CHAPTER IV

THE INCOME TAX OF 1894

§ 1. The Origin of the Tax

For almost two decades after the abandonment of the income tax the subject disappeared from the public mind.1 The demand for a progressive income tax was indeed found in the planks of the Socialist party and of the farmers' groups which afterwards consolidated into the Populist party. But in the country at large these demands were not noticed. The prosperity of the eighties brought to the front the problems of surplus financiering, and the country as a whole approved of the protectionist policy of the dominant party, a corollary of which was the periodical cutting down of the internal revenue taxes. There was therefore no need of any additional federal revenue.

During the beginning of the nineties, however, the situation changed. The great decline in prices which had set in

1 The greater part of this chapter was published in the Political Science Quarterly, vol. ix (1894), pp. 610 et seq., and in a slightly different form in the British Economic Journal, vol. iv (1894), pp. 637 et seq. For other contemporary articles, see C. F. Dunbar, “The New Income Tax," Quarterly Journal of Economics, vol. ix (1895), pp. 26 et seq.; A. C. Miller, "National Finances and the Income Tax,” Journal of Political Economy, vol. iii (1895), pp. 255 et seq.; F. C. Howe, "Federal Revenues and the Income Tax," Annals of the American Academy, vol. iv (1894), pp. 557 et seq. The discussions in Congress are treated by G. Tunnell, "Legislative History of the Second Income Tax Law," Journal of Political Economy, vol. iii (1895), pp. 311 et seq. For articles that were published before the enactment of the law, see the argument in opposition by D. A. Wells, “The Income Tax: Is it desirable?” in the Forum, vol. 17 (1894), pp. I et seq.; and the argument in favor by U. S. Hall, “The Income Tax: Reasons in its Favor," ibid., pp. 14 et seq. For articles that appeared after the passage of the law, but before the decision of the court, see D. A. Wells, "Is the Existing Income Tax Unconstitutional?" in the Forum, vol. 17 (1895), pp. 537 et seq.; and an article by the present writer, "Is the Income Tax Constitutional and Just?" ibid., vol. 18 (1895), pp. 48 et seq.

toward the close of the preceding decade was becoming more and more marked, and the prosperity of the western wheatgrower and of the southern cotton-planter was succeeded by a period of hard times. The immense growth of large fortunes in the industrial and financial centres, and the appearance of the new combinations of capital known as trusts, served to set in still greater relief the difficulties of the agricultural classes. This seeming conflict of interest was responsible for several great political movements, each of which reflected itself in legislation. In the first place, the growing suspicion of the aggregations of capital engendered a movement which resulted not only in the prohibition of railway pooling in the interstate commerce law of 1887, but more especially in the Sherman anti-trust act of 1890. In the second place, the fact that the farmers ascribed the falling prices of agricultural products to the appreciation of gold led to the free silver movement which came within an ace of entirely controlling the government's policy. In the third place, the bad times among the farmers produced a gradual change in their attitude to the tariff. The protectionists of the East originally found their allies among the farmers of the West, not only because the favors of protection were accorded also to the growers of wool, but chiefly because of the home-market argument, according to which the growth of industrial centres as fostered by protection would afford an increasing demand, and therefore a higher price, for the productions of the soil. The home-market argument, however, slowly lost its force as the foreign demand augmented and as the country entered upon the period of immense exports of agricultural products. This sapping of the farmer's interest in protection was now very materially increased, during the many weary years of hard times, by the reflection that but for the tariff he could secure his clothing and his agricultural implements more cheaply, and that it was the protected manufacturers in the East who were lending their support to the "gold-bugs" of Wall Street whose nefarious machinations, in his opinion, were responsible for the falling prices of agricultural products.

Not only were the farmers beginning to become disloyal to the policy of protection, but they were, partly for the same reasons, growing more favorable to the idea of an income tax. This tendency was accentuated by the changes that were taking place in state and local taxation. As a result of a familiar process, the general property tax throughout the country was fast breaking down. It was becoming, in most places, almost exclusively a real property tax, except in the rural districts where the tangible, visible personalty was to be found. The rich urban investor in securities, the wealthy business men, and the well-to-do professional classes were escaping taxation almost entirely. The weight of state and local taxation was falling more and more on the small farmer, who, under existing conditions of international competition, was unable to shift his burdens to the community. The farmers, and more especially the farmers of the West and South, who constituted the great bulk of the middle classes, as well as the preponderant factor in the voting population, were becoming restless. In the face of a system of state and local taxation which rested with crushing force upon them, and of a system of national taxation which no longer seemed to afford them any protection but which, on the contrary, appeared to benefit the classes responsible, in their estimation, for the fall in prices, it was no wonder that the complaints of the agricultural class should become loud and deep. For some years a progressive income tax was one of the chief planks in the platform, not only of the Populists and of the Anti-monopolists, but of the farmers' conventions throughout the length and breadth of the land.

