Transcripts For CSPAN3 Progressive Era Tax Reform 20240712

1877 to 1929. He explains how and why the United States shifted from generating most of its revenue from regressive consumption tax toss a more direct and progressive tax on North Carolina with the passage of the 16th amendment. The National Archives Center Hosted this event in december 2014. Into. Netanyahu for attending Todays Researcher talk, itch richard mccauley, we host this noontime series. Todays talk is the last in 2014, a year when weve been treated to some splendid presentations by some of the centers most significant researchers. That said, we end the year with a bang by hosting todays guest, Ajay Mehrotra who is discuss his significant and timely book making the modern american if i say ral state, law, politics and the rise of progressive taxation 1877 to 1929 published by Cambridge University press. We will resume this talk these talks on january 15 when we host Rebecca Edwards professor of history and Department Chair at vassar college. Her talk is titled sex on the frontier, fertility in americas antebellum empire. Rebecca edwards is an eminent historian who would you expect to get quite a draw from, but with a presentation with that title i think this is something that cannot be missed. Professor mehrotra is the associate dean for research, professor of law and louis nizer adjunct professor of history at Indiana University. He received his jd at Georgetown University law center and his ph. D. In history at university of chicago. He has served as the codirector of the Indiana University center of law society and culture. Before arriving at Indiana University he was a doctoral fellow at the American War Foundation in chicago. After law school and prior to his graduate training in history he was an associate in the structured finance department at the new york office of jpmorgan. Ajay must be among the very small group of individuals who have left wall street to pursue a degree in history. He is coeditor of the new fiscal sociology, taxation and comparative and Historical Perspective published by Cambridge University press. We should have time for q a afterwards. If you have questions please raise your hand so we can pass around the mic and then after that there are copies of ajays book for purchase at the back of the room. Thank you. Well, thank you all for coming. Let me begin actually by saying thank you to richard for inviting me to this. We met at the policy history conference last summer where he was kind enough to come to one of the panels where i was presenting some recent research that is an outgrowth or elaboration from some of the work on the book project and we got talking to how important the National Archives is to my project and Research Agenda and many other people. There is a real revival in political history, Rebecca Edwards is one of those pioneers and i think you will have a good talk when shes here. Richard was kind enough to invite me here. Let me take this moment to thank the archives and archivists everywhere. Historians cannot do what we do without the great work of the archivists and Staff Members and place like National Archives, library of congress and other places. We know that. We try to make acknowledgments in our books for all the great archivist out there but really it is the fodder for all of history and its the primary sources that you guys all put together that are very important to our profession. So i wanted to take a moment to thank you for that. So i thought id take about a half hour, 40 minutes or so to go over the general outlines of the book and before i do that i wanted to give you some background on how i became interested in writing about u. S. Fiscal policy, particularly during this particular period as richard mentioned the book that im going to discuss today but is the making of the modern american fiscal state, law, politics and the rise of progressive taxation from 1877 to 1929. I thought i would spend some time going over what the main arguments and claims i try to make in the book and then i want to focus on the source frs of historical evidence. I want to weave in some of the valuable sources ive found here in this building as well as nar2 and library of congress and some of the other places where, again, the primary the unpublished primary sources, the historians true desire for getting to the sort of unmediated paths and there were a lot of important sources in this building and i will try to weave those into my presentation. So as richard mentioned, i am a legal historian and ive so ive been trained both as a lawyer and as a historian, but i also teach and write about a topic that most historians do not want to focus on and thats tax law and policy. I think tax is one of those areas that at least for the american historical profession has been neglected at least in this country. Im actually in town for a conference the next couple days at the german historical institute. The ghi puts together this terrific conference on taxation and all these folks from europe, germans and they are just for them fiscal history is it. There are so many people doing it and they have so much vast knowledge and they come over here and go whats wrong with you americans . How come you dont pay enough attention to these issues of fiscal policy. With he try to say were getting there. The sources are here, give us a chance, were watching up in a sense. So this has been my Research Agenda from the very beginning. This book project is part of a larger Research Agenda when ive looked at the political causes and consequences of changes in american tax policy and so at its core my book really is about the intellectual, legal and administrative foundations of what i refer to as direct and progressive taxation, those two keywords, direct and progressive are really important. Like all historians, though, my motivations arent just based on the historiography theyre shaped by our own present political climate. Arthur schlesinger said all historians are prisoners of their own generation, as much as we want to write about different generations we impacted by whats