University of Michigan Law School Scholarship Repository
Abstract
Perhaps we should blame it all on Mill. A great deal and possibly all of the mind-numbing complexity of America\u27s largest and least popular tax follows from the decision to have a progressive personal income tax. Proponents wanted an individual income tax notwithstanding - indeed, in large part because of - such a tax\u27s double taxation of savings. This double-tax argument is an analytic point generally attributed to Mill\u27s classic 1848 treatise, Principles of Political Economy. Historically, much of the support for the Sixteenth Amendment, ratified in 1913, came from Southern and Midwestern, progressive, agricultural interests, who wanted, in general, to implement a redistributive tax and, in particular, to collect some tax from East Coast financiers. After all, the Supreme Court had ruled that the income tax of the late nineteenth century was unconstitutional only insofar as it fell on the fruits of capital; no constitutional amendment would have been necessary to retain or implement a national wage or sales tax. The legal raison d \u27etre of the income tax was to get at such returns to savings as dividends and interest. To this day, liberals and moderates insist on retaining the structure of an income tax precisely because it gets at the returns to saving in addition to labor earnings. Consumption taxes of all sorts are set in contrast to the income tax, on another side of a great divide, as taxes that fail to get at the yield to capital - that deliberately avoid Mill\u27s second tax. Prominent commentators on the case for consumption taxation - both those in favor and those opposed - continue to cite, as the best or most sophisticated argument for adopting a consumption-based tax, the analytic facts that consumption taxes do not overly burden capital or its yield, and as such do not distort the savings-consumption decision, or, equivalently, do not favor present over deferred consumption. The literature for and against consumption taxation is strewn with stock horizontal equity models, comparing savers and spenders, Ants and Grasshoppers: the idea is that income taxes punish savers, like the mythical Ant, vis-a-vis spenders like her friend Grasshopper. On the other side of the great divide, supporters of redistributive taxation argue that retaining an income tax base is a central task of maintaining or obtaining fairness in tax in large part because it, alone, gets at the return to capital, the nearly exclusive province of the economically fortunate
