AMERICANS WOULD FIND that classifying themselves by their income was especially congenial. But the significance of “income” brackets in the social spectrum was quite recent: a by-product of modern commerce and industry, with the new importance these gave to money and to the disposable, replaceable and attenuated forms of property. Before the nineteenth century the concept of “income” had very little importance in the Old World; it was used indirectly to measure property ownership or stake-in-the-community or as a basis for election reform. The English expression “forty shilling freehold” and similar tests of voting qualification came closer to being a test of property ownership than a test of income. In English literature in 1839, Ten Thousand a Year became familiar as the title of Samuel Warren’s popular satirical romance; Dickens, Trollope, and other novelists of manners used income figures mainly to describe the newly wealthy whose financial worth could easily be estimated because it had been so recently acquired. “Millionaire” came into English from French (by way of Benjamin Disraeli’s Vivian Grey, 1826) and soon appeared in American usage. But since that word referred to a person’s “worth,” the value of all his possessions rather than his annual income, it too was a characteristically Old World way of assessing wealth or well-being.
Among mobile Americans, a nation of recent immigrants moving from one place to another up and down the social scale, “income” was a more convenient and more universally applicable standard of measurement than wealth or property. Income was as close as one could come to quantifying the standard of living, and it provided a simple way of telling who was above or below the standard. But before Americans could be parsed into “income brackets,” they had to know what their income amounted to, in numbers of dollars. In the twentieth century the American for the first time was actually required to know his income. Income consciousness, no longer merely a by-product of technology or of government statistics, became a civic obligation, under penalty of fine and imprisonment.
IN AMERICA the rudimentary notion of taxing a person’s income, or his earning “faculty” (as it then was called), is found as early as 1643, when the colony of New Plymouth taxed persons “according to their estates or faculties”; three years later the colony passed a tax on the “returns and gains” of tradesmen and craftsmen. Other colonies followed. This “faculty” tax was actually rooted in the Middle Ages. It was not an income tax in the modern sense, for it did not allow taxpayers to balance losses against gains, and it was levied only on certain kinds of income. Sums received from this kind of tax remained small. Not until the mid-nineteenth century did anything substantially like a modern income tax appear. Between 1840 and 1850, six states introduced some kind of income tax. A Virginia law of 1843, for example, imposed a tax of 1 percent of salaries and professional incomes over $400 a year, and 2½ percent on interest received.
In Britain, William Pitt had imposed an income tax to finance British war efforts between 1798 and 1816, and the British later used an income tax to meet special and temporary needs. Following this example, to help finance the Civil War, Congress enacted an income tax in 1861, which would have brought in 3 percent of all incomes over $800. But Secretary of the Treasury Salmon P. Chase, complaining that the lack of statistics made it impossible to estimate what the tax might yield, never collected the tax. In 1862 an income tax was again enacted, to become the first income tax actually collected by the federal government. After an exemption of $600, the rate was 3 percent on income up to $10,000 per year, and 5 percent on income over $10,000. In addition to the basic objection that any income tax, “being inquisitorial,” was unworthy of a free people, there were additional objections to the radical new principle of progressive taxation. The Confederacy, too, imposed an income tax, with rates exceeding 15 percent for certain classes of income over $10,000.
A special obstacle to a federal income tax was the provision in the Constitution (art. I, sec. 9, cl. 4) that no “direct” tax be imposed by Congress except in proportion to the population. To get around this objection, the first champions of the income tax had argued that it was not a direct tax at all, but rather an “indirect tax.” The income tax for war purposes (reenacted with higher rates in 1864) was allowed to lapse when the legislation expired in 1872. By that time the pressure of patriotism and war needs was off, and a new campaign against the income tax had gained momentum. “The Income Tax,” the New York Tribune declared on February 5, 1869, “is the most odious, vexatious, inquisitorial, and unequal of all our taxes…. a tax on honesty, and just the reverse of Protective. It tends to tax the quality out of existence.” After the war, government finances improved, the national debt declined, and the need for an income tax seemed to disappear. The public appeal of the income tax, as Special Commissioner of Revenue David A. Wells observed in 1869, was largely due to the fact that only 250,000 persons in a nation of 39.5 million were paying any income tax. Still, that was an influential quarter-million, and the income-tax law lapsed on March 15, 1872.
