What’s the worst thing about Delaware?
No, not Joe Biden. He’s just a harmless clown and the butt of some good jokes.
Instead, the so-called First State is actually the Worst State because 100 years ago, on this very day, Delaware made the personal income tax possible by ratifying the 16th Amendment.
Though, to be fair, I suppose the 35 states that already had ratified the Amendment were more despicable since they were even more anxious to enable this noxious levy (and Alabama was first in line, which is a further sign that Georgia deserved to win the Southeastern Conference Championship Game, but I digress).
Let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.
The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.
But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.
Here’s a chart, based on data from the Office of Management and Budget, showing the burden of federal spending since 1789.
Since OMB only provides aggregate spending data for the 1789-1849 and 1850-190 periods, which would mean completely flat lines on my chart, I took some wild guesses about how much was spent during the War of 1812 and the Civil War in order to make the chart look a bit more realistic.
But that’s not very important. What I want people to notice is that we enjoyed a very tiny federal government for much of our nation’s history. Federal spending would jump during wars, but then it would quickly shrink back to a very modest level – averaging at most 3 percent of economic output.
So what’s the lesson to learn from this data? Well, you’ll notice that the normal pattern of government shrinking back to its proper size after a war came to an end once the income tax was adopted.
In the pre-income tax days, the federal government had to rely on tariffs and excise taxes, and those revenues were incapable of generating much revenue for the government, both because of political resistance (tariffs were quite unpopular in agricultural states) and Laffer Curve reasons (high tariffs and excise taxes led to smuggling and noncompliance).
But once the politicians had a new source of revenue, they couldn’t resist the temptation to grab more money. And then we got a ratchet effect, with government growing during wartime, but then never shrinking back to its pre-war level once hostilities ended (Robert Higgs wrote a book about this unfortunate phenomenon).
The same thing happened in Europe. The burden of government spending used to be quite modest on the other side of the Atlantic, with outlays consuming only about 10 percent of economic output.
Once European politicians got the income tax, however, that also enabled a big increase is the size of the state.
But Europe also gives us a very good warning about the dangers of giving politicians a second major source of revenue.
Here’s a chart I prepared for a study published when I was at the Heritage Foundation. You’ll notice from 1960-1970 that the overall burden of government spending in Europe was not that different than it was in the United States.
That’s about the time, however, that the European governments began to impose value-added taxes.
The rest, as they say, is history.
I’m not claiming, by the way, that the VAT is the only reason why the burden of government spending expanded in Europe. The Europeans also impose harsher payroll taxes and higher energy taxes. And their income taxes tend to be much more onerous for middle-income households.
But I am arguing that the VAT helped enable bigger government in Europe, just like the income tax decades earlier also enabled bigger government in both Europe and the United States.
So ask yourself a simple question: If we allow politicians in Washington to impose a VAT on top of the income tax, do you think they’ll use the money to expand the size and scope of government?
If it takes more than three seconds to answer that question, I suggest you emigrate to France as quickly as possible.
P.S. You probably won’t be surprised to learn that the crazy bureaucrats at the Paris-based OECD think the VAT is good for growth and jobs. Sort of makes you wonder why we’re subsidizing those statists with American tax dollars.
[…] we have a chart showing how the burden of government spending in the United States and Western Europe used to be […]
[…] we have a chart showing how the burden of government spending in the United States and Western Europe used to be […]
[…] the federal income tax, which started as a simple 2-page form with a top rate of 7 percent, but now has become a 75,000-page […]
[…] the federal income tax, which started as a simple 2-page form with a top rate of 7 percent, but now has become a 75,000-page […]
[…] Yes, libertarians will appropriately worry that government will botch its response (see below, for instance), and we’ll also worry that government will use a crisis to accumulate new powers (the “ratchet effect” mentioned in this column). […]
[…] the federal income tax, which started as a simple 2-page form with a top rate of 7 percent, but now has become a 75,000-page monstrosity […]
[…] the federal income tax, which started as a simple 2-page form with a top rate of 7 percent, but now has become a 75,000-page monstrosity […]
[…] The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax. […]
Reblogged this on Por mis finanzas.
