats. However, if the movement is successful, if the schools are brought under the watching eye of the federal government, it is a certainty that the curriculum will conform to the ideals of Big Government. The child’s mind will never be exposed to the idea that the individual is the one big thing in the world, that he has rights which come from a higher source than the bureaucracy.

Thus, the immunities of property, body and mind have been undermined by the Sixteenth Amendment. The freedoms won by Americans in 1776 were lost in the revolution of 1913.

---

¹ A typical remark in the debate on income taxation in the debate of 1894 is the following from the speech by Sen. Wm. A. Peffer, on June 21:

“The only object we have in view in presenting this amendment [graduated income tax] is to rake in where there is something to rake in not to throw out the dragnet where there is nothing to catch. The West and the South have made you people rich.”

² The Fordney-McCumber Tariff Act of 1922 (with an average ad valorem rate of 33.22 percent) restored the high protective tariff of pre -income -tax days. Ironically, the agricultural bloc of the Middle West and the South that had fought for the income tax, to enable a reduction in tariffs, joined with their erstwhile opponents to enact this bill. The highest tariff schedule in American history, with an average ad valorem rate of 40.08 percent, was passed in 1930. It was the Hawley-Smoot Tariff Act.

³ Even the staunchest advocates of income taxation, in those days, stressed only the need of revenue, though they suspected the possibility of the taxation-for-social-purposes doctrine that followed the adoption of the Sixteenth Amendment. Thus, Sen. Williams, on August 26, 1913 : “we do not want to collect any more revenue than we need…. Having concluded that we had enough, we are not taxing people’s income even for fun, nor are we taxing them for the purpose of building up a system.”

⁴ It was not until 1937 that the Supreme Court, through the mouth of Justice Benjamin Cardozo, had the forthrightness to declare that “natural rights, so-called, are as much a subject of taxation as rights of lesser importance.”

⁵ “I know that some of the wealthiest men in this country support it [income taxation]. I know that Mr. Gould in an interview favored it, and I am told by the gentleman from Missouri that Mr. Carnegie favors it.” Rep. Bourke Cockran, Jan. 30, 1894.