Liberty Matters

Sumner and the Income Tax

As several contributions to this discussion have noted, William Graham Sumner deserves credit for anticipating the analytical framework of public choice theory. Perhaps nowhere is this more apparent than his multi-decade crusade against protective tariffs, as highlighted in David Hart's most recent comment. Tariffs were the quintessential example of rent-seeking in Sumner's time – a government manipulation of the market in the service of politically connected protectionist industries.
Not all of Sumner's work in this area carries the commendation of a favorable legacy, though, and since much of the discussion has sought to revive his reputation against unfair slanders, it seems appropriate to note the fairness of one largely unnoticed critique. Sumner, in a roundabout way, bears some of the blame for the modern federal income tax – a position he came to from the same line of reasoning as his stinging attacks upon the tariff system.
The occasion happened in 1878 when a group of anti-tariff legislators invited Sumner to testify about a proposed reformulation of the federal revenue system. High protectionism had ruled the day in the United States since 1861, and electoral attempts to mount a challenge to the tariff after the Civil War ran into the recurring problem of legislative logrolling and cronyism. Sumner noticed that substantive congressional pushes to reform the tariff often faltered on the same lines – a reform would be initiated and then whittled away by legislative amendment as even nominally anti-tariff legislators carved out exceptions for industries in their home districts. Part of the problem, as Sumner noticed, came from the tariff's dual use not only as a protective measure but also as the primary revenue mechanism for funding the federal government. He recognized – and with good reason – that the revenue function of the tariff also provided a source of its political entrenchment. Congress had made a habit of adopting notoriously complex "revenue" schedules that also served as cover for thousands of protectionist favors tucked into the bill at the behest of import-competing industry groups.
To get around this problem Sumner proposed an ingenious plan – switch the federal tax system over to an alternative source of revenue, and protectionism would no longer be able to piggyback on the revenue system. He outlined his plan in his testimony, stating, "I am in favor of the income tax as a matter of public finance." The purpose would be to effect a revenue swap and bypass the political problems that entrenched the tariff system and all its favoritism. "If we had an income tax and could do away with tariff taxes," Sumner continued. "The non-capitalist classes, those who depend upon their labor and who have no income or profits from capital, are the consumers and pay this consumers' tax, which is laid directly by the tariff."[95]
Initially, Congress declined to act on Sumner's argument.Income taxes were a constitutionally shaky proposition due to a clause restricting the use of direct taxation, absent a census-based apportionment. A modest attempt at an income tax swap under the Wilson-Gorman Tariff faced a Supreme Court challenge in 1896 that portended greater uncertainty for the proposition. The court struck down a portion of the tax that pertained to income from property, sowing doubts as to whether a tax on wages would survive a future challenge. Sumner's tax swap strategy weighed heavily on a complex set of legislative maneuvers during the 1909 fight over the aggressively protectionist Payne-Aldrich Tariff. Seeking to force another constitutional challenge, a group of free trade Democrats advanced an income tax swap with the hopes of undermining the tariff's support. It was meant to be a flanking move. Protectionists in the Republican leadership were able to initially deflect the tax swap by offering constitutional cover to future income taxes in the 16th Amendment in exchange for withdrawing the income tax proposal. Their concession to preserve the tariff though depended on future Republican control of Congress and the White House, as the alternative revenue source had a stronger constitutional grounding.
After the Democrat electoral victories of 1912, incoming president Woodrow Wilson moved aggressively to execute the long-sought swap with the tariff system. And initially it worked – when the amendment was ratified in 1913, Congress took notice of this new and alternative source of revenue. They coupled the first modern income tax with the first major tariff schedule reduction in over half a century.
The tax swap strategy that Sumner had first proposed over 30 years prior involved one crucial miscalculation though. He correctly recognized that the tariff's revenue component was providing cover for protectionism. But he failed to realize that the tariff's clear constitutional sanction vis-à-vis the alternatives also effectively constrained the government's ability to extract revenue by other means. The eventual 16th Amendment opened the floodgates to a new and untested revenue device that quickly proved itself more effective at extracting revenue than any tax system the federal government had ever seen.
Writing in 1954, Frank Chodorov succinctly diagnosed the problem that eventually emerged from this anti-tariff proposition. "The idea that the government would give up tariff revenue in exchange for income-tax revenue was contrary to all experience. It promised to make the swap, and perhaps its leaders believed the promise, but the nature of government is such that it cannot give up one power for another."[96] Sumner, commenting in 1878, could not have fully anticipated the course that tax policy would take in the coming decades. He almost certainly would have approved of jettisoning the tariff as a revenue device. But it is also not hard to imagine his horrors with the then-unseen fruits of the tax system that replaced it.
[95.] William Graham Sumner, Investigation of general causes of depression in labor and business. House Miscellaneous Documents, 45th Congress, 3rd Session, (1878), 206.
[96.] Frank Chodorov, The Income Tax: the Root of All Evil  (New York: Devin-Adair Co, 1954), 40.