[…] that’s exactly what happened and today we’re burden with a grossly unjust and punitive tax […]
[…] But once the VAT gave politicians a new source of revenue, spending exploded. […]
[…] I’m more worried about the long run, particularly after looking at evidence from Europe and […]
[…] Mitchell had a couple of interesting graphs the other day. Here’s […]
Reblogged this on Climate Ponderings.
[…] graph above, also courtesy Daniel Mitchell, shows how the VAT enabled further government expansion in Europe, much the same way that the […]
[…] One could also argue that February 3 is the worst day in history because that’s when Delaware ratified the 16th Amendment, thus making an income tax […]
[…] The 100th Anniversary of the Income Tax…and the Lesson We Should Learn from that Mistake […]
How do I restore my computer to an earlier time when the “Restore” feature on my computer is not working. I’ve tried more than a dozen occasions to restore my computer and I keep obtaining the error message “computer could not be restored to this date. No changes happen to be produced. Try another date.” Try an additional date the same thing happens.. . All of my personal files were deleted from my computer and I want to get them back. Have no clue how this happened. Checked the recycle bin and none of them were there. It is as if they merely disappeared off my computer. Please help. Thank you!.
[…] So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?* […]
[…] The 100th Anniversary of the Income Tax…and the Lesson We Should Learn from that Mistake […]
[…] The income tax celebrates 100 years, and along with it, some of the most elaborate and entertaining conspiracy theories ever devised by man. Oh fringed flag, long may ye wave. […]
Reblogged this on This Got My Attention and commented:
“The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.”
[…] Daniel J. Mitchell points out the consequences thereof: […]
“Blame the income tax on the prohibitionists. Previously, alcohol taxes were the largest domestic tax and the second largest overall source of federal revenue. The income tax was a necessary prerequisite to Prohibition.”
Typical Roman Catholic bologna. Blaming good people for your sins. Gee something new from you clowns. Woe unto him that giveth his neighbor strong drink, that puttest thy bottle to him (Hab 2:15). The context of the passage, btw, is the “town fathers” using the sale of liquor as a source of tax income to “make their town a better place to live in.” (Hab 2:12).
Furthermore, taxes come from Caesar Augustus another Roman Catholic (Luke 2:1). You Roman Catholics like Obama couldn’t run a popsicle stand without destroying everythign and everyone around it for $$$$.
Sorry, that was for Skip, not Larry
Anyone with “taxable income” Larry. What makes “income” taxable, and for that matter, what is the definition of “income”? Is that a direct tax on people, places, or property under Article 1 Sec 2 and 9 or an indirect or excise tax under Article 1 Sec 8? Just wondering if you could clear that up for me..
Your graph shows that Federal spending stayed at 3% of GDP until 1919, when we passed the 19th Amendment. At the state level, this ramp-up started before 1913, but only in states that allowed women to vote. Women want government to help people; men want people to help themselves.
Conservative women should see that for every one of them denied the vote, we’d lose a Julia, a Lena Dunham, and a Peggy Joseph. Every Democrat since Lyndon Johnson goes down in flames without women’s votes.
I don’t care ANY more. I am doing all that I can to shield/hide/not notate any income I have.They can’t hire enough agents to track everyone down and I and many others are willing to risk it. But I always file, cause that’s what good Peons do.Wesley was an idiot.
You want a legal citation? Try United States Code, Title 26, Subtitle A, Chapter 1, Subchapter A, Part I, §1 “Tax Imposed” OK?
Wesley was found not guilty of tax evasion. Just because people are convicted by juries who don’t understand the issue doesn’t mean that there is a law, If you are going to say there IS a law, prove it, show it.
“There is no law making the average person liable for the “income” tax.”
Tell that to Wesley Snipes
http://goo.gl/EgKBF
Watch the truth about the “income” tax. A great film. There is no law making the average person liable for the “income” tax.