It was this feeling as to the essential inequality and injustice of the tariff, as well as the movement toward free silver, which resulted in the Democratic victory of 1892. The advent of President Cleveland to power was, therefore, understood to mean a modification of the tariff, and the urgency of fiscal reform was emphasized by the fact that the country was facing a series of deficits. Accordingly, when the President submitted his message to Congress in December, 1893, we

find the first suggestion of an income tax, not, indeed, in the shape of a tax on incomes in general, but in the form of a tax on incomes from corporations. The President said: "I am satisfied that the revised tariff duties provided for in the proposed legislation, added to existing internal revenue taxation, will, in the near future, though perhaps not immediately, produce sufficient revenue to meet the indebtedness of the government. The Committee, after full consideration, and to provide against the temporary deficiency which may exist before the business of the country adjusts itself to the new tariff schedules, have wisely embraced in their plans a few additional internal revenue taxes, including a small tax upon incomes derived from certain corporate investments. These new assessments are not only absolutely just and easily borne, but they have the further merit of being such as can be remitted without unfavorable business depression whenever the necessity of their imposition no longer exists."

It is uncertain to which committee the President here referred. Senator Hill stated subsequently that at the date of the measure "neither the full committee of Ways and Means nor the Democratic members thereof, had agreed upon any income tax or other internal taxation,"1 and he characterized the statement of the President as "both inaccurate and premature." The ways and means subcommittee on internal revenue had, however, been considering an income tax, and had heard various witnesses on the subject, among them, in October, Mr. Shearman, who had suggested a tax on incomes from land and certain corporations.2 In Secretary Carlisle's report reference is also made to the possibility of an income tax, but limited to incomes from corporations. On Decem

1 Congressional Record containing the Proceedings and Debates of the 53d Congress, 3d Session. Washington, 1894, vol. 26, p. 3558.

2 This testimony was published as A Just and Practicable Income Tax. By Hon. Thomas G. Shearman, before the Ways and Means Subcommittee on Internal Revenue. Washington, 1893, 21 pp.

3 Report of the Secretary of the Treasury for 1893. Washington, 1893, p. lxxxiii. In November, Secretary Carlisle had received from Smith, the assistant register of the treasury, a document containing his History of the Income Tax.

ber 19, in fact, the committee of ways and means submitted a tariff bill which contained no reference to an income tax, and on January 8 the debate on the tariff began. The house adopted a resolution that on January 15 the bill should be read and be open to amendment, and that on January 29 the bill, with all amendments recommended or pending in the committee of the whole, should be reported to the house, and that two hours' debate only be allowed, "whereupon the vote shall be taken."1

Although the record shows that three separate income tax bills were introduced, one by Bretz on December 19, to levy an income tax in order to pay pensions, one by Davis on December 20, and one by Johnson, of Ohio, on January 3, designed to impose a tax on the income from invested capital,2 the chairman reported to the committee of the whole on January 22 that no income tax amendment to the tariff bill had been received by him.3 On January 29, however, the day fixed for the vote, Mr. McMillin of Tennessee, chairman of the subcommittee, submitted an income-tax amendment to the Wilson Bill, providing for a two per cent tax on all incomes over four thousand dollars, to be payable by individuals and corporations alike.*

In his speech explaining the amendment,5 McMillin presented virtually all the arguments in favor of the tax. He started out by calling attention to the abundant crops and, referring to the aftermath of the crisis of 1893, asked: "Why is it that in the midst of plenty we are starving?" The answer he gave was, the misdeeds of the Republican party and especially their tariff policy. He summed up his indictment against the tariff by stating that "want, not wealth, pays the tax," and that the time had come to "put more tax upon what men have, less on what they need." Referring to the recent growth of revenue and expenditures, he went on to

1 Congressional Record, op. cit., p. 572.

2 House bills nos. 4861, 4898, and 4955.

The amendment will be found in op. cit., pp. 1494 et seq.

8 Op. cit., p. 1193.

5 The speech will be found in op. cit., vol. 26, appendix, pp. 411 et seq.