going on around us. So ive been working on this book for longer than i car to remember from the dissertation to the transformation of the book process. During that time weve heard from many social commentators and scholars that the United States has entered a new gilded age and this is of course not tremendous news, lots of scholarly commentary about this, lots of books about the growing inequality and the concentration, the mall distribution of wealth thats occurred not just in the United States but the western industrialized world since about the 1970s to the present. All you have to do is read paul including man every other day and you will be reminded of that, hes been writing about this for quite a long time and of course the sensational reception of thomas picetees capital is another example of how this has become a very important issue not just for scholars but for social commentators and all concerned citizens. To my goal in this book is to take us back to the first gilded age. If we are in the second gilded age there is clearly an earlier period in which there was this massive inequality, this incredible concentration of wealth symbolized by such mansions as this one. This is the vanderbilts built more estate in asheville, now a big tourist attraction, this 250room home, nice humble abode for a summer home for the valter builts is one example of the opulence of this massive inequality and of course contrasted against that was the ravages of industrialism the late 19th century is the period where massive you wish ban zags, migration and industrialization has the other end of the spectr spectrum. You get the point that the massive inequality that exists in the gilded age is a fundamental part thats driving my concerns about this book. So the puzzle that drove me when i first started thinking about this, thinking about the first gilded age and what the response what was the political and economic and social reaction to this kind of inequality. I noticed there was a fundamental fiscal transformation in the United States at the turn of the 20th century, its best seen with quantitative data. I teach tax law, numbers are everywhere, you cant talk about tax and fiscal policy without some numbers. There is this dramatic transformation from the late 19th century in the sources of revenue for the federal government. Custom duties, incorrect and reg sieve taxes. The excise consumption tax, what we call today consumption tax. 90 of the government revenue in 1880 and then if you scan up, if you go to 1930s you see the income tactics up almost 60 , 66 by 1920 the legacy of world war i of course. So this is a fundamental transformation in the way our federal government finances itself. So this was the real puzzle, how did we make this shift . How did we go from this indirect and highly regressive system of consumption taxes to a more direct a direct system, the income tax is a direct tax as we would say referring to the base and its graduated rates, not dramatically graduated as we would expect although during world war i there is quite a spike in which the top rate does go up to 77 . How did this shift occur, what was the driver behind it . And part of it of course is geopolitical, so this another version of this as you can see the yellow is the income tax. World war i is the pivot upon with i this transformation occurs. I have a separate chapter on world war i. It plays a very crucial role. Much of the mystical social Science Literature gives emphasis to war. War and state building go hand in hand. The chronology doesnt quite work for the u. S. Because our income tax is well before world war i. 1913, before the war even starts in which we have a 16th amendment and then the first set of federal income tax laws. So part of my contribution to the literature is to challenge a little bit the Charles Tilley view of the world that war states make war and war makes states, its all about war adds the independent variable. We go to the social scientists and tell them it cant be just one variable. Theres lots of variables. There isnt just one independent variable that explains such fundamental structural changes in society. So i wanted to ask myself what were the motivations for this fiscal transformation, what were its consequences that was really what i was trying to get at in this book. There are really five. Im not going to spend the entire time going over five but let me go over the main what i see as the consequences of what i see as not just a transformation of Public Finance but how that leads to a new fiscal policy, a new kind of state craft. One is is this desire to reallocate the fiscal burden, moving it away from regressive consumption taxes towards a direct is really about reallocating the burden of how you finance what at this time is the emergence of burgeoning modern regulatory social welfare state. The roots are there in this progressive era period. How are you going to fans it and are we going to do it in a more equitable and effective manner . This is not all that new, literature has talked about how the rise of income tax and graduated direct tax has had this effect, but whats been underestimated, i think, is how this also has had a sort of social or cultural implementation. So i argue in the book the second element of this new fiscal policy is how it create this had new sense of civic identity and national what i refer to as fiscal citizenship. Thats not a term that i have soind, but its an important term to my book andook and has more popular in tax law debates. Part of it is this notion of fiscal citizenship. That the actual process of paying taxes actually engages citizens with the state in a positive kind of way or at least it potentially can be. Certainly in my period thats one of the drivers of this move away from a hidden sort of regressive consumption tax to a more direct visible transparent kind of tax system. Thats a really important part of the book. Then also third i am at heart a legal and political historian. When one thinks about ttu of the 20th century this is the time when we see a transformation awayn away from known as the party