W. Marc Gilfillan CPA

So the question remains, what happened with the tax system in the United States?

US tax makers have been collecting what they have been sowing for a long time. The honor system has been trumped by a monster in which every tax payer is under surveillance due to the heavy inclination of evasion. In other words, compulsion has replaced consent. Honor has been replaced with spying on citizens.

In the mid-20th century, there was not a bank in the US that told the IRS about customer affairs, interest was not reported, withdrawals of cash were not reported, and not a thing that went through accounts were photographed. Also, real estate transactions were not reported, stock transactions weren’t reported, dividends weren’t reported, income from other sources (Form 1099) wasn’t reported, and US Customs didn’t require a declaration of cash carried.

Before it was espionage, it was an honor system, and it functioned quite well. The deterioration that happened over the previous fifty years to the present is that anything of any fiscal significance is now reported.

Adam Smith stated that people will evade taxes and tax laws shown no respect when there is a general suspicion of a lot of meaningless expense and a lot of misapplication of the public revenue. For example, $500 toliet seats, high-dollar grants to study the sex lives of ants, etc.

For the sake of catching a handful of tax resisters and evaders in the 1950s Congress spawned a tax monster of the US tax system that more and more taxpayers attempt to evade. As a general rule, widespread tax evasion is a clear signal that a government’s tax system is bad. Citizens will pay taxes, even income taxes, if the rates are acceptable.

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1861 – After Lincoln was put in office, the South walks out of Congress and form the Confederacy with a rewritten constitution to curtail the right of their newly formed country to tax.

1862 – The beginning of US income taxes is levied to help finance the rising massive debts of the Civil War.

1872 – The income tax is abolished.

1894 – Congress creates an income tax in response to southerners complaining that large reliance on tariffs pushes up the costs of imports for farmers and consumers.

1895 – The US Supreme Court susta‌ins that the 1894 income tax law is in direct conflict with the US Constitution’s restrictions on insituting direct taxes.

1913 – The 16th Amendment is passed and removes that bar and Congress establishes an income tax system.

1917 – World War I revenue requirements bump up tax rates, with the largest rate reaching 77% in 1918.

1924 – Publication of the names of taxpayers and the amount of taxes they owe fails to achieve the task of forcing payments and the practice is given up.

1942 – Prior to World War II, the lowest income level for filing income tax left most working people out. However, the cost of the war bumped the threshold down the income ladder and put the top rate to 94% before the war was over.

1943 – In order to force compliance from the hugely increased number of taxpayers, Congress institutes tax withholding from wages, effectively turning employers into tax collectors.

In the 1940s Justice Jackson of the Supreme Court, former chief counsel of IRS, boasted about how law-abiding Americans were in reporting their income taxes. It was an honor system – there were very few informational returns. Open resistors to the taxes were few and the black market was relatively small.

1962 – IRS Commissioner Caplin said “no other nation in the world has ever equaled this record of voluntary compliance. It is a tribute to our people, their tradition of honesty, and their high sense of responsibility in supporting our government.”

1982 – Chief Justice Neely said – “cheating on federal and state income tax is all pervasive in all classes of society; except among the compulsively honest, cheating usually occurs in direct proportion to opportunity.”

Stay tuned for Part 3 of the Timeline of US Tax Policy!

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Between 1868 to 1913, almost 90% of the national government’s income was gotten from tax on whiskey and tobacco. During the Civil War the government instituted a short income tax, but it was not until 1913 that the 16th Amendment was passed and enabled Congress to tax incomes “from whatever sources attained.” The first 1040’s were due on March 1, 1914. No money was withheld from paychecks and no money was sent in with the return. Each taxpayer’s taxes were calculated by IRS field agents and a bill mailed to the taxpayer on the first of June.

1766 – Colony leaders got together to extinguish British taxes under the Stamp Act. The Stamp Act Congress, as it was named, marked the beginning of the American independence movement and the origin of the modern U.S.

1782 – The first Congress under the Articles of Confederation formed. This Congress didn’t have any taxing powers.

