The Income Tax's 95th Birthday—John McCain and Barack Obama Are Voicing Old Arguments

It is one of the abiding traditions of American politics, at least since the era of Ronald Reagan. In the final weeks of the 2008 presidential campaign, Sen. John McCain's campaign is taking a leaf from the Republican playbook and suddenly suggesting that Sen. Barack Obama is a closet socialist who wants to "spread the wealth" by taxing the rich and providing tax breaks and spending for the poor.

It was exactly 95 years ago this month that the income tax as we know it today was signed into law by President Woodrow Wilson as part of the Underwood-Simmons Act lowering tariff barriers. In the process, Wilson also established the pattern of how Americans would debate the tax in coming decades.

On one side in 1913 were the populist Democrats who argued that the income tax was the only fair way to ensure that the wealthiest Americans paid their fair proportion of the burden. "I have no disposition to tax wealth unnecessarily or unjustly, but I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty," said one of the tax's most eloquent proponents, Rep. Cordell Hull of Tennessee, a future secretary of state under President Franklin Roosevelt.

On the other hand were those who charged that the tax was a socialist or even communist plot. "What these people want to do," said Sen. Elihu Root, a New York Republican who had served as secretary of war under Teddy Roosevelt, "is to take away the money of the rich, and then pass laws distributing it among their people at home."

The income tax was a centerpiece of Wilson's "New Freedom," which included establishment of the Federal Reserve, lower tariffs, and a more muscular prosecution of trusts and monopolies. But Wilson was not one of the tax's biggest advocates. In fact, as it headed toward approval, he told lawmakers not to raise rates so high as to anger the public and make the Democrats look like they favored confiscation of wealth.

The income tax was actually enacted three different times in American history. First, it was imposed during the Civil War. Lincoln's treasury secretary, Salmon Chase, worked with Republican congressional leaders to pass a tax that helped assuage popular discontent over the huge new class of wealthy Americans who were making money from the war. The tax was repealed in stages after the war.

It was re-enacted in 1894 at a time of the biggest economic crisis—bank runs, unemployment lines, homeless people riding the rails—faced by the United States until that time. The main proponent was Rep. William Jennings Bryan of Nebraska, more famous for his opposition to the gold standard. The following year, the Supreme Court threw the tax out, saying that it violated the Constitution's requirement that direct taxes be paid proportionate to their populations. (The income tax meant that rich states of the North paid more taxes per capita than poor states of the South and West.)

Throughout the 19th and early 20th centuries, however, the tariff was a far bigger issue than the income tax. That is because the tariff rose as high as 50 percent on many household goods, and it favored the manufacturing states that produced these goods over the farming states of the South and West. It is worth noting that in those decades, Republicans were the party of protectionism, advocating high tariff walls to protect big business, whereas Democrats favored lower tariffs because they argued that the tariff forced consumers to pay higher prices for clothing, household goods, and other necessities.

In the Progressive Era after the turn of the 19th century, the Republican Party split over the issue. In 1909, President William Howard Taft was unable to heal the party's disagreements on the issue, but he agreed to congressional passage of a constitutional amendment allowing the income tax as a price for getting a tariff bill through Congress. He and others were secure in the feeling that such an amendment would never be ratified by three quarters of the state legislatures, as the Constitution requires.

Then in the 1910 election, the Republicans completely split apart. Teddy Roosevelt had returned from his Africa safari to rebuke Taft and lay the groundwork for his 1912 presidential race. Democrats swept into office in 1910, remaking statehouses across the country. Wilson, a president of Princeton, was elected governor of New Jersey that year. The 1912 election saw an even deeper Republican split, as Taft and Roosevelt both ran for the White House. Democrats turned to the relatively untested Wilson as its nominee. By early 1913, the 16th Amendment permitting the tax was ratified and adopted, and Wilson was president.