Taxes for Revenue Only?
The IRS’s corruption has deep historical roots.
Jun 3, 2013, Vol. 18, No. 36 • By JAY COST
The news of the Internal Revenue Service targeting Tea Party groups has Americans spooked. We’re supposed to be a republic, in which everyone is treated equally. So how is it that the federal government has abused so egregiously its taxing power, one of the most potent tools at its disposal?
Some things never change.
This is a good question, and it’s right to focus outrage on the Obama administration, including (and perhaps above all) on the president himself. Yet it would be a mistake to personalize this scandal too much, for the history of American tax policy is a long, sad record of political abuse, of which this recent wrongdoing is but the latest episode.
Put aside the issue of legality—which does not necessarily capture the full scope of corruption—and we see the same story play out again and again: Since the earliest days of the republic, the political class has used the government’s power to tax as a way to reward friends and punish enemies. And these parochial schemes always go hand in hand with the noble goals that public-spirited leaders articulate.
The first American to promote tax policy as a means to accomplish big ends was Alexander Hamilton. In his Report on Manufactures, written in 1791, Hamilton proposed a series of protective tariffs, duties, and other tax devices to direct capital toward the development of the country’s largely undeveloped industrial base. The Jeffersonians staunchly opposed Hamilton’s plans, but after the War of 1812 moderate Jeffersonians began promulgating the very same ideas. And Henry Clay’s “American System” was a plan to use tariff policy to protect industry and use the proceeds to develop infrastructure.
But even this early there was a seedy underside to tax policy. The “Tariff of Abominations,” passed in 1828, was the result of political miscalculation by the Jacksonian faction in Congress, which was angling to get its leader elected president. Jackson men proposed a tariff heavily favorable to the middle states (then the “swing” states of the nation) but hard on New England and the South. They expected those regions to unite against it, killing the bill but scoring Jackson political points with voters in Pennsylvania. But New England’s members in Congress split on the measure, President John Quincy Adams signed it, and the consequence was grave damage to the Southern economy, as Britain reduced its cotton imports accordingly.
Over the course of the 19th century, especially after the Civil War, the protective tariff regime became a massive payoff to big business, which in turn supported the reelection of mostly Northern Republicans, who were its biggest backers. These campaign kickbacks became the grease of many Gilded Age political machines. In a series of muckraking essays called The Treason of the Senate, turn-of-the-century journalist David Graham Phillips outlined how many senators had struck bargains with industrial magnates. The leaders of the trusts would supply campaign contributions in exchange for favorable industrial policy—above all, protective tariffs.
The door swung both ways. Not only did the trusts become clients of the government; they also became its masters. In response to outrage over the corruption of the tariff laws, the Republican party in its 1908 platform pledged reform, which helped it retain the presidency and both chambers of Congress in that year’s election. A bill lowering tariffs passed the House easily in 1909, but by the time it got through the Senate, Republican leader Nelson Aldrich of Rhode Island—whom Graham had derisively referred to as “the head of it all”—ensured that the final bill largely raised tariffs.
Widespread indignation over the abuse of the tariff system ultimately helped produce the Sixteenth Amendment, which legalized the income tax in 1913. Progressives of that era hoped the income tax would reduce the burden on consumers, especially poor farmers in the South and West, and increase the burden on the wealthy.
So much for that.
It’s been a century since the income tax was implemented, and the tax regime of the United States is just as unfair and politicized as it has ever been. Start with the burden on average people: The typical 1040 nonbusiness filer spends 8 hours, or a full working day, just filling out the document. Business filers of the 1040 spend an average of 23 hours. All told, the nation spends 6.1 billion hours and $168 billion filling out its tax forms. A 2011 report from IRS watchdog Nina Olson stated, “If tax compliance were an industry, it would be one of the largest in the United States.”
What’s more, the federal government now learns answers to all sorts of personal questions. How many children do you have? What are their ages? How much did you pay in student loans this year? How much did you spend on health care? How much did you give to charity? To which charities did you give? And soon: Where do you get your health insurance? What ailments are covered? Americans 100 years ago did not have to reveal such intimate details to Washington, D.C., but nowadays most of us simply take this kind of invasion of privacy for granted.
And what of the tax breaks for special interests? They are, of course, plentiful in the tax code, so much so that both sides agree it is time to clean them out (something that happened just 25 years ago). The special favors in today’s tax code remind one of Phillips’s complaints more than a century ago:
Is it any wonder that IRS agents abused their authority by targeting groups for political purposes? If anything, they simply followed Congress’s lead—the tax code as it exists today is largely political in nature. The legislature, with the assent of the executive, gives payoff after payoff to this interest or that faction while the compliance burdens falling upon the whole country grow heavier and heavier. The republican principle of treating similar people similarly does not apply to the tax code as written by Congress.
A mere 100 years after the United States threw out the politicized mess that was the old tariff system, the new tax code is just as politicized, just as messy, and substantially more intrusive. History has repeated itself, and that says something about the nature of government.
Liberals complain about the inefficiencies and inequities of the free market. And, in some circumstances, their complaints are valid. An unregulated marketplace is not necessarily going to produce the social outcomes we consider just. This is why both sides agree on a basic regulatory regime; the differences between left and right are usually reducible to a debate over its size and scope. But the history of taxation in America demonstrates that the political marketplace can be just as inefficient and unfair, sometimes even more so. If the profit motive is not necessarily conducive to social harmony, neither is the reelection motive.
In light of this, maybe it is time for conservatives to rethink their approach to tax policy. Implicitly, many on the right still see the tax code in the same way that Hamilton and Clay did, as a wonderful tool to redirect social and economic outcomes for the betterment of all. But the history of American taxes demonstrates that the noble cannot exist without the ignoble, and the latter inevitably triumphs. For after the work of men like Hamilton and Clay is done, men like Aldrich invariably emerge to pervert public policy toward their own, selfish ends. And the Aldriches always seem to outnumber the Hamiltons and the Clays.
The rallying cry of small-government advocates in the late 19th century was a “tariff for revenue only!” They understood the kind of corruption that a complicated tariff or tax code inevitably breeds, despite the best intentions that the public-spirited might have. The IRS scandal demonstrates just how right they were.
Jay Cost is a staff writer at The Weekly Standard.
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