1789 – Americans gave a new Congress taxing powers. Without taxing powers, the initial Congress of the United States scantly lasted seven years prior to being declared a failed attempt; the 2nd Congress, with taxation powers, is currently functioning after more than two hundred years.

1792 – Alexander Hamilton persuades Congress into passing an excise tax on whiskey to raise revenue and steady the increase in drinking. In the western frontier alcohol was the traditional mode of exchange, and the twenty-five percent tax was harsh. By 1794 the region was openly in revolt. The father of the IRS was created to enforce the tax.

1832 – The national debt remaining after the Revolutionary War and the War of 1812 is paid off. The South does not see any reason for continued high import taxes that raise prices for Southern consumers and promote industrial monopolies in the North.

1850 – John C. Calhoun of South Carolina tells Congress that the South might leave the Union because heavy taxation of the South increased funds that ended up in the North, creating a great change in wealth from the South to the North.

Stay tuned for Parts 2 and 3 of the Timeline of US Tax Policy!

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“Slavery – the one cause of the Civil War.” – John Stuart Mill, 1862

Can there be any doubt about it? Certainly the American Civil War was about the slavery issue… was it not? Well actually, one of the greatest popular myths in American history is that the Civil War was started because of the slavery issue and that Lincoln, the Great Emancipator, used a bloody struggle to sever the claims of bonding that shackled over 3 million black Americans. Right before the war, the South had all it could have wanted.

In 1860, Southerners controlled the Supreme Court and Lincoln and Congress were approving a constitutional amendment to keep slavery forever! So what happened?

We should rewind the clock back to the year 1832. By that year the national debt left from the War of 1812 had been re-paid and the South saw no need to keep up the high import taxes which appeared to only raise price tags for Southern consumers. Either the South had to pay high import taxes on imported goods or it purchased Northern manufactured goods at excessive prices. In either case, the South’s funds ended up in the North. To say the least, the South was not happy with this arrangement.

So, in 1832 a convention was hosted in South Carolina to get rid of these federal import taxes. The convention declared the tax was unconstitutional and gave the governor the power to to defy the enforcement of these taxes instituted by the federal government. It seemed like a civil war was in the works. Mild tempers won over, however, and the Great Compromise of 1833 reduced import taxes over the next few years to levels the South could tolerate.

Over the next few years, however, Northern commercial and manufacturing companies bullied through Congress more taxes that once again stressed Southern planters and allowed Northern Manufacturers to become rich once again. In 1850, John C. Calhoun, the South’s most outstanding spokesman, gave a speech to Congress. His speech listed three wrongs done to the South that could lead to secession from the Union and war. The first two involved fears about the gradual decline of power of the South in general and the states in particular.

The third, and really the only concrete grievance, concerned tax policy. In Calhoun’s view, federal import taxes was a targeted legislation against the South. Heavy taxes on the South created funds that were spent in the North. The focus of economic life in the United States was steadily changing strongly to the North. Calhoun spoke of secession if the taxes weren’t reduced. But what about the slaves? Well, in his run for the presidency in 1860, Lincoln steadily repeated he wouldn’t interfere with slavery in the South. Truly, most Northerners did not care much about enslaved blacks, any more than they worried about the Indian in the West or impoverished illiterate workers in factories. The majority of black slaves received substantially better quality treatment and more compassion than their counterparts in the North. Lincoln, actually, told Southern slave-owners that fugitive slaves would be returned. The Congress and then the Supreme Court (Dred Scott decision) continually acknowledged that slavery was not going anywhere.

But, as soon as Lincoln was elected and Congress assembled in 1861, they created new high import tariffs. Slavery wasn’t the problem – higher import taxes were. In his inaugural address Lincoln stated he would go get the customs in the South even if there was a secession!

Fort Sumter, near the beginning of the Charleston Harbor, began filling with Union troops to enforce the collection of the new taxes. The Civil War began in 1861 when South Carolinians shot at the federal garrison at Fort Sumter. The inevitable had been stewing for decades – but it was not over slavery. It was about taxes.