period, the period when things like the tariff are the defining issues that separate republicans and democrats to the move to whats known as i dont know if there is an exact term but the post party period is certainly one which special interests rise and there is a more fractured sense of politics and how law making occurs and fiscal policy it at the center of that. The move away from the tariff and customs and excise taxes to an income tax as part of this shift, this alteration in political arrangements. So those are the sort of three main elements, the other two that i dont sort of tease out in the book but that i allude to that are more consequence of the fourth is really how at the end of the day the income tax becomes a fiscal workhorse, it doesnt happen in my period, its world war ii when we move from a class to a mass tax that it generates the revenue thats important for us today but the foundations, again, the intellectual, legal, administrative foundations are all there in the progressive err la, it just gets accelerated i argue in world war ii when it underwrites this modern as ive said administrative regulatory social welfare state. You have to have the revenues to do these kinds of things and it is at this early progressive stage when the foundations are built. The fifth which is a little more provocative or a little more present my historian friends always push me on this, but i try to make the argument that the foundations theres also a paradox or an unintended consequence that comes from this kind of move to towards direct and progiv progressive ts and away from consumption tax. That exacerbates what i describe as ais myopia that americans might have. This comes from some of my comparative historical work ive doesnt lone looking at, for ex the value added tax in europe, for example. In one looks at data today it i think shows us two things, one that there is a myth, an undertaxed american, were overtaxed, pardon me. If you look at we dont pay as much as others but its not as if were overtaxed in that sense. More importantly whats missing is almost all modern industrial countries have some kind of consumption tax in the form some Something Like a value added tax. The conspicuous absence of a value added tax in the United States, tax law policy perspective is really sort of jarring. So in some ways the present that im trying to make is not to explain why, that would take another book all by itself but at least to gesture that this fixation on a progressive income tax may have foreclosed the opportunity for other kinds of taxes, possibly the movement to so in some ways no vat in the United States the question of why no vat in the United States is like the question of why no socialism in america. I think the two kind of go hand ha in hand. I will talk in the end about my current research, i think im going a little bit more in that direction, but consequences i s this foundational period really kind of narrowed the imagination and vision of tax reformers when they thought about the income tax versus consumption tax and what was possible. I will be happy to talk about this more in the q a, as i said, i dont think i can prove this point, but i certainly i think there is evidence to suggest that this foundational period had this unintended or paradoxical consequence. Let me get to the first three claims because they really are the important. The first is this notion about shifting the tax burden. So what we saw here was this move again away from regressive tariffs associated with the tariffs and excise taxes on alcohol and tobacco to really taxing individual income, business profits and wealth transfers, intergenerational wealth transfers, direct taxes. Its about shifting the base. That was clearly part of it. That meant targeting wealthy individuals and corporations in the northeast. Theres clearly a sectional story to this. This has been told again by others so im weaving and synthesizing some of the historiography that exists. One thing i focus on is this notion of ability to way. To this three words these really kurt words at this time become powerful tools. This is where my book is a kpngs of intellectual and political history. I look at the reformers who initially are populist farm nurse some sense, to intellectua intellectuals. So some of the key protagonistes in my book are political economists. Today we would call them economists but back then they were called political i think the distinction is important. They were thinking about the economy in amy in a much more b way than economists think of today. It was these political economists led by edwin sechlt. Ligman at columbia university, political economist Richard Ellie the labor act terrorist, henry carter adams, these are the pioneers of american Public Finance, at least theoretical pioneers. They are aller german trained, there is a transatlantic story to be told as well that i use in my book and they focus on this notion of ability to bay. That our tax system should have as its fundamental cornerstone the motion that those who earn more have a duty, a social obligation to contribute for, nor jt proportionately more but progressively more, the notion of graduated rates fits into this idea an driven by this concept of ability to pay. Of course, its no coincidence that these exists are writing a time when marginal analysis is taking over the United States coming from a transatlantic story from europe. How the last dollar to the vander belts means less than the last dollar to the new york laborer. This phrase ability to pay, i traced this language from the political economist, their writings and treatises, this is a time when political economists are progressive reformers, too, not just writing for a specialized audience of intellectuals, they are actually trying to write seligman writes just as many articles in the political review. What i argue theyre doing is harnessing a social response, social reaction against the existing regime of regressive indirect taxes and are using this language ability to pay not just as an intellectual tool but as a Political Tool as a way to galvanize a