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?
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.”