2 years later, Lincoln issued the Emancipation Proclamation, and then only following several military defeats, as the last resort to rally the North to a worthwhile cause. With respect to the slave issue – the majority of the North cared little about black people in bondage, any more than they cared about Native-Americans to the west and the poor uneducated peasants in the factories. Ironically, many black slaves received better treatment and more compassion than their impoverished counterparts in the North.

That’s it for the History of Taxes Series!

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Ah…. now we have a historical event clearly about abusive taxation. Was the Boston Tea Party a protest concerning the British tax on tea, as we were told? No, not one bit. The colonies had already been boycotting English tea for 5 years before to the Boston Tea Party! They had actually smuggled in Dutch tea and were quite prosperous. There was tea for everyone and no British tea tax paid. Naturally, the British didn’t like the boycott. So, the British bypassed the duties at home. The Parliament told British tea merchants to disregard the import tax of getting the tea into England and then transfer the money saved along to the colonies when they sent the tea over and then sold British tea at a price lower than the Dutch smuggled tea.

But what people would sell this British tea?

They sold it through loyal British merchants in the colonies. But will the colonists take the cheaper British tea with an included tax? Yes. They bought so much that what ended up happening was loyal British merchants got all the business and a taxes were still being given to England. Obviously the colonists did not care about the tax very much; they still were receiving cheaper tea. BUT, the non-British MERCHANTS did not enjoy this gig. The British merchants, with the help from England, had essentially established a monopoly on tea sales. The colonial merchants feared it would only be a matter of time before additional monopolies would be created with the same mechanism and they would be forced out of business.

So, a collection of MERCHANTS who appeared to be Natives, boarded a vessel containing British tea and tossed it into the harbor. Was this a crowning moment in American tax protest? No, it was not. The Boston Tea Party was looked at as the wanton desecration of private property at a period when private property was highly regarded. This event was extremely looked down upon and didn’t sit well with the colonists. Ben Franklin was shocked and told the merchants that full repayment would be given at once to the owners of the tea. Anyway, it escalated into war.

However, the colonies would soon realize that fleets of war vessels, legions of redcoats, and cannons were much scarier than a few tax collectors. The funny thing is, America didn’t lose the war, primarily because England realized it was too expensive to fund war so far from home. BUT after the war, America had huge debts and taxes, and even with representation they were going to be huge.

Keep an eye out for W. Marc Gilfillan’s next chapter in his History of Taxes series: Taxes and Slavery and the Civil War.

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There has been no modern revolution that was more solidly based in taxation. Taxation didn’t just cause it, but assisted in providing unity for the disorganized and squabbling colonies. However, probably not precisely the way you might imagine.

First, the British taxes on the colonies were neither not fair nor oppressive. Actually, Americans had it great: we had the help of the British empire, the land was rich, businesses thrived, and jobs were widely available. Europe’s social castes did not enchain us and our sons were not conscripted to battle in wars in far-away places… we had it good. So why? Well, some missteps and misstatements by each side.

“Taxation without representation” was indeed an issue. But nobody quite knew what to do about it (after the American revolution, many colonies such as Canada and Australia were able to find adequately achievable solutions). However, at the point in history there was no agreement by the British parliament or American leaders on what could happen to dissolve “taxation without representation”. Ben Franklin, probably without his own knowledge I presume, made the issue worse. He took a boat over to England as our liaison and said that internal taxes were unacceptable but external taxes were OK.

By internal taxes, Franklin meant the stamp tax and other taxes that were paid on transactions in the actual colonies themselves. External taxes, according to colonists’ definition, were taxes like import taxes that were on transactions that only partially took place within the colonies. The colonists believed import taxes were external to the colonies. Yes, if you are puzzled about this, you should be. It makes almost no sense. Apparently no one understood the connection between import/export taxes and the ultimate prices paid for the goods and services. In other words, import/export taxes affected the “other guy” so they were OK.

OK, said the British parliament. if that’s what you want we will play along and give you whatever it takes to make you happy. So, the British created new tariffs, import and export taxes. Then, Americans decided they made a mistake. They saw the folly of their reasoning… but it was too late and the situation got worse.

Keep an eye out for W. Marc Gilfillan’s next chapter in his History of Taxes series: Taxes and the Boston Tea Party.

http://www.marccpa.com/