movement. Their ideas are picked up by politicians so this is where the lawmakers come in, this is where the national after five story has been important to me to tray how the language ability to pay moves from the halls of economic popular magazines to what lawmakers are saying in the halls of congress. This is clearly one of the main points about this and the other thing that seligman and others are pushing is they are not tried to radically pre droe do you say wealth. I think we sometimes forget what the origins of our tax system are about. In some ways our historiography at least whats the current existing im thinking of the work of morton who are owe wits as well as Robert Stanley who has also written about the rise of income tax, its this view that this was a lost opportunity, that co opted, the income tax was co opted by conservatives who averted we could have been scandinavia is the premise, we involved this really radical change in this progressive era and we missed out. Its this conservative employee the silent masses will have this token income tax and i think thats just wrong because if you take a look at the primary source, yes, this were some people, Nelson Aldridge the famous conservative republican from rhode island who says that hes going to agree for the income tax to stop the socialists. Thats a claim he makes explicitly. There is some evidence of that but thats not whats going on elsewhere. He is not the only lawmaker who has influence on this. We lose sight in the list gravy by thinking that our income tax was meant to radically redistribute wealth. I think in Popular Police cat discourse sometimes folks on the right think we had a goal of using it to radically dis distribute wealth. Our modern Day Tea Party in a sense has this sense that our tax system is about punishing capital or wealth. You see these posters about taxed enough already. This was one of the core elements of our modern tea party. There is of course a huge cognitive dissidents to some of the tea party and this is my favorite poster from the tea party, keep government out of my medicare. Again, going back to the salient, people really understand the public versus the private in all of this. I am trying to address going back to schlesingers point, im trying to address the new left historiography and the current political dialogue that thinks that were radically redistributing wealth or wanted to at one point. That was never the goal in any of this. So if you go back to this what the goal really was was really its about reallocating the financing. How are we going to support a modern industrial state. It wasnt just the intellectu s intellectuals, it starts i argue with a social history. Here is a source that i found in this building, i dont know if its too small, but this is a letter, a petition from the secretary of a massachusetts Grange Movement to his congressman which i found here in the petitions in the ways and means box, box 180, folder this is upstairs somewhere i imagine and this is the quote thats in the book, right, that the American Farmer is heretofore and now paying more than his just proportion of tax tags and believing that an Internal Revenue tax upon incomes will equalize the burden of taxation. I want to draw your attention to that phrase. Its not about radically redistributing wealth. The resolution is that the members request our representative of congress and also our senators best efforts to place such a law upon the statute books. This is in 1893, 94 when the first income tax is struck down by the court as introduced. This is a social movement. It starts with this kind of populous and spreads politically through the peoples party. You actually see this. Its not just the granges theres actually some political voice in the Political Parties and then later you actually this becomes a resounding theme that again the intellectuals harness but to my story moms from the social movement to the intellectua intellectuals, they become the bridge between the people on the ground and then the lawmakers because what im trying to write about is ideas in action, how theyre trying to influence lawmakers. So one of the most important lawmakers in this period is kordell hall who is in many ways the political father of the income tax. Halls call here, too, suggests its not about any kind of radical notion of redistributing wealth. He says i have no disposition to tax wealth unnecessarily or justly but i do believe that the wealth should wear its just share of the burden of taxation. Just share is a everyone has a different vision of what just share is. There was at least at this time a at least initially and slowly and gradually sort of a bipartisan notion about after shift from a regressive and indirect system to a direct system was one way to ensure that kind of just share. Again, you saw this again back in the popular cull door. There was this terrific cartoon that is the cover of my book, and this was here in the library of congress that i stumbled upon and you can see the title of the cartoon is the new man on the job, the treadmill is governmental expenses. This is about its going, we have this modern burgeoning regulatory social welfare state, its the working class thats been on the top of the treadmill doing all the work and finally the heavyset graphic this is the idle rich and the collar is the income tax. Its the collar thats bringing the rich on to the treadmill. Not to equalize all wealth and income but to get them on board with doing their fair share. And then this quote from George Holmes a government statistician talks about this person that there is always a danger that the rich will get too hard, hold upon the wealth of the labor in the country which case the most effective are progressive taxes on incomes, gifts and inheritances. A direct and graduated tax system, move away from incorrect and regreg sieve. And i think we still hear echos of this today. If you think back to just a couple years ago when Warren Buffett was talking about his own Tax Liability compared to his secretarys, this was an example of this concern about ability to pay. I think