Our Federal Tax System: How We Got Here From There

How did our current federal tax system coming into being? What lessons can we draw from its history as Congress contemplates tax reform? These were the questions raised in the National History Center’s Congressional Briefing on “American Families, Global Competition, and Comprehensive Tax Reform in Historical Perspective,” held in the Rayburn House Office Building on Friday, May 8. The event, co-sponsored by the Congressional Joint Committee on Taxation, attracted a standing-room-only crowd and generated a lively and informative discussion.

The briefing speakers were Ajay Mehrotra, a professor of law and history at Indiana University and author of Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929; Joe Thorndike, director of the Tax History Project at Tax Analysts and an adjunct professor at the Northwestern University School of Law; and Bruce Bartlett, an author and historian who served as a senior policy analyst under President Reagan and deputy assistant secretary for economic policy at the Treasury Department under President George H. W. Bush.

Mehrotra traced the modern system of taxation to the Progressive Era, which saw a dramatic shift from a reliance on regressive excise taxes (comprising 90% of federal revenue in the 1890s) to a progressive income tax (which produced 60% of revenue by the 1920s). Thorndike took the story from there, noting that the income tax rates rose for the wealthy during the New Deal, and the government became even more reliant on the income tax during World War II. Since the war, Bartlett observed, the system of taxation instituted in prior decades has remained largely unchanged, but it has come under increasing strain as tax cuts, the inflation of the 1970s, ballooning budget deficits, and other developments have spurred calls for tax reform.

Why didn’t the United States adopt the welfare state model that developed in postwar western Europe? Mehrotra and Thorndike argued that European liberals and conservatives made a grand bargain: conservatives accepted a robust social welfare system in return for liberals accepting a regressive sales tax (the VAT, “value-added tax”) to help fund it. In the United States, by contrast, liberals resisted any version of the VAT (and conservatives surely would have resisted the quid pro quo of a European-style welfare state). American progressives focused exclusively on the ability to pay, viewing taxation as a vehicle for redistribution. Ironically, their emphasis on “fairness” led to a “fiscal myopia” that lost sight of the connection between raising revenue and spending on services. As a result, funding for Social Security, Medicare, and other social services was never fully secured, while health care was made an employer-based system during the war. We are currently struggling with the fiscal consequences of those decisions.

Bartlett’s remarks focused on the postwar period, commenting on successive administrations’ futile efforts at tax reform. He argued that the opposition to a federal sales tax came not just from liberals; conservative in states that drew much of their revenue from consumption fees opposed it as well (a point disputed by Thorndike). Bartlett noted that President Kennedy launched an ambitious tax reform initiative, but it simply resulted in tax cuts, not tax reforms. The inflation of the 1970s pushed many people into higher tax brackets, but it also increased tax revenues, reducing the incentive for reform. While conservatives from Reagan onward have argued that tax cuts alone can generate the economic growth needed to overcome revenue shortfalls, Bartlett insisted that such claims are illusory.

The panelists gave the audience a lot to chew over, and their remarks generated vigorous discussion. It is impossible here to summarize all the issues that were addressed in the question-and-answer session, but the National History Center has posted a video of the event here and on its website, along with videos of many other exciting NHC events. Enjoy.

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