Federal Taxation in America: a short history - W. Elliot Brownlee (Cambridge University Press, 1996)

A concise history of the several tax regimes used by the United States government from its founding to the late 1990s.  Usually, a war or other financial emergency was severe enough to provoke a rethinking of what should be taxed and how it was to be carried out.   The last chapter addresses the discussions about the tax system following the elections of 1994.  The topic has been popular for the last twenty-five years, although no substantial change in the system has taken place.  [336.200973]

The taxation issue has dominated much of American politics for the past half-century with opponents to the current system growing in volume and intensity and political power.  A system as core to government functions as taxation, however, deserves a long look at the what can be gained from the experience that has accrued since 1789.  This book provides just such a review.  It covers the several tax regimes that the national government has relied upon for revenues across its history.

Two points stand out in this history.  First, that the country has implemented major changes in its tax regime only in the face of severe, nation-threatening crises.  These crises were the Civil War, World War I, the Depression, and World War II.  (Some mention is also merited for the Tax Reform Act of 1986 for its efforts to broaden the tax base and its bipartisan development.)  In each of these cases, the national government was faced with massive requirements for resources that could not be met by the regime still in place.  The regime of the 1790s was established partly to create the ability of the government to tax.  It sufficed with its protective tariffs and customs duties and, eventually, sales of government land to fund the government and even to pay off the debt by 1837.  The system was inadequate for the financing needs of the Federal government in putting down the rebellion of 1861-65.  That crisis even brought the first attempts to enact a mild income tax.  The First World War expanded the use of the new personal income tax, but it also expanded the taxes on business.  This included progressive taxes on business income (they are a flat rate today.)   The Depression and the Second World War saw further refinement of income identification.  In the 1930s, the challenge was to pay for public works and reconstruction while taxable incomes were reduced.  At the same time, FDR was wary of running deficits and often moved to balance the budget.  The demands of WWII were just enormous, but the Administration hoped to broaden the tax base to promote a patriotic effort.  Outside of the adjustments made in 1986, the country has faced no existential crisis and this is likely why there has been no agreement on the direction forward to a new tax regime.

The second key point is that redistribution of income has always played a role in designing tax regimes.  In its earliest years, the government would have considered property taxes as a means of addressing an "ability to pay" issue.  The Constitution's restriction on direct taxes was, according to the author, created to keep the national government from competing with state governments who relied on this same tax base rather than on some principle about even-handed taxation.  Part of Woodrow Wilson's plan for WWI financing was to redistribute wealth by encouraging the middle class to by government bonds which would be paid off in future years by taxation on the wealthy.  In fact, all income tax schedules have had some element of progressivity, although Secretary Mellon did his best in the 1920s to reduce that.  Although FDR was less interested in progressive tax rates during WWII, the Congress did keep them along with flat rate corporate taxes and the regressive payroll taxes.  Post-War inflation probably did contribute to easy finance through "bracket creep."  Finally, some note must be made of the Reagan Administration's tax reform of 1986 with its efforts to close loopholes and broaden the tax base.  Since then, there have been no radical reforms of the tax regime.  Further, the growing anti-government movement - as reflected in movements such as California's Proposition 13 - has contributed to the impediments to any such reform.

The shifting balance of the tax burden across income groups and between citizens and businesses  is the result of these processes.  And, it contains the motivation for future tax regime changes when the need presents itself.

(This book has been issued in two subsequent editions which may bring it up to date.)

This book is recommended for its brevity and the insight it provides on the topic.

Hamilton's Blessing - John Steele Gordon (Walker and Co., 1997)

Ostensibly, a history of the national debt; unfortunately, the narrative devolves into a diatribe against an economic straw man and into an extended speculation about a flat tax.  A promising start that loses sight of its worthy goal. 
[336.340973]

This book begins as a needed history of the National debt.  The first half of the book explains what benefits the national debt provides and, with less detail, why it was part of Alexander Hamilton's fiscal plan for the new nation.  The author particularly likes to focus on individual incidents such as the compromise that set the capitol in Washington, DC and the assumption of many states' Revolutionary War debts.  The book then addresses the general problem of financing the young United States.  That brings in topics such as our first two central banks, the First, and Second, Bank of the United States, the difficulties caused by a taxation system reliant almost exclusively on customs duties, and the costs of Jackson's Specie Circular.  The selling of the government's debt during the Civil War and the currency adjustments in the post-War period are also well-written.   