we also saw it in california, for example, which people often they raise their taxes in california a couple years ago. People often think i mention this town in particular that you cant talk about tax increases, its completely off the table. It doesnt have to be. It hasnt always been that way. Thats one of the things im trying to show i guess present day concerns today i guess you could label my book as a my ee progressive assault to remind us that americans have not always and everywhere been antitax and antistate. I think people draw a direct linear line from, say, the revolution and the initial tea party to newt gingrich, thats how American Political Culture has always been. Thats just not right. So thats part of the upshot of this book and i think with he see echos of that today, we saw it as well in some of the occupy movements and some of the other things. I think we actually see it in law. The Obama Administration partial victory in raising taxes on the eye end, not as high as they wanted to, not the same threshold levels but certainly that partial victory all suggests that this notion of ability to pay still has resonance today. The other claims that i would mention i will try to run through relatively quickly so we have time for q a, i mentioned already this notion of forging a new civic identity. So reformers during this progressive era really believed that you could use taxes to reconstitute or reinvigorate the social contract, the relationship between citizens and the state. And you could use taxes in a sense to help citizens reenvision or reimagine their ethical or social obligations to the broader community. Thats what taxation was about, giving back to a larger broader community, a state that could help with things like crisis management, Economic Development and all the things that the Public Sector does for us. So this is really at heart what in many ways the historiography tells us what progressivism was all about. This was an age when democracy were the key concepts, the identification with the common lot as jane adams put it is the essential idea of democracy, this is clearly the progressive era notion and thats why its this time that we see this structural transformation that leads to the fiscal state. And i think we also see it in the sense of replacing what they saw as an old and outmoded notions that taxes were based on government benefits and that was the sort of ideological rationale used for much of the existing tax system, certainly at the state level, the property tax, for example, and even the tariff to a lesser extent, it was a notion that there was this quid pro quo, that people paid taxes for the direct benefits the government gave them, protecting their property, for example. The intellectuals i look at particularly the political exists really attack benefits theory and say thats really an outmoded notion that there is no real such thing as an isolated oneonone relationship. This he use this notion of ability to pay as a counter to the benefits theory to suggest that there is a social obligation that comes and that taxation is one way to fulfill that social obligation. The third thing that i try to stress in the book is how this movement to an income tax or direct tax, its not just income, its also corporate profits taxes and as well as wealth transfer, the estate tax has its origins in this time period, it also transforms politics or political arrangements, institutions of course. We get new tax law policies and regulations that are very different from a tariff. So its no longer about log rolling, about whats going to be on the duty list and how much its going to be, but its about how do we define something called income which to this day is an important concept that continuously is litigated and discussed for which theres regulations. In that sense this move to a different base and graduated rates i argue really becomes in that sense tax law becomes a vanguard for our i think the new deal still becomes the High Water Mark for a lot of these changes but a lot of the a lot of the agencies that follow up are following along in a lot of what treasury is doing, the treasury regulations that come up in this time period to help us define what counts as income, what counts as a taxable unit all of these things are important in develop a new set of politics. We are Less Beholden to the party period and the politics of horse trading over which items to put on the duty list and how much and who to appoint to the customs had a uses these were all part of the party period and though its about butte democratic experts. I have a separate chapter on the Critical Role that treasury lawyers play during world war i in particular in building the administrative infrastructure of this fiscal policy that spills over into other aspects of the modern state. So another example of this is we see a tariff and it says its all about partisan politics, relatively simple collection methods to this much more much more detailed and sort of need for professional knowledge about the tax and the process of remittence. This is no coincidence this is a time when the modern corporation plays an Important Role, represented policies when i first met richard was about how important the Corporate Tax is in all of this. Its less about tax incorporations than it is about the knowledge, the information that corporations start to accumulate at this period. That becomes very important through the process of withholding. Withholding is this really important cornerstone to our system of taxation and its the modern richard bird who is a wellknown Public Finance economist has this terrific line, he says that if the custom house was the locust of tax power in the 19th century the tariff its the modern corporation thats become our custom house of today. Its the information that the corporations contain that allows us to do all the kind of thirdparty reporting through withholding other things that leads to this kind of change in political arrangements. Ive used up a lot of my time. I want to conclude, though, just a couple of quick slides on the importance of constitutional