The remaining national tax system put the whole federal tax burden on consumption. There was no federal tax on either property or income. Meanwhile, large fortunes were accumulating. By 1863, in New York City alone there were several hundred men each reputedly worth $1 million; two decades before there had not been twenty such in the whole nation. A. T. Stewart, the New York department store magnate (with a fortune valued at $50 million), reported to the federal government in 1863 an income of $1,843,000. This personal income was a larger proportion of the national income than $25 million would have been in 1929. As facts and myths about men of enormous wealth were featured in the newly popular press, as their exploits and their follies were widely advertised, public demand for an income tax increased.
These pressures, organized by William Jennings Bryan and others against “those Eastern Plutocrats,” forced an income tax into the Wilson-Gorman Tariff Act of 1894. It was as the congressional champion of this tax that the young Bryan, according to himself “clad in the armour of a righteous cause,” attracted national attention. A wealthy New Yorker, Ward McAllister (creator of the expression “the 400” to describe the social élite), appointed himself spokesman for those who would be taxed 2 percent on their income over $4,000. McAllister threatened to leave the country if Congress enacted the income tax. In a speech to the House, Bryan replied:
Of all the mean men I have ever known, I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 per cent deep…. If “some of our best people” prefer to leave the country rather than pay a tax of 2 percent, God pity the worst…. we can better afford to lose them and their fortunes than risk the contaminating influence of their presence…. let them depart, and as they leave without regret the land of their birth, let them go with the poet’s curse ringing in their ears.
The income tax became law.
But the very next year the Supreme Court declared that the income tax was a “direct” tax, and so was unconstitutional because it was not apportioned among the states according to population (Pollock v. Farmers Loan and Trust Co., 1895). This decision provided Bryan his battle cry of “Judicial Usurpation!” in the presidential campaign of 1896, and so helped make the income tax a national issue.
It took a generation of muck-raking journalism, and such books as Ida Tarbell’s History of the Standard Oil Company (1904), Lincoln Steffens’ Shame of the Cities (1904), and Gustavus Myers’ History of Great American Fortunes (1910), to persuade Americans that they needed an income tax. A constitutional amendment was proposed in 1909, and in 1913 the Sixteenth Amendment was adopted, empowering Congress to tax income from any source, without regard to population.
DEBATE OVER THE INCOME TAX had encouraged Americans to take an increasingly quantitative approach to their material well-being. For arguments over the justice of an income tax finally turned on statistics over the distribution of wealth and income. A study by Dr. Willford Isbell King, The Wealth and Income of the People of the United States (1915), summed up the arguments for the tax and became the bible of tax reformers. The need for such a tax, he pointed out, arose from the increasing concentration of income in the hands of a few. In 1890, King observed, the richest 1.6 percent of American families received 10.8 percent of the national income, and by 1910 they were receiving 19 percent. At the same time, the 88 percent of Americans who received 65 percent of the income in 1890 received only 62 percent in 1910. According to his estimate of the money income in 1910 of different segments of the population, the poorest 65 percent of Americans received only 38.6 percent of the total national income, and had an average income of $197 per capita, while the richest 2 percent received 20.4 percent of the national income and averaged $3,386 per capita. When World War I suddenly and drastically increased the need for tax revenue, income-tax rates went up. Public debate focused more than ever on the quantity of income of different groups. The wartime Revenue Act of 1917, according to a leading economist of the day, was based on “democratic principles hitherto unrealized in fiscal history.” This time the income tax had come to stay.
When all Americans were required to classify themselves in “tax brackets” in order to obey the law by paying their taxes, they became increasingly income-conscious. They were of course, putting themselves in new statistical communities. And thereafter when one American said he belonged in the same “bracket” as another, everyone understood. By 1970, American desk dictionaries included among their definitions of “bracket”: “A classification or grouping; especially, one of taxpayers according to income.”
As the century advanced, an increasing proportion of Americans was required to pay income tax, or at least to file tax returns. While in 1913 less than 4 percent of all Americans filed a personal income-tax return, by 1920 the figure exceeded 7 percent, by 1940 it reached 11 percent, and by 1945 it included 36 percent of the total population, which came to more than three quarters of the total labor force. By 1970 more than 60 percent of the total population was filing returns, which numbered some 75 million. The separate corporate income-tax returns, which numbered only 300,000 in 1913, exceeded 1 million by 1958 and 1.5 million by 1968. All the while, the federal income tax accounted for an increasing proportion of federal revenue. By the late 1920’s income-tax receipts, individual and corporate, comprised two thirds of all federal tax receipts, and they remained the dominant item in the federal budget. The planning of government activities inevitably depended more and more on estimates of individual and corporate incomes. A slightly faulty prediction could produce an enormous deficit.
