Income Tax: Foundations of a Meddling Government

Crossposted on Annapolis Politics

A letter writer yesterday made a very astute observation about the nature of government. Referring to the “From Our Pages Years Ago” blurbs that run in The Capital from time to time:

Over time, I’ve noticed an interesting pattern. The further back in time the articles come from, the less likely they are to mention government. It’s a real rarity for the articles from 100 and 200 years ago.

I conclude that government just wasn’t that significant or newsworthy in the daily lives of Anne Arundel citizens over a century ago.

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After all, they paid no U.S. income taxes, didnt’ have to beg the county’s permission to improve their property, and didn’t’ expect the government to solve their problems.

This man is exactly right, and I think it would be fair to trace the most major change in government attitude to the creation of the income tax in 1913. The Treasury Department elaborates:

Prior to the enactment of the income tax, most citizens were able to pursue their private economic affairs without the direct knowledge of the government. Individuals earned their wages, businesses earned their profits, and wealth was accumulated and dispensed with little or no interaction with government entities. The income tax fundamentally changed this relationship, giving the government the right and the need to know about all manner of an individual or business’ economic life.

The first income tax was levied to finance the civil war, but was eventually ruled unconstitutional on the grounds that it was levied unfairly amongst the United States. The court ruled that such a tax would require a constitutional amendment allowing for unfair taxation, and such an amendment (the 16th) was ratified in 1913.

So now government had this great new tax vehicle…what are they going to spend it on? World War I. The newly formed Federal Reserve (also est. 1913) did a poor job handling the new tax structure and its relationship to the postwar economy, contributing to the Great Depression.

Enter John Maynard Keynes, who is either the #1 or #2 most influential economist of the 20th century depending on who you ask. (The other is Milton Friedman). Keynes had little faith or patience in the ability of the private market to reach an optimal outcome, famously declaring that ‘in the long run, we are all dead’. He had the ears of policy makers, and told them that governments can better orchestrate an economy.

Since that time, the government has never looked back:

Government spending as a portion of total economic activity has risen from about 5.5% in 1900 to around 30% today. If the government increases their hand in economic affairs by 600% over the course of a century, you’re darn right people are going to take notice!

If the income tax, Keynesian theory, and The New Deal didn’t conceive the notion that a bigger government can solve your problems, they were certainly defining moments for the liberal philosophy.

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