law in all of this. The 16th amendment is what allows for the creation of income tax. Law. It strikes down the 1894 income tax that i marked. And i found some terrific information. Theres this really Important Role that the new york senator played in drafting. And so richard and i were talking earlier about how important it is to demonstrate to grad students and junior scholars about what the archives can tell you. I spent several weeks looking through a lot of the papers and i stumbled upon this is up in nar2 up in college park, this back and forth between route and the Treasury Department about how to write the actually language of the 16th amendment. This is roots handiwork. Hes thinking carefully about how the language of the resolution needs to be worded in this particular way. Theres seven or eight drafts that go back and forth about how are we going to have from whatever source revived, the keyword that is not only part of the 16th amendment that becomes part of our income tax law. You cant get that from the published sources. This is why the archives are important. I probably dont make enough of it in my book. My next project, im thinking about toying with another book, a second book on the pollack decision. There is no at least not since twist i think that weve had a book that takes a closer look at the Income Tax Supreme Court income tax case. The pollack decision. It plays an important part in my role. But im thinking about going in that direction to talk a little bit more about how important that constitutional amendment has been. Let me conclude with presentday implications. When i give this talk, especially to an audience not familiar with archives or scholarship, they kind of go, what are you talking about . That period is gone, right . Civic identify, ability to pay. No one believes that. I have to concede, times has changed. Theres no doubt about that. But, i would also say that even todays revolt against taxation, even the tea party share this link with the roots of our modern fiscal policy. Theyre responding. That has set the agenda, the progressive period and the knew deal elaboration of it, continues to set the agenda of our modern fiscal politics. This long history that im talking about, i think continues to press upon the thinking of today. Let me end there. Thank you very much for your attention. Im happy to take questions. Thank you again. My experience has been that in developing federal policies, very often state governments test out interesting ideas first. Yes. So can you describe the history yes the history of district taxation and income taxes at the state level and comment on how that influenced the federal government. Yes, thank you. Great segue. Wisconsin is the answer in some ways. The short answer. During the progressive era, wisconsin is really the incubator to use brandeiss term at the laboratory of democracy. Its one of the states its there in 1911 where we see the first statelevel income tax. Its no coincidence, it becomes a proponent of the income tax at the federal level. And it has an Important Role in convincing the reformers, the intellectuals. Edwin sellington, before wisconsin implements it says its impossible. Too many things are national now, even in the early 20th century. The states are kind of kidding themselves, it has to be on a national level. States shouldnt bother. Its too difficult. And richard eli doubts him and i have a chapter on whats going on at the Sub National Level and its wisconsin that becomes a leader. Theres other states that do other things on administration. But on the Actual Development and implementation of income tax, its wisconsin that becomes the bellwether for the National Government and one of the important innovations they have is this thirdparty reporting. Its requiring banks and other Financial Institutions that are paying interest and dividends this things of that sort to report what theyre paying and to whom. That becomes a very important administrative thing that they pick up on. Theres a story about states experimenting with things, ohio does interesting things, so does indiana, and then the actual implementation of a direct and progressive taxation successful at wisconsin, i think emboldens National Lawmakers to do it themselves just a few years later. Theres a state to national story. Does that help . Yeah, was it limited just for the rich in wisconsin . Yes, very much so. Thats one of the keys to this. It allows social democrats in milwaukee, for example, to gavelize support for it. It requires a constitutional amendment in wisconsin as well. And part of the argument is were going to keep rates high and this is, again, meant to in a sense, get rid of the existing dysfunction of the statelevel property tax, for example. The property tax ought to be a graduated sense. People who have more property should be paying mu. But we see a radical transformation about wealth. Its about stocks, its about securities. In wisconsin, its about mortgages to large farmers that have mortgage that is are not being taxed. So the argument at the state level is, our property tax, which may have functioned fine in a preindustrial, prefinancial capitalist world is okay. Now that we have all of this intangible wealth, its supposed to, on the books its supposed to. But in effect its not. How do we counter that . We come up with another tax as a counter balance to that and its aimed at the elite. Thats exactly how its pushed through. Does that the state story is very important. I have a whole chapter, probably too long a chapter. I found it very interesting. Your talk focused on taxing side, not so much on the spending side. One point you made early on was that developments in your period may be exacerbated fiscal yeah. I began wondering, what was happening on the spending side during your period and a couple of questions, number one, just imperically, to what extent was Government Spending growing and what was Government Spending its money on and did that change during your period and, two this is motivated from observations about our current politics. I think now theres a great disjoint