With the spread of income consciousness and the movement to equalize incomes, the states adopted their own taxes on income. Wisconsin introduced an income tax experimentally in 1911, and in 1916 a New York State income tax displaced the general property tax as the main source of state revenue. By 1970, the District of Columbia and nearly all the states were levying their own income tax. The calculation of income required for filing the obligatory federal tax return provided a convenient basis for state taxes, and when states taxed income simply by assessing a proportion of the federal tax, they avoided the need to elaborate their own rules.
Among the oddities of American civilization in the mid-twentieth century, none seemed more remarkable to visitors from abroad than the scrupulousness of Americans in reporting their income for purposes of taxation. On the continent of Europe, in the Middle East, and elsewhere, it was a newsworthy event, and not necessarily one that improved a reputation, if a man of wealth filed a full and honest tax return. In the United States, however, even professional gamblers, confidence men, and gangsters (who were earning their income by violating state or local laws) took care to report their illegal earnings to the federal government to avoid the penalties of federal tax laws. Al Capone, the notorious gang lord and “Public Enemy No. 1,” was finally brought to a legal reckoning by his failure to pay his federal income tax.
A new profession, that of Certified Public Accountant, attested the public need and desire to obey income-tax laws. In Britain in the mid-nineteenth century the first “chartered public accountants” appeared, to satisfy the requirements of the new Companies Acts of 1845 and 1868, and also to protect the public against a company’s false balance sheets. Even before then there had been “public bookkeepers” in the United States, but after the Civil War, when corporations operated in a proliferating network of state and federal legislation, businessmen needed something more than a bookkeeper. Perhaps the oldest American accounting firm—Barrow, Wade, Guthrie, and Co.—was founded in New York City in 1883. New York laws in 1896 provided public examinations for candidates for the title of Certified Public Accountant. Other states followed, and a professional organization appeared in 1897, which held its first national convention in 1902. Still, the numbers of accountants and auditors remained small until the enactment of a national income tax.
The effort in 1909 to devise a corporate income tax that the Supreme Court would not declare unconstitutional produced an act that was so complicated that it created a new demand for accountants. But that act was never enforced and corporations actually were not pressed to keep accurate records of income until the Income Tax Amendment was adopted in 1913. The law passed pursuant to that amendment had been drafted with the aid of certified public accountants, who now were drawn intimately into corporate affairs but at first only to prepare tax returns. When these accountants became at home in the inner sanctums of large corporations, they not only shaped corporate accounting procedures but guided crucial decisions of policy.
The World War I excess-profits tax and the rising rates of taxation made the accountant more necessary than ever. By 1924 the Board of Tax Appeals ruled that certified public accountants (along with attorneys) would be the only representatives qualified to appear before them on behalf of taxpayers. “C.P.A.” now designated the member of a potent and prestigious profession. Within the profession’s first half-century, some 60,000 accountants were certified; by 1972 the figure had doubled. The total number of accountants and auditors serving American business had increased twentyfold, from some 20,000 in 1900 to nearly 400,000 by mid-century.
Even Americans in the lower brackets became the numerous clients of a national network of tax-advising services, of which the largest was H. & R. Block and Co., which by 1972 had 6,486 tax-preparation offices which prepared 7.6 million individual income-tax returns, and for these services grossed nearly $100 million. Up-to-date do-it-yourself handbooks for puzzled citizens, like J. K. Lasser’s Your Income Tax, became best sellers.
THE NEWLY AVAILABLE STATISTICS of individual income made possible new quantitative ways of thinking about the welfare of the whole nation. Income statistics provided an arsenal for a generation of increasingly effective reformers. One of these was Isaac M. Rubinow, who had come from Russia in 1893 at the age of eighteen, then attended Columbia College and Medical School and began practicing medicine among the New York City poor. Suspecting that sickness among the poor was as much an economic as a medical problem, he turned to statistics and became a pioneer in studying the trend of real wages and the distribution of purchasing power. From detailed studies of incomes between 1914 and 1917 Rubinow concluded that while the money income and the productivity of workers had greatly increased, the purchasing power of their income had risen only slightly. Drawing on income-tax statistics, he showed that the workers were receiving an ever smaller share of the community’s income. At first he saw these facts as an argument for socialism. “Things which are un-American today are very apt to become very much American tomorrow,” Rubinow explained. But he gradually came to the notion that statistics could provide a new approach to all the risks of an industrial society: he argued that insurable risks ought to include not only industrial accidents but also sickness, old age, death, and unemployment. In his Standard Accident Tables, as a Basis for Compensation Rates (1915), he aimed to provide the foundation for wider social insurance. Rubinow urged new forms of insurance to reduce the risks of the poor and the aged, and he devised ways of incorporating these into American institutions, for events in Russia in the 1920’s had disillusioned him with socialism. During the Depression of the 1930’s he developed plans for state unemployment insurance, and he helped shape the Federal Social Security Act.
