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We can be forgiven, especially this time of year, for questioning a decision our predecessors made just over a century ago. In the 1910s, Americans decided to make personal and corporate income taxes a permanent feature of the US economy.Why did they start...

Why Pay Taxes? A History And Timeline Of IRS Income Tax In The US

We can be forgiven, especially this time of year, for questioning a decision our predecessors made just over a century ago. In the 1910s, Americans decided to make personal and corporate income taxes a permanent feature of the US economy.Why did they start...

Why Pay Taxes? A History And Timeline Of IRS Income Tax In The US

We can be forgiven, especially this time of year, for questioning a decision our predecessors made just over a century ago. In the 1910s, Americans decided to make personal and corporate income taxes a permanent feature of the US economy.

Why did they start us down this road? And given that the taxes they endorsed started out small in scope and size but have multiplied by a factor of eight as a share of our economy, have we gone off course?

After all, when an income tax was introduced in 1862 to fund the Civil War, it lasted just six years before being replaced by other taxes. It took another 50 years before the 16th Amendment, which allows Congress to levy a national income tax, was adopted in 1913.

One of the clearest statements of why Americans in the early 20th Century were willing to tax their incomes came from President Franklin Delano Roosevelt in the 1930s:

With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay.

Here, FDR sounds very much like an economics professor. He identifies a principle, a “guide,” for policy that relies on abstract concepts like “ability to pay” and “benefits received.”

But FDR is also saying something quite simple: if people do well, it is only right that they should help to pay for the setup that made their success possible. More to FDR’s point, people who do better should pay for more of that setup.

FDR’s reasoning is far from obsolete; our current President seems to agree with him. In 2011, Barack Obama explained why he supported higher taxes on higher incomes:

As a country that values fairness, wealthier individuals have traditionally borne a greater share of this [tax] burden than the middle class or those less fortunate… [This is] a basic reflection of our belief that those who’ve benefited most from our way of life can afford to give back a little bit more.

Like FDR, Obama wants us to see taxes not as a burden to be lamented but as a fair payment for benefits received. And as our society has grown more complex, the increasing size of taxes we are willing to pay reflects the greater benefits we gain from the activities of government required to support it.

President Obama disagreed on many policies with Mitt Romney, his opponent in the 2012 presidential election, but on this logic for taxation they are not so far apart. Lost in the press coverage of the president’s 2012 rebuttal to anti-government forces “You didn’t build that” was Romney’s reply:

[The President] describes people who we care very deeply about, who make a difference in our lives: our school teachers, firefighters, people who build roads. We need those things…You really couldn’t have a business if you didn’t have those things. But, you know, we pay for those things…in fact, we pay for them and we benefit from them.

It turns out that Romney, like Obama and FDR, views taxes as our way of paying for what we want government to do for us. As US Supreme Court justice Oliver Wendell Holmes famously said: “I like to pay taxes. With them I buy civilization.”

Part of the appeal of this logic for taxes is that it seems fair. Each person paying for what they get reminds us of a group of friends who split the bill at dinner according to what they ordered.

But perhaps fairness demands something in addition, namely that we help those who are less fortunate. Some people appear to benefit very little from our economic system, earning little income and having even less to spend. Is it fair to ask them to contribute to the pool of taxes nevertheless, or should we focus on providing them with the opportunity to share the benefits most of us enjoy?

As President Obama said in 2013:

And the result is an economy that’s become profoundly unequal and families that are more insecure…The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.

Americans have long balanced competing notions of fairness when deciding on policy toward the poor. We want everyone to pitch in, to pay their “fair share,” so we have moved away from making cash transfers to low-income households and have avoided proposals for a minimum guaranteed income.

At the same time, we want to support those in need, to give them a “fair shot,” so we make use of policies such as the earned income tax credit, childcare subsidies, and Medicaid to help people work their way into the broad middle class.

The same balance is at play in how we design policy toward the rich. We ask the highest earners among us to pay a greater share of their income than the rest of us. But, despite the well-known fact that inequality in incomes is now at levels not seen since FDR’s time, President Obama faced stiff opposition in Congress when he sought to raise the marginal tax rate (the share of the next dollar earned that is paid in taxes) at the top of the income ladder.

Speaker of the House John Boehner, for example, argued that those high earners already paid their fair share: “The top one percent of wage earners in the United States pay 40 percent of the income tax. The people [the president is] talking about taxing are the very people that we expect to reinvest in our economy and to create jobs.”

With the Presidential election of 2016 around the corner and political polarization at peak levels, debates over the purpose and fairness of taxation are once again front-and-center in US politics. Sometimes it can seem that these debates go around in circles, with partisans from both extremes advocating reforms that even they don’t imagine becoming reality.

But we should celebrate these debates, for they are how we work our way toward an economic policy that reflects Americans’ nuanced, evolving sense of fairness. They are a part of what makes our economy, and our society, work. And that knowledge might even make writing that check on April 15th a bit less painful.

Matthew C Weinzierl, Associate Professor of Business Administration , Harvard Business School

This article was originally published on The Conversation. Read the original article.

The Conversation's logo. Photo: The Conversation

Our editors found this article on this site using Google and regenerated it for our readers.

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