[…] Related: Dan Mitchell: The 100th Anniversary of the Income Tax…and the Lesson We Should Learn from that Mis… […]
Great post. This the the best chart I have seen to prove this most important of points….
The post is only half the story and is missing the other half – in 1913 we also got the Federal Reserve. The creation of the Federal Reserve facilitated the growth of government, the wars and corporatism. Things really got ugly in 1971 when Nixon de-tethered the dollar from gold. Gold was a noose around the necks of government and banksters.
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I’d say:
“If you see people around you taking more than three seconds to answer this question, you need to keep your bags packed and teach your children how to be economic cyber mercenaries, capable of working from anywhere in the world for any one electorate — or any one authoritarian regime may turn out – lets them keep the reward of their creativity and the freedom to make the important decisions in their lives”.
Unbeknownst to western world voter-lemmings, mobility of capital, labor and people is becoming the overriding new world changing force.
——————————————
To give some credence to the last, not so pleasant scenario — the possible emergence of some modern form of authoritarianism — remember that many are already feeling freer in Russia and Dubai (or quasi-democracies like Hong Kong and Singapore) than in France — and perhaps increasingly the United States.
That should come as no surprise. It takes quite a bit of dictatorship to match the democratic welfare mandate that every single day you work for some distant unknowns from 1pm to 5pm. Many people will gladly compromise some freedom of speech and even the silly requirement they keep a photo of the king at the office, over an extra four hours of work at the office. At a fifteen percent top tax rate, many people will accept moderate restrictions on their personal freedom and still feel freer overall. Besides, it is not a given that democracy will necessarily outperform in the personal freedom arena. Not when a majority of voters demand the personal freedom levels promoted by people like major Bloomberg.
So, this emerging hyper-mobility, is still one of the less recognized pivotal changes in our newly mobile world, where capital and labor can travel on a mouse click, whole households can quickly relocate on cheap transportation and keep in touch with friends and relatives: Even dictatorships have to compete!
Consequently, the dictatorships that are emerging are not your parent’s dictatorships. And if western world voter-lemmings keep hoping for the coercively compassionate, redistributive machine of prosperity (the one that after initial Krugman stimulus yields perpetual lesser-effort growth), then, some dictatorships may eventually overtake the voter lemmings, not only in competence and productivity but also in total personal freedom.
To be honest, I reflexively cringe at the possibility. But by virtue of the law of probabilities someone, or a few, will get it right and their prosperity will diverge forward, leaving the lemming cultures behind to bicker amongst themselves in misery. Cultural evolution at work.
So, America, will you be the Dinosaur? Complacent in your personal freedom heritage – which you foolishly take for granted, you think that you can descend to French motivational levels and keep growing at three to four percent annually — and even that is not enough to maintain position in our five percent growing world. Seduced by the shepperd of decline you just re-elected, you are quickly converging towards permanent quasi-European growth trendlines. At two, two and a half percent, your growth deficit compared to the world average is now hoplessly wide. And, in a preview of your predictable suicide, your solution is: More France! You sure are on the route to prosperity extinction, and I don’t see any exits.
I’m not saying I’m a fan of income tax but I’ll argue debt and spending doesn’t have to be a bad thing. Linking the two fiscal policies doesn’t hold much merit. It’s no secret that carrying a certain percentage of debt-to-income can improve shareholder value. On a macro scale, you can deduce that spending on programs that improve our asset base lead to more jobs, technology improvements, or just in general, a stronger economy – creating value for the Americans. We have to continue to reinvest in our country for today and future generations. It’s not the spending that’s bad, it’s what we spend on that matters. And, it’s not the $ figure of debt that’s bad, it’s the ratio of debt to real GDP that matters.
Blame the income tax on the prohibitionists. Previously, alcohol taxes were the largest domestic tax and the second largest overall source of federal revenue. The income tax was a necessary prerequisite to Prohibition.