Within a decade after the passing of the Income Tax Amendment, a new phrase, “National Income,” had entered the vocabulary of economists and was heard in the more sophisticated political speeches. The phrase and the concept were products of imaginative scholars in the new social sciences who were building institutions to gather quantitative facts and explore their meaning. What the new American law schools were to American faith in legislation as ways of shaping society (what Dean Roscoe Pound of Harvard Law School called “social engineering”), these new American institutes of economics were to the American faith in quantitative norms. In 1919 a group of brilliant practitioners of the new social “science”—economists Wesley C. Mitchell and Alvin Johnson, historians James Harvey Robinson and Charles A. Beard, and sociologist Thorstein Veblen—founded the New School for Social Research in New York. Their purpose was “that all scientific research, whatever its field of operation, should be directed not chiefly to the support of accepted ideas, but to the acquisition of new ones, and to the ways in which new knowledge may be applied to remedy existing evils and meet the ever-growing needs of mankind.”
When before had a nation’s pundits undertaken such explorations on a similar scale? The neutral language of numbers, using the novel vocabulary of statistics, encouraged free ways of thought. The chief statistician of the American Telephone & Telegraph Company in 1920 had led the way in founding the National Bureau of Economic Research, expressly to make quantitative studies of the public welfare. A widespread confidence in the healing powers of statistics was attested by the fact that the National Bureau’s board of directors covered the whole spectrum of social philosophies, from a declared socialist to a representative of the American Bankers’ Association.
Within a year of its founding the National Bureau published Income in the United States: Its Amount and Distribution, 1909–1919, the first comprehensive study ever made of the national income. The sober conclusion was that the wartime expansion of income had not been as large as was commonly assumed. Although per capita money income had risen from $319 in 1909 to $586 in 1918, the National Bureau showed that the rise, in terms of 1913 prices, amounted to an increase in real income only from $333 to $372. The study pointed out that at the same time there had been a tendency toward equalization of incomes: the 5 percent who had the largest incomes in 1913–16 were receiving 33 percent of the total national income, but in 1918–19 they were receiving only about 25 percent.
The National Bureau of Economic Research was soon joined by other statistical researchers into the nation’s welfare. An enterprise characteristically American in origin was the Brookings Institution, founded by a self-educated St. Louis businessman who had made a fortune in merchandising woodenware, and who then retired at the age of forty-six to spend his accumulated millions in philanthropy. Inspired by the example of his long-time friend Andrew Carnegie, Robert S. Brookings built the medical school of Washington University, which set a new standard for American medical education. Then, during World War I, when he headed President Woodrow Wilson’s price-fixing committee, Brookings became interested in statistics and at the age of seventy he began studying economics. In 1928 he founded the Brookings Institution in the nation’s capital “to collect, interpret, and lay before the country in clear and intelligent form the fundamental economic facts concerning which opinions need to be formed,” and to supply facts to the people who shaped government policy. The Institution, independent of government support, became one of the nation’s most useful and most influential interpreters of statistics.
Wartime urgencies had multiplied the government agencies that collected statistics. By the 1920’s there was an enormous up-to-date fund of what Wesley Mitchell called “planning statistics.” An important new source was the Bureau of Labor Statistics in the Department of Labor, which had been created in 1913. When the Depression of the 1930’s came, officials in Washington were already quite familiar with the concept of “national income.” A National Income Division was established in the Department of Commerce in 1932, “when bread lines were forming in the streets … to find out just how deep the Depression actually was.” And so began the regular annual presentation of estimated national income by the federal government. In charge of these first studies was the pioneer economist Simon Kuznets, who developed the notion of “Gross National Product”; it was first published in 1946, and thereafter provided a new standard for measuring the American economy. Others, aided by Kuznets’ calculations (for which he received a Nobel Prize), projected the measure back into American history to calculate trends. By the 1960’s the abbreviation “GNP” had entered American dictionaries and was part of the American idiom, another everyday clue to the spread of statistical ways of thinking.