American Economic Development, Managerial Corporate Capitalism, and the Institutional Foundations of the Modern Income Tax

Mehrotra examines the factors contributing to the introduction of the corporate income tax in 1909 and of the individual income tax in 1913. According to the conventional wisdom, these taxes were the products of politics, political institutions, and social forces; economic factors play a cameo role in the standard historical accounts. He argues that economic developments were as significant as political and social factors in the enactment and development of the taxes. The corporations created the wealth that became the targets of the corporate and individual taxes. Here, he investigates two particular economic factors. First, he explores the broad, long-term, structural transformations in the American economy that fostered the development of the modern progressive income tax. Between the end of Reconstruction and the onset of the Great Depression, the American economy underwent dramatic changes. The second set of economic factors that facilitated the development of the modern income tax followed from the first

Lawyers, Guns & Public Monies: The U.S. Treasury, World War One, and the Administration of the Modern Fiscal State

The First World War was a pivotal event for American political and economic development, particularly in the realm of public finance. For it was during the war years that the federal government ended its traditional reliance on regressive import duties and excise taxes as principal sources of revenue and began a modern era of fiscal governance, one based primarily on the direct and progressive taxation of personal and corporate income. Like other aspects of war mobilization, this fiscal revolution required an enormous infusion of national administrative resources. Nowhere was this more evident than within the corridors of the U.S. Treasury Department – the executive agency responsible for creating, managing, and defending wartime fiscal policies. This article examines the vital role that Treasury department lawyers played in constructing, administering, and defending the emerging fiscal polity during the Great War. It contends that these attorneys relied on their social and professional networks, their technical legal skills and their practical experiences as social and economic intermediaries to shape the administrative foundation of the rising modern American fiscal state – a state that contained significant limits as well as achievements

The Missing U.S. VAT: Economic Inequality, American Fiscal Exceptionalism, and the Historical U.S. Resistance to National Consumption Taxes

Since the 1970s, economic inequality has soared dramatically across the globe and particularly in the United States. In that time, one of the obstacles of using fiscal policy to address inequality has been the growing myth of the “overtaxed American”—the misguided notion that U.S. taxpayers pay more in taxes than residents of other advanced, industrialized countries. This myth has persisted, in part, because of the peculiar and distinctive nature of the fractured American fiscal and social welfare state. Even a cursory review of comparative tax data shows that the United States, by most measures, is a low-tax country compared to other affluent nations. One reason for this shortfall is the missing U.S. value-added tax (VAT). Unlike the United States, other developed countries fund robust social spending through a balanced mix of levies, including by relying on broad-based national consumption taxes such as a VAT, which produces a tremendous amount of government revenue. By contrast, the United States has historically rejected comprehensive national consumption taxes, suggesting something distinctive about American fiscal policy. This American fiscal exceptionalism leads to a series of important research questions that may help us understand the relationship among fiscal policy, social welfare spending, and economic inequality: Why is the United States such an outlier in global comparisons of national taxes? Why have Americans historically resisted broad-based national consumption taxes of any kind? Simply put, why is there no U.S. VAT? This Essay begins to address these fundamental questions by, first, synthesizing the existing literature to provide several stylized facts about global economic inequality and the particular concentration of wealth in the United States. Second, the Essay explores the distinctive and peculiar nature of the modern American fiscal and social welfare state, illustrating how the U.S. reliance on direct and progressive taxes and indirect and stealth social welfare spending may be perpetuating the myth of the overtaxed American. Finally, the essay identifies three key historical time periods when the United States seriously considered, but ultimately rejected, a broad-based national consumption tax. This Essay focuses mainly on the first period of the early 1920s, when post-World War I historical conditions provided tax experts, lawmakers, and social groups an opportunity to consider the adoption of a wide-ranging national consumption tax. The Essay concludes with some reflections on how the missing U.S. VAT may inform future tax reform and attempts to address economic inequality

Forging Fiscal Reform: Constitutional Change, Public Policy, and the Creation of Administrative Capacity in Wisconsin, 1880-1920

In 1911, Wisconsin became one of the first U.S. states to adopt an effectively administered income tax. Wisconsin reformers were able to overcome several institutional barriers to create the administrative capacity necessary to assess and collect a graduated income tax that in time raised significant revenue, but did not supplant the property tax. With this limited success, the Wisconsin income tax soon became a model for other states and even the national government. In this sense, Wisconsin was a leader in forging fiscal reform. Political activists, lawmakers, and other government actors in the Badger State led a turn-of-the-century property tax revolt when they sought to replace the aging, locally administered general property tax with a graduated income tax managed by a centralized, administrative bureaucracy. This essay investigates how and why Wisconsin tax reformers were able to help build the administrative capacity to levy new forms of taxation but were unable to replace the property tax completely with a progressive tax on income. By confronting the entrenched power of political parties, state constitutional constraints, and cultural resistance to centralized authority, activists and lawmakers established an institutional beachhead for the subsequent development of a new fiscal order. The administrative reforms enacted as part of the 1911 income tax law dramatically changed the way Wisconsin managed the assessment and collection of taxes. The building of administrative capacity was thus a critical step in addressing the fiscal challenges of the time, in forging a new sense of fiscal citizenship, and in laying the foundation for the subsequent growth of the public sector