in discussions about taxing and spending. And so i wondered whether the protagonists in your book, maybe other policymakers at the time, were sort of similarly segmenting those discussions or were they talking about taxing and spending together. Yeah, so that really gets at this point about fiscal myopia. Its in fact i try to suggest one of the arguments i make is its during this period that we actually see that segmentation occurring much more explicitly. This is not an argument that im making. Richard musgrave made this argument in the mid20th century when he was attacking the ability to pay, the notion as being too powerful. And so ive just taken the argument and put it back into Historical Perspective. What musgrave and peacock and what im trying to say now, back when the benefits principle was the ideology, the two were linked. Spending and extraction were tied together. Ability to pay comes along and in a sense this is an unintended consequence. This is what responders are responding to. The card thats been dealt to them is this regressive system of consumption taxes. They do everything against it. And in that sense, by pushing ability to pay as the counter, they focus exclusively on the extraction side and they sever the link between spending and raising 11. Thats what i think is myopic about this. That might not have been such a great thing because if you take a look at other countries, other industrialized countries in the world that are trying to address poverty and inequality, its through consumption taxes. Why arent we scandinavia . What is scandinavia doing . I used the example it as a as just one example, as an illustration. Its got an incredibly regressive vat that taxes everything, as far as the last time i checked, it doesnt have anything exempted. National health care, national education. Part of the fiscal myopia is that the reformers in this period were fixated on the ability to pay, were so obsessed with trying to focus on the extraction. I think theres a its not entrepreneurial an intellectual story. This picks up on the argument on the classical work on taxation and democracy and his work is about political institutions. Theres a parliamentary system. Roger smith as a cultural argument about how notions of race and ethnicity have also influenced our policy. All of those things are there. Im just adding another layer to suggest that this intellectual legacy is pretty strong too. And to get the other question about spending, there isnt a lot of spending in this early period. There is the ratchet effect, of course. As soon as world war i comes along, the civil war, in the beginning of the period, one of the largest accounts for federal spending is on civil war veterans pensions. Thats the beginning of our social welfare state. It starts to dwindle later on. But in some ways, raising revenue isnt the goal of the tariff system. Scholars say, look at the tariff system. I didnt raise a lot of revenue. And you go, thats the point. It was a protective tariff. It really wasnt meant to it wasnt like there was a lot of demand for federal revenue at that time period. Things change after world war i. The wars do become important. Theres a ratchet effect. Military spending stays very high during it comes down but it never goes back to the prewar period. Theres spending on world war i veterans as well that leads to other policy. This is also the time, of course, where regulatory states take the federal trade commission. All of these agencies that didnt exist in the late 19th century. Theres an incremental growth of federal spending that is beyond National Defense and the question becomes, where is the revenue going to come from. Part of my story is describing the forces that led to it. Does that help . Very good question. I have a question about what you think of funding our transportation infrastructure. Our Highway Trust Fund is broken and thats based on fuel taxes, gasoline and diesel fuel. But they have not raised no politician has had the guts, including obama, to raise our gasoline tax. Its been the same since 1990. Yeah. And should we pay for Highway Infrastructure out of the general fund or should we how should we do this . Wow. Let me take the first out and say im a historian. As a historian, i study a lot of periods. But the future is not one of them. Im not sure where we should be going. But at other times, if we take history as an analog, at other times when weve had these earmarked kind of taxes and theyve been insufficient, the response the response has been to increase them in some cases. Youre right, in todays political environment, that seems unlikely. And so the turn in other contexts have been to other sources. So maybe part of Discretionary Spending ought to be going more towards transportation infrastructure. Theres talk of it occasionally. President obama does talk ability our dysfunctional infrastructure and how we need to do more about it. Its mostly rhetoric. I agree with your point. In the current environment we dont seem to be spending money in that, but if history is any guide, there becomes a crisis moment. Im not sure what that again, the future i dont know we had a crisis in august when they predicted the Highway Trust Fund would be in the red. Yeah, but that was a budgetary crisis, right . The crisis that usually galvanizes the kind of reform were talking about is more farreaching than that. When theres a next bridge catastrophe or Something Like that and human lives are taken, that might be the moment. Thats the other thing that fiscal history teaches us, there are moments, opportunities, windows for reform. And that might be the time when progressive reformers who want to increase the gasoline tax or find other funds for it, might be able to use that. What was the Rahm Emmanuel line, its a shame to waste a crisis. Theres a lot of historical truth to that. You said income is a slippery term. Another slippery term is direct tax. Apparently the Supreme Court thought some things are direct taxes and others disagreed. Would you elaborate on the use of that term and the political repercussions that they seem to have