January 24

1916: Brushaber v. Union Pacific Railroad Co., is decided. The United States Supreme Court heard the case based on income taxes. The Sixteenth Amendment to the US Constitution had been passed in 1913 and in response to that passing, the Revenue Act of 1913 was implemented. The Act permitted the imposition of an income tax but these were not apportioned among the states based on state population. Frank R. Brushaber was the plaintiff and he was also a shareholder in the Union Pacific Railroad Company (the defendant). Brushaber wanted an injunction to stop the company from paying the taxes levied against it. He believed the tax to be in violation of the Fifth Amendment, stating it was taking away personal property without due process. He also argued the tax was not apportioned among the states and was therefore unconstitutional.

The case was argued before the Court on October 14-15, 1915. The verdict was handed down on this day, with an impressive 8-0 decision (Justice James Clark McReynolds did not participate). Chief Justice Edward Douglas White opined the Sixteenth Amendment removed the need for apportioning by population. He reviewed the rights and powers listed in the amendment and found them to be consistent with the Revenue Act. He also found the Constitution gave the government power to institute taxation itself and it was not seizure without due process. Other arguments were similarly handled and the landmark case confirmed the government’s power to issue a personal income tax.

Taxation is the price for society and civilization. The pooling of funds to provide for the greater good has been an issue since societies began. Who is to pay for the projects needed by all to live in concert? Funds can be obtained in only so many ways and taxation seems to have become standard practice. The tariffs and taxes can be levied against certain goods or against other real property, including income. The benefit of funding the government has been seen as outweighing the personal sacrifices made by the taxpayers.

The first time a personal income tax was bandied about for US citizens was during the War of 1812. The war ended before the need for the funds was imperative and the tax was never enacted. During the US Civil War, Congress imposed the first personal income tax in 1861 but the law was repealed in 1862. In 1894, the first peacetime income tax was imposed but only on the top 10% of American households had income high enough to be taxed. It was deemed unconstitutional because it counted rents and interest income from personal property. The Sixteenth Amendment clarified what would be considered taxable income. Several times the idea of taxation has come before this highest Court and the personal income tax remains a viable way to support the common good of society.

Every diminution of the public burdens arising from taxation gives to individual enterprise increased power and furnishes to all the members of our happy confederacy new motives for patriotic affection and support. – Andrew Jackson

Nearly everywhere monarchs raised themselves further above the level of the greatest nobles and buttressed their new pretensions to respect and authority with cannons and taxation. – J. M. Roberts

Taxation is just a sophisticated way of demanding money with menaces. – Terry Pratchett

If it is the duty of the State to educate, it is the duty of the State also to bear the burden of education, namely, the taxation out of which education is provided. – Edmund Barton

Taxing

Abraham Lincoln

August 5, 1861: The Revenue Act of 1861 is enacted. The government needed to pay for the ongoing US Civil War and so imposed, for the first time, an income tax which was to be “levied, collected, and paid, upon the annual income of every person residing in the United States”. The source of the income was immaterial. A flat tax was applied to all incomes over $800 with a straight 3% going to the government. It was signed into law by Abraham Lincoln and was modified the year after. The flat tax was rescinded in 1862 and 3% was paid beyond $600 (about $14,000 today) and 5% was paid on annual incomes beyond $10,000  (about $237,000 today). Those living outside the US were also taxed at a higher rate. The law also included a termination date of 1866.

The US faced economic issues even before the outbreak of the Civil War. The Panic of 1857 had led the Government to deficit spending with the annual budget having a shortfall in excess of $40 million. They were paying between 8 and 12% interest on loans to fund public expenditures. With impending war, the nation was faced with even more expenses and the need for greater cash flow. On July 4, 1861, Lincoln opened a special Congressional session to discuss the Civil War from a purely legislative standpoint. One of the major issues was funding and how to pay for the Union Army and military expenditures. In order to increase income, the government used a three prong approach. Increase tariffs, institute a property tax, and create the first personal income tax.

Tariffs were introduced for many imports – sugar, tea, nuts, brimstone, coffee, liquor, and various fruits and herbs. Luxury items such as wines were taxed at a rate as high as 50%. The property tax was levied in proportion to each state’s population. Their enforcement was limited and the groundwork for the Internal Revenue Service was laid in order to collect funds. Sparsely populated states were charged less, but their territory was greater. Populous states were charged more with more people available to pay the bill. No one seemed to think it was fair. The flat income tax was levied on those making over $800 which at the time was only about 3% of the population. Lincoln was to assign one principal collector for each state or territory to collect the taxes.

