A Unified Theory of War and Taxes

world war 2 saipanIf you hate taxes but dutifully cheer for wars, it’s lucky you also oppose school funding sufficient to produce historical literacy. Taxes are a byproduct of wars. Were it not for wars and war propaganda, this country would have never begun paying taxes. If we were to end wars, and only if we were to end wars, we could consider ending taxes too.

But wait! Wasn’t the war for independence a war against taxes? Aren’t taxes created by weakness, while militarism generates wealth? Isn’t it the effeminate socialists and pacifists who oppose wars?

“War and Taxes” is the title of an excellent book by Steven Bank, Kirk Stark, and Joseph Thorndike. These guys are historians of taxes. (How many children aspire to join that profession?) They lay out the history of U.S. taxation, the debates, the votes, the legislation, the compliance and evasion. Here are all the details in clear chronological order. It turns out that “war and taxes” have a lot more in common than “death and taxes.” War and taxes are both optional and are joined at the hip. Or, as these authors put it:

“War has been the most important catalyst for long-term, structural change in the nation’s fiscal system. Indeed, the history of America’s tax system can be written largely as a history of America’s wars.”

u.s. tour of dutyAlexander Hamilton argued in Federalist No. 30, as he and his allies argued elsewhere, for the federal power to tax precisely because the federal government might need to fight wars. Between 1789 and 1815, tariffs produced 90 percent of government revenue. But taxes were needed for wars, including wars against protests of the taxes — such as President Washington’s quashing of the Whiskey Rebellion. A property tax was put in place in 1789 in order to build up a Navy (some people in what is now Libya allegedly needed killing for the good of humanity, oddly enough). More taxes were needed in 1798 because of the troublesome French. But taxation really got going with the War of 1812.

Remember, this was to be an easy cakewalk kind of war with Canadians welcoming us as liberators. But mistakes were made, as they say, and the bill grew hefty. Congress passed a tax program in 1812 that included a direct tax on land, and excise taxes on retailers, stills, auction sales, sugar, bank notes, and carriages. And in 1815, our representatives added a new direct tax and restored that controversial whiskey tax as well, plus taxes on all kinds of items, luxurious and otherwise. The idea of an income tax was raised but rejected.

The income tax was brought to you courtesy of that glorious act of mass stupidity that began 150 years ago this month: the Civil War. The North began an income tax in 1862, and the Confederacy in 1863. This was after the routine promises of a cheap and easy war had worn out their welcome. Both sides were forcing men to leave their homes to kill and risk death, but effectively excusing the wealthy from that duty. Thus arose popular pressure to compel the rich to “sacrifice” financially. Both sides enacted progressive, graduated income taxes, and other taxes as well. The North taxed everything in sight, including inheritances and especially corporations. The financial cost of the Civil War was astronomical, and the veterans’ pension program was our first major social welfare program. It required massive funding.

vietnam warBut with the end of war came the end of support for taxes, and the income tax and the inheritance tax lapsed temporarily in 1872. Taxation returned to primarily regressive forms, taxing consumption rather than taxing incomes at various levels. Advocacy remained strong in the country, its newspapers, and in Congress in the following years to restore the income and inheritance taxes. Major change would not come, however, until World War I and its army of patriotic propagandists:

“The transition from an almost exclusive reliance on customs duties to a substantial reliance on internal revenues, such as the income tax, the estate tax, and excise taxes, could not have occurred without the demand for fiscal sacrifice that accompanied wartime politics.”

What a bargain: we stop taxing foreign goods in order to tax ourselves, and we do that in order to go kill the people who make the foreign goods — unless they kill us first. What’s not to like?

“But this process did not flow naturally from the public mood in support of the war. Rather, for the first time, the notion of wartime fiscal sacrifice was cultivated, marketed, and sold to the American public.”

New taxes were created in 1914, 1916, 1917, and 1918. The income tax was now back in a big way, along with the estate tax, a munitions tax, an excess profits tax, and other heavy taxes on corporations. The munitions and profits taxes were results of an ongoing debate through most of U.S. history over how to tax war profiteering. Until the current century, profiting financially from war was widely considered unacceptable. The draft again served as an argument for taxing the wealthy. Even the U.S. Chamber of Commerce claimed to be “undismayed at the prospect of great taxes,” and pledged “its full and unqualified support in the prosecution of the war.” The 1917 legislation drew 74% of its revenue from taxing the wealthy and another 13% from taxing luxuries.

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