Rose-colored glasses and sepia-tinted memories

We view history through a rose-colored tint. People often leave out the historical context of events and why they occur. Understanding the evolution of systems and their context allows us to better comprehend past decisions and keep current because of them.

Over the past two years, I have seen a number of memes across the Internet decrying personal income tax and how the government worked just fine without taxes before 1913.  Memes like this are destructive because they only show a portion of the true story and tell a false narrative.  Much like the perception that historical legacy systems were more secure than they really were, memories are tinted like the sepia tones of old photographs and fade over time. 

Knowing the true story helps us realize that we have many of the same issues today that we had in 1828, and that while we as a society have undergone significant evolution, we have to understand the context in which decisions were made in the past before we go posting memes that are not true and give a distorted view of history.  It is this view that causes people to make irrational decisions and choices and make incorrect assumptions about how the government and society at large operate.

The history of taxation

Before the early 20th century, the economy of the United States was mainly agrarian and piecework.  Employees were paid based on how many items they produced.  The Guild system, which provided oversight to crafts and trades performed, set the rates by which pieces were sold or services performed.  These originated in Europe in Medieval times and made their way to America.  Guilds held monopolies on the production of items, goods, or services.  They provided education and professional development from apprentice to master to grandmaster.  Many of these terms still exist today, specifically in the construction trades.  The logical descendants of these guilds are the Screen Actors Guild for actors, Bar Associations for lawyers, the American Medical Association and the International Brotherhood of Electrical Workers, amongst others.

Guilds fell out of favor as the Industrial Revolution progressed, and technological innovations such as the Cotton Gin reduced the amount of expertise needed to complete tasks.  Frederick Taylor’s Scientific Management theory introduced the concepts of productivity management and quantitative performance measurement.  Henry Ford’s usage of the assembly line concept to assemble Model T cars, high hourly wage and its subsequent adoption by other manufacturers led to a significant consolidation of industry.  The number of domestic auto manufacturers in the United States dropped from several hundred to the three we have today. 

The implementation of these three innovations in particular led to a complete change in lifestyle.  The use of technology lessened the need for experts and lowered the bar to entry.  The Industrial Revolution caused a shift in industry from agriculture and piecework to assembly lines and hourly wages.  This meant that there was a shift in the economy that needed to be accounted for, as less people owned property and the cost of goods dropped with innovation.

Before 1913, income was not taxed, but property, inventory and excise taxes on specific goods and services were.  There was high variety in how these taxes were processed from state to state.  Tariffs were imposed on imports.  The northern states wanted high tariffs to protect industry, and the southern states favored low tariffs to allow cheap imports.  The Tariff of 1828, which was a major contributor to the Civil War, set a 38% tax on 92% of all imported goods, and was enacted to protect Northern industry.  Southern states, which were still mostly agrarian and relied on strong reciprocal trade with Great Britain, resisted these taxes.  Up until 1860, excise taxes were the major source of federal revenue for the United States.

The Revenue Act of 1913 re-implemented the federal income tax, originally established to pay for the Civil War in 1861, after the Sixteenth Amendment was ratified.  It established the Income Tax to compensate for the loss of tariffs due to the downward shift in pricing because of technological innovations, the shift from an agrarian to industrial economy, the loss of the monopoly power of guilds, and some will say, the robber barons of the Gilded Age using arbitrage to make significant amounts of money tax-free.

The truth of the story is that as the economic drivers of the United States shifted, the country had to pivot to be able to continue operations and fund itself.  Tariffs dropped significantly after the Revenue Act was implemented, facilitating international trade.  If items were taxed at the rates they were before the Act today, the cost of consumer or manufactured goods would rise significantly, and it would have a cascading ripple effect on the economy.  The first steps toward true globalization happened here.

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