At 100 Years, How Has Federal Income Taxes Affected the U.S. Economy?

In February of 1913, the American people approved and adopted the Sixteenth Amendment to the U.S. Constitution, which allowed Congress to create a federal income tax. Later in that year (October 3rd), President Wilson signed the first federal income tax into law. The top tax rate would sit no higher than 7 percent on income higher than $4,000 — the equivalent of slightly more than $94,000 today, according to John Buenker and Sam Pizzigati in a recent column published by Reuters. They are authors of several books on the implementation of the income tax in the United States and its subsequent effect on the U.S. economy.

The voices in opposition to the income tax were fierce:

“They characterized a “graduated” tax on the incomes of America’s affluent as “extortion,” a “penalty upon ability and intelligence” and an imposition on a “small class of people powerless to defend itself.” Taxing the wealthy, they contended, would be “killing the goose that laid the golden egg.”

In the Virginia House of Delegates, Speaker Richard Byrd predicted that an income tax would put freedom itself in jeopardy. Any new income tax law, Byrd charged, “will of necessity have inquisitorial features.”

He forecast: “Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the taxpayer. An army of federal inspectors, spies and detectives will descend upon the state.””

After World War Two, this top tax rate would rise as high as 94 percent on income over $200,000, staying as high as 90 percent into the early 60s. Buenker and Pizzigati conclude that despite what the critics predicted, the income tax had a positive effect on the U.S. economy.

The lowest poverty rate in U.S. history (12%) occurred during a period when the top tax rates where among the highest in history between 1959-1969.

“These high-tax years — for the rich — should have been a time of economic calamity. At least according to the critics of progressive income taxation. But real life proved these critics wrong. Commerce did not cease when the tax code levied steeply graduated rates on U.S. incomes. The wealthy did not flee. The entrepreneurial spirit did not evaporate.

Quite the contrary. The United States thrived throughout the mid-20th century heyday of high taxes on the rich. We became the first mass middle-class nation in the history of the world, the first industrial nation ever where the majority did not live in poverty.”