The United States first adopted a permanent income tax in October 1913, months before World War I broke out in Europe. Once the war hit, for the first time since Napoleon a century before, the major trading partners of the United States stopped shipping products into the country for sale. The tariff had long been the principal source of federal revenue. But now the government was both free from foreign entanglements, as went its revenue source, and outfitted to raise its money domestically—because it had an income tax.
Armistice Day, several weeks ago. (Photo by Jane Barlow/PA Images via Getty Images)
PA Images via Getty Images1913 also marks the point at which the United States was about to begin a very long season, still with us, of military activities abroad. The United States remained neutral through the first years of World War I. But in 1917 it entered with a bang, so as to “make the world safe for democracy,” as President Woodrow Wilson said. The tax basis of the making-the-world-safe was the domestic U.S. economy. The income tax put upon it would carry the load.
World War II—the Big One—saw the United States jack up income tax rates to 94% and extend tax brackets down to earners of the most meager levels. The income tax became a “mass tax.” By 1945, the United States had projected its power globally like none before. The financial basis was the domestic taxation.
Same thing with Korea and Vietnam. The United States took on these military projects on the basis of its ability to tax the domestic economy. The Iraq and Afghanistan wars were different. Thanks to a defunct gold standard, foreign capital flows to United States provided much of the funding.
The United States acquired an income tax, and quickly it stepped up its military activities around the world most massively for the duration. Is there a connection? The book that shook up the diplomatic history of the 20th century more than any other was Fritz Fischer’s Griff nach der Weltmacht, or “Grasp for World Power” (1961), which argued that Germany went to war in 1914 to bind up its domestic wounds, to rally the nation to be one, via a glorious external military project.
Since Fischer, every country’s military endeavors are assumed to be a function of domestic political imperatives, outgrowths of major domestic political reforms. Why not the United States?
Bind up the nation’s wounds—a Lincoln phrase, of course, from the second inaugural. After the civil war, the regnant North ostentatiously hiked up and expanded the tariff beyond its revenue-protective range. It was a fruit of victory. The South hated the tariff, so Congress rubbed its noses in it as tariff protection enabled crony Yankee fortunes.
Yet the South had hated the tariff only selectively before 1861, mainly when it was too high to be revenue-productive. Prior to the war, the South wanted the federal government to have revenue so it could shore up the King Cotton system with spending on slavehound marshals and so forth. After the final freedom of the 13th amendment abolishing slavery, a primary reason for the South to hate the tariff was removed. The feds could no longer use the receipts to maintain the peculiar institution.
Therefore opposition to the protective tariff extended into the working classes—exemplified by the three million or so people who bought the books of impecunious free-trade and single-tax advocate Henry George—while the South still reviled it as a symbol of Unionist vindictiveness. A coalition of working-class and Southern Democrats developed. It produced the 1913 Constitutional amendment that allowed the first permanent income tax of October of that year.
In the law that gave us the income tax in 1913, the tariff was reduced. It was a trade-off, led by House majority leader Rep. Oscar Underwood of Alabama. As John F. Kennedy noted in Profiles in Courage, Underwood’s eventual steadfast opposition to the Ku Klux Klan was remarkable for an Alabaman officeholder of his time.
All of this contributes to the impression that the income tax came in some part to “bind up the nation’s wounds.” Vindictiveness was too hard to stave off in the immediate aftermath of 1865. After a generation and a half, the Yanks would reduce the tariff and permit themselves to be taxed at their heart, on their income, and they certainly had more income than could be found in the realm of the old Rebs. Since the income tax at first would hit only high earners, and them modestly, it also was a gesture of comity towards the working class and gentleness all around. There even was a hint of relaxing the rapaciousness against African-Americans, as expressed by Underwood’s example. How reconciling it was to a nation that rather recently (only two score and eight years before) had been rent to its core.
Wounds of all sorts were starting to get bound up, but one thing remained: a great quest befitting a unified people. Perhaps a people is only unified (or appears to be so) if there is collective action. Soon it came, in that characteristic activity of the United States since 1913: warfare around the globe.
Again, since Fischer every war is analyzed in this fashion—there is no reason to exempt the U.S., at least for argument’s sake. Consistent with this interpretation is how Southerners have cottoned to the expanded military, in particular in the rank and file, filling out the recruits as they do. Once the olive branch signaled by the income tax came in, they signed up for the modern union army (of all things) and went off on the great national quests.
The expanded American military potential, as secured by the domestic revenue base via the income tax, probably drove international events more than we are apt to think. It created a sort of moral hazard. Europe and the Far East could go a little crazy—as they did, 1914-45—on the reasonable assumption that America would come in and clean up the mess. It is telling that the great offenders of World War II—Japan and Germany—did so well after 1945, once the American military had won its victories, Germany even achieving its war aims excepting Lebensraum, while the attacked including China and Poland did not.
Had the United States not committed itself to great global political-military quests—a precondition of which was domestic taxation—would regimes around the world have been as adventuresome as they were under this condition? Perhaps not. Perhaps in some not entirely oblique fashion, the income tax was one of the causes of the world wars. A U.S. insistent on being reliant on the tariff would have entailed no geopolitical moral hazard. The message would have been that the U.S. will not be bailing you out. It would be happy to get by with nothing—as Jefferson had tried to do, when the country was far less developed, in the embargo of 1807.
As for the social state that the income tax purportedly funds, welfare, education, health care and the rest, it is well understood in Washington that a social state of some size is essential for the health of the military state.
This is so on two grounds. The first is that a large expenditure on the social state justifies large military expenditures. It is easier for the military to call for a large budget if it is proportionate to other major items of federal spending. Even Ronald Reagan was warned, as Martin Anderson’s memoir tells us, not to cut domestic spending for this very reason, so as not to endanger his military buildup.
The second is that a significant social state lessens real economic investment and opportunity. This increases the number of potential recruits to the military. If the economy is vigorous on account of low government spending and taxation, the military has to compete with this vigorous economy for manpower. Perhaps it could do this, but from the perspective of narrow self-interest it is easier for the military if there is a sluggish, opportunity-poor economy. Otherwise recruits might number what they did in the 19th-century, when there was a dedicated group of the few. A welfare state, in contrast, yields many Gomer Pyles.
Vietnam recruitment expressly proceeded along these lines. If you had prospects in life, if you were in college, a deferment. If you didn’t (according to government lights), draft. The juvenile delinquency crisis of the 1950s occasioned by the frequency of recessions in that decade met its obverse in the draft of the 1960s. And Robert “McNamara’s 100,000” mopped up the low-IQ for the service. The funding for all this social-state goodness, this ersatz Great Society, would come from creaming off the suddenly booming domestic economy, via income taxation.
The United States is still contemplating what kind of 21st century it wants to make for itself and the world. One mistake it might strive not to repeat is acting on the belief that the nation cannot be one and whole—with heaven knows what consequences for the world—unless there are great government-sponsored ventures for the domestic population. A way to make progress on this score is to wind down taxation at home. If income-tax enabled foreign wars are how we chose to bind up the nation’s wounds, Lincoln rolled over in his grave.
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