While this was the first time a personal income tax was levied on Americans, it was not the first time the idea was tried. In the early Roman Republic, taxes were levied on wealth and property and were fairly modest – between 1 and 3%. The East also had income taxes. In 10 AD, Emperor Wang Mang of the Xin Dynasty instituted a brand new revenue scheme when he levied a 10% tax on all profits for professionals and skilled labor. The Saladin tithe was introduced by Henry II in 1188 in order to fund the Third Crusade. This again was a straight 10% levied for personal income and movable property. The modern income tax was begun in Great Britain when Prime Minister William Pill the Younger introduced it into the budget in December 1798. Today, there is a sliding scale with deductions and assessments added to the basic income of all Americans.

One of the greatest perplexities of the government, is to avoid receiving troops faster than it can provide for them. In a word, the people will save their government, if the government itself, will do its part. – Abraham Lincoln to Congress

Income tax returns are the most imaginative fiction being written today. – Herman Wouk

The hardest thing in the world to understand is the income tax. – Albert Einstein

Nothing hurts more than having to pay an income tax, unless it is not having to pay an income tax. – Thomas Robert Dewar

Also on this day: Candle in the Wind – In 1962 Norma Jeane died, mysteriously.
Road Trip – In 1888, Bertha Benz went for a drive.
Jobless – In 1981, 11,345 striking air traffic controllers were fired.
Dot, Dot, Dot – In 1858, the first transatlantic cable was finished.
Truth is Not an Excuse – In 1735, John Zenger was found not guilty of libel.

“Temporary” Tax

Sir Robert Borden

July 25, 1917: Sir Robert Borden introduces a new temporary tax in Canada. Unlike their neighbor to the south and the Mother Country, Canada was able to avoid instituting an income tax until World War I. Prior to this, one of the key reasons for immigrating to the country was the lack of an income tax. Funding of the government came from tariffs and customs as well as management of natural resources. At the beginning of the twentieth century, one debate between the Conservatives and Liberals centered on whether or not to tax imports from the US. The Conservatives defeated the Liberals in 1911 as they supported free trade. The Conservatives also opposed an income tax in the hopes of attracting more US and British citizens to their lands.

Wartime expenses increased and the Tories had to reconsider their stance. Borden imposed what was to be a temporary income tax to help cover the cost of the war. With debts piling up in spite of having the tax imposed, it was impossible to simply stop after the war was over. A new Liberal government with Prime Minister William Lyon Mackenzie King was brought in. The debate over dismantling it was abandoned and the income tax has been part of Canadian life ever since. The constitutional authority comes from section 91 paragraph 3 of the Constitution Act, 1867.

Canada levies personal income tax on her citizens and certain types of Canadian-source income earned by nonresidents. The amount one must pay is based on the total of taxable income (income earned less allowed expenses). Taxes may be sent to the government via deductions at the source, installment payments, payments paid when filing, or arrears payments. The most often used deductions are for contributions to Registered Retirement Savings Plans, union or professional dues, child care expenses, and business investment losses. Other deductions are less used and certain amounts can be excluded from taxation altogether. Charitable contributions create a tax credit which is based on the amount donated.

Robert Borders was the 8^th Prime Minister of Canada and served in that role from October 10, 1911 until July 20, 1920. George V was King at the time with Earl Grey as Governor General. Borders was born in Nova Scotia in 1854 and was originally affiliated with the Liberal party (1867-1891). He switched at that time to the Conservative party and remained so affiliated with them except for a stint as a Unionist from 1917 to 1922. After retiring from political life, he went on to become Chancellor of Queen’s University and at the time of his death in 1937 he was president of Barclay’s Bank of Canada and of the Crown Life Insurance Company. Just as an interesting fact, he is a distant relative to Lizzie Borden, accused murderer.

The hardest thing to understand in the world is the income tax. – Albert Einstein

There is no such thing as a good tax. – Winston Churchill

When there is an income tax, the just man will pay more and the unjust less on the same amount of income. – Plato

Be wary of strong drink. It can make you shoot at tax collectors… and miss. – Robert A. Heinlein

Also on this day: Oh Joy! Louise – In 1978, Louise Joy Brown is born.
TP – in 1871, a patent was granted for perforated toilet paper.
Free Press – In 1925, TASS is established.
SS Andrea Doria – In 1956, the ship was struck out at sea.