Paul L. Caron

Wednesday, February 27, 2013

Crane: How the 100-Year Old Income Tax Unleashed the Modern U.S. Economy

The Atlantic op-ed:  How the 100-Year Old Income Tax Unleashed the Modern U.S. Economy, by Charlotte Crane (Northwestern):

The capitalist's case for the income tax: The widely despised and thoroughly misunderstood levy helped the United States move toward a more open economy.

One hundred years ago today, Secretary of State Philander Knox certified to Congress that the Sixteenth Amendment had been ratified by Delaware and Wyoming, clinching the required 36 states. Congress was free, once again -- this time without the threat of obstruction from the Supreme Court -- to do something that has changed the scope of government for the next century. Washington could tax incomes. ...

Many political observers rue this day in history. To them, the income tax embodies all that is wrong with the modern federal government. By encouraging some economic activity more than others, they say that the income tax, like much federal regulation, dampens economic growth and stifles entrepreneurial creativity.

Far worse, in their eyes, is that the income tax makes the federal government possible. It funds bloated services and enables all sorts of social and economic meddling in the sacred workings of the free market. But what would the past 100 years have looked like without the Sixteenth Amendment? Certainly not much like a free market--unless something else had come along to get rid of tariffs and tariff politics, which had been restraining the economy. ...

[T]he Sixteenth Amendment created a new political and economic environment. It freed us from the shackles of tariff politics, lowered living costs for many Americans, allowed the federal government to raise enough money to build roads, mount the world's greatest army, provide income security to the poor, and transform ourselves into the dominant country in the 20th century. In other words, the income tax not only enabled the modern federal government. It enabled the modern US economy.

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