As it shifts to the beginning of the 20th century, the narrative drifts far from an analysis of the debt.  The author discusses the income tax amendment and invests some effort in covering the differences between the corporate and personal income taxes.  Although this is an interesting topic, it is a digression from the main subject and, even worse for the book, becomes a springboard for the author to go in a new direction.  No real rational for an income tax is presented; the author doesn't acknowledge that the gathering momentum of the Prohibition movement will mean that the government will need an alternative to the alcohol excise taxes that helped fund the government.  Instead, the author becomes fixated on thinking of the graduated tax as an experiment in social engineering.  Forward from that point, questions about the debt fall to a secondary topic. 

Much of the last section of the book becomes an extended critique of Keynesian economics.  The usefulness of any observations is thrown away, however, because the author focuses on a caricature of Keynes' thought.  It is treated as a policy spending and borrowing no matter what the economic situation.   (The bibliography reveals that the author has consulted some free market economists who are unlikely to give an unbiased critique of Keynes.)  The rest is a description of the benefits of the Flat Tax, particularly as a means of avoiding what the author refers to as "social engineering" or using the tax code for progressive taxation as a means of combatting income inequality.

This book advertises itself as a history of the national debt.  In truth, with its forays into central banking and a central government with the ability to tax, it summarizes more of Hamilton's design for the United States than just the debt.  The entire plan may be Hamilton's Blessing.  If only the author had maintained focus.

The first half of the book is recommended as a useful summary.

Confederate Finance - Robert Cecil Todd (University of Georgia Press, 1954)

How a lack of financial infrastructure and policies to avoid taxation led to inflation and the collapse of the Confederate treasury.  A bit detailed on individual bond or note issues or tax methods. [336.75]

The American Conflict of 1861-65 has a large and devoted following of readers and enthusiasts.  The number of books available on individual battles or the character of individual leaders published each year must account for a significant share of American nonfiction.  There are far fewer books, however, that examine the Confederacy as an experiment in government under the principles that led those states to rebellion.  (Two good examples are The Confederate Nation, 1861-1865 by Emory M Thomas and The Confederacy edited by Albert D Kirwin.)  In these works, the financial problems of taxation and financing a war are rarely addressed; the effects of fiscal policies, such as inflation, barter taxation, and consumer goods shortages are described without linking them to any cause.

Todd's book focuses exclusively on the fiscal operations of the Confederate treasury: taxation, currency, debt, and tariffs.     The details, including exact amounts raised by each bond issue or the amounts of currency emitted by the treasury, can obscure the larger themes if one does not read carefully.  Todd allows the messages of Secretary of the Treasury Memminger to the Confederate Congress to carry the impact of each policy decision.

Taxation.  The new government handicapped itself from the start.  There was no mechanism or network of agents to collect direct taxes in 1861.  This led the treasury to defer taxes as a means of finance and to begin financing the government with a loan instead.  When taxes were finally imposed after a year into the war, it was necessary to replace the separate state systems that had each been created.  The first taxes were collected as a quota imposed on the states to make up however they might.  Since many of the later-imposed taxes were direct taxes on assets, a network of assessors was required to value property (including slaves), as well as a network of agents empowered to collect the taxes.  A tax-in-kind was also introduced to collect food and resources for the army.  When an income tax was introduced in a legislative bill, the Senate cut the rates in half.  In the end, adequate taxes were only approved by the Congress in March 1865.  

Coinage.  Each governmental agency was required to pay its own way.  Although Federal mints in Charlotte North Carolina, New Orleans Louisiana, and Dahlonega Georgia had been seized with their stocks of bullion, there was no continuing flow of precious metal that would allow the mints to continue to earn seigniorage that would keep the mints open and provide a more stable means of exchange for the country.  Instead, the bullion was sold for immediate war materiel needs.  Currency, including interest bearing notes, would serve as the medium of exchange.  The treasury would continue to worry about the growing number of notes in circulation - and the risk of inflation - but could not bring about meaningful reductions in the stock of currency.      

Debt.  The Confederate government seemed to prefer debt as a means of finance.  In the first years, even its circulating currency were interest bearing notes issued under successive acts of Congress.  The intent of later loans often included a mechanism for reducing outstanding currency.  By late 1863, this reached the point of compulsory loans as a means of removing currency from circulation.  Almost no foreign loans were available after 1863 and the burden of financing the war fell on an rapidly shrinking geographic base.  Offers of payment in cotton or specie (at the government's discretion) for loan repayments point to a collapsing financial system to be replaced with a crude barter.   

War stresses a nation's economic system and draws heavily on its resources to destroy or waste them.  Todd highlights policy choices and options that weakened the ability of the fledgling government to undertake a conflict with a better organized and fiscally integrated power.  The outcome, if not decided in months, was too easy to foresee. 

This book is recommended, but it may not appeal to a general audience.