given some momentum to. Yeah, thats a great question. So for the direct tax clause thats in the constitution from the founding period requires that any taxes that are it doesnt define direct. But the phrase is a direct tax has to be apportioned by population. Thats the language before the that governor right before the 16th amendment changed that. But thats how the could you repeats interpreted it. For many years, before pollack, an income tax was not deemed to be a direct tax. There was never a challenge to that. But for the most part, the way the court defined direct tax, it was presumed that an income tax would be fine. In fact, in my chapter on the lead up to the pollack decision, a trained lawyer is consulted by both sides of the pollack decision, theyre all theres a bunch of new york wall street lawyers who are representing pollack. And they contact him as well as the government lawyers to cold front get his hes the expert. Hes done historical work on it. And he thinks this is a nonstarter. This is not going to be challenged. Weve always had this. He does an incredible study from the colonial era, all the way up to all the cases and tries to convince the pollack lawyers theyre wasting their time. In fact, he says that. And, they, of course, are paid lawyers so theyre going to do their job. And they use some of his research and not the way he was appreciative of and so he writes an article in response, but its all moot because to his surprise, to the surprise of every expert, they deem a tax on rental income, that was the key part of the pollack decision, a tax on rents, was a derivative of land tax and it was a direct tax, it had to be apportioned. It was struck down. And the experts are all shocked by this. The law reviews are all full of what is the court doing and sense th since that time, the case is tricky. They hear it once and theres a missing justice and they hear it again, and theres a different justice who votes a different way. Thats why a book on that might be interesting. The courts interpret the direct tax clause very differently than all the Supreme Court cases that have been at least similar on that topic have before. The experts are shocked and in fact, when taft is running for president , hes a lawyer, he knows he thinks on the campaign trail, he says, we probably should have an income tax. The probably he doesnt say they made a mistake. But he said we might be able to implement an income tax despite the pollack decision. When he becomes president , he backs off, does not want to challenge the integrity of the court and helps broker the compromise that leads to the 16th amendment. The image i had here is fascinating. My wife stumbled on that. Its root going through each word, trying to figure out how he can write the 16th amendment so there wont be any future challenges. The language of the 16th amendment says without apportionment. He adds in there that this is an income tax will be deemed direct tax but will not require apportionment. Direct response to the restriction. And so root plays this Important Role, the political economists play this Important Role, but at the end of the day, its really about social politics. Its a social movement to ratify a constitutional amendment is not an easy thing to do. It really its not surprising when you go back to the populist farmers. Alabama is the first state to ratify the 16th amendment. Influx of Southern States because theres what the income tax is going to do is tax the northeast industrial sector. Its the south thats being hurt by the tariff. The shift from the tariff to the income tax has an important sectional implication. You see this slowly going through. New york becomes a crucial state in the 16th amendment battle. And thats where he is. I riff off of john bunkers great book on the 16th amendment where hes testifying before the new York Assembly about the 16th amendment, and governor hughes, he comes out against the 16th amendment because hes worried that its going to give the federal government too much power visavis the states. Hes worried that means theyre going to tax state interests on bonds, for example, and things like that. Hes worried. And he comes out and says Charles Evans hughes is a classmate of his. Theyre friends. And he has this terrific presentation before the new York Assembly where he says governor hughes doesnt understand the economics of taxation. If he was a student, i would have flunked him dead. The Capital Markets would sort it. Its an implicit tax. The markets will sort out what if theres an exception for certain kinds of rates. Governor hughes is going down the wrong path. Im not saying that his testimony was the linchpin, but new york, thats where 2080 f the income tax from new york. New york is one of the states you would expect to resist but it in fact goes along with the 16th amendment as well. Does that help . It was a round about response to your question, richard. But it gives you some flavor. More questions . Well, if a. J. Has not given us a really example of why we should purchase his book, i dont know it was a great discussion of clarity on a frightful topic. Thank you so much for a wonderful presentation. Thank you. Thank you all for coming. [ applause ] weeknights this month were featuring American History tv as a preview of whats available every weekend on cspan3. Tonight, a look back at a union prisoner of war camp during the u. S. Civil war in new york where almost 3,000 confederate p. O. W. S died. Derek maxfield is the author of the most famous prison camp in the civil war. That starts at 8 00 p. M. Eastern. Enjoy American History tv this week and every weekend on cspan3. Historian and author Molly Michaelmore discusses her book. She looks at tax policy and American Attitudes towards taxes from the end of the new deal to the 1986 tax reform act. This talk is won in a series with col with scholars. The Center Hosted this event and provided the video. Thank you for attending Todays Research or talk. Im a historian at the center for legislative archives, the sponsor of this series. Weve had a full program this year, showcasing significant