The central character is a guy named Charles Pollock. He lived in Boston in the 1890’s, a dull town in a dull time. And Charles worked in a bank; dull, dull, dull. But at least he was narcissistic. That made him a little interesting, if only to himself. Then, in 1894, dull dull Charles took a lawsuit all the way to the Supreme Court. It was that case which made Charles the hero of the modern anti-tax movement. And here let me suggest you imagine a really big explosion, a suicide bombing maybe, with piles of innocent people dead and dismembered laying all over the place, because, really, the anti-tax movement is just a loony tunes version of suicide bombing- you blow up yourself and everybody around you.
I don't like paying taxes. I never have, I never will. There are some things my taxes have helped pay for that I don't approve of; a couple of wars, subsidies to a few domestic monopolies and some foreign dictators, to name just a few. But the sin of those pales in comparison to the sin of not having a state to protect me and you. And, call them libertarians or anarchists, those who oppose the power of the state to tax its citizens resemble, to borrow a description from Tom Wolf, “…the logician who flies higher and higher in ever-decreasing circles until, with one last, utterly inevitable induction, he disappears up his own fundamental aperture and emerges in the fourth dimension as a needle-thin umber bird.” (“From Bauhaus to Our House”) To whit:
The U.S. government has been taxing income since 1861, as permitted in the Constitution under Article 1, Section 2 ("Representatives and direct Taxes shall be apportioned among the several states…") and Article 1, Section 8 ("The Congress shall have Power To lay and collect Taxes,…"). But in 1862 Supreme Court Chief Justice Roger Taney, the author of the Dredd Scott decision which had helped to bring on the Civil War, became incensed that money was actually being taken out of his paycheck to help pay for the Civil War. Taney was a very strong believer in slavery and in being treated as somebody special.
And Taney’s objections to paying taxes for the Civil War also struck a cord with those who might not like slavery but who thought they were also special and did not deserve to be paying taxes. We're talking about rich people here, very rich people, who had no compunction about buying politicians to get what they wanted. Buying politicians is what is currently known as free speech, if your logic can somehow equate "buying" with "free" in the same thought without your head disappearing up your s own fundamental aperture.
Anyway, in 1872 the rich people had the income tax laws repealed. Unfortunately for Taney he was already dead and he wasn't getting his money back. Or his slaves. For that he would have to wait until the "Inheritance Tax" could be redefined as the "Death Tax". But I'm getting ahead of myself..
For the next twenty years the Federal government struggled along supported by import duties alone, which amounted to less than 2% of the nation’s gross domestic product. And yes, that is how we funded government before 1861. But before 1861 we were primarily an agricultural economy, where farm workers do not require much education, where populations were scattered and where all health problems were local, because transportation was by foot and horse. After 1861 we were a growing industrial economy, where transportation was mostly by railroads. Factory workers required a high school education (or better). They were concentrated in population centers, and railroads were making public health a regional problem. In other words, economic conditions had changed.
Now, besides being unable to support an effective government, import duties (taxes on imports), raised the price of all consumer goods, imported and domestic. In fact, during the 1880's import duties added as much as 48% to the final price consumers paid, for milk, for steel, and for everything in between. This protected domestic companies and allowed them to keep their prices high enough to ensure high profits. Are your eyes glazing over, yet? Picture this; you walk into your local 'speak easy ' and discover that overnight the price of a beer has gone up 50%. You ask the owner what gives. He tells you that he has new suppliers, and the cost of beer from them is 50% higher than it was from the old suppliers. You ask why he switched suppliers, and he explains, "They made me an offer I couldn't refuse."
Congressman William Jennings Bryant of Nebraska labeled high tariffs “socialism for the rich”. “They weep more because fifteen millions are to be collected from the rich than they do at the collection of three hundred millions upon the goods which the poor consume.” And that was true, And it was unfair, But it ain't like they did it in secret.
Between 1871 and 1891 sixty separate bills were introduced in congress to reestablish an income tax. That's right, people were actually voting and fighting for the right to pay taxes. The Republicans, the party in power at the time, beat all of those efforts back. And then in 1893 a new tariff reform bill was introduced by Democratic Rep. William Wilson of West Virginia. Wilson's bill was primarily intended to lower the import duties on foreign iron ore, coal, lumber, wool and sugar. But the bill also included a minor amendment, introduced by Rep. Benton McMillan from Tennessee, which read, “That from and after the 1st day of January, 1895, there shall be levied, collected, and paid annually upon the gains, profits, and income of every person residing in the United States, derived from any kind of property, rents, interest, dividends, or salaries…a tax of 2 per cent on the amount so derived over and above $4,000” during any five year period Thanks to inflation, today, that amount, would be equal to almost $90,000, over any five year period - not likely to create a hardship for many, and a modest amount by any measure, except of course to those being asked to cough it up. And, maybe it will seem odd to you, but those most able to pay this tax, screamed the loudest.
The pundits paid little attention to Mr. McMillan’s amendment because so many income tax measures had been introduced so many times before, and none of them ever came to anything. This was because the rich and powerful had a secret weapon, sort of a human Tommy gun, a Homo sapian Chicago typewriter, if you will.
His name was Senator Arthur Gorman of Maryland, and he was a tool of the rich and powerful. Gorman helped the opponents of the Wilson bill attach more than 600 amendments which reinstated almost all of the import duties the bill had attempted to lower. It was a legislative St. Valentine's Day Massacre on the floor of United States Capital building, right in front of God and everybody, as my father used to say.
With the “Tariff reduction” bill thus bullet ridden and bleeding on the floor, no one believed that President Grover Cleveland, who had campaigned on a lower tariff platform, would ever tolerate such a misbegotten bill. Surely he would veto it. But he didn’t. He signed the bill,It didn't cost him anything. At least the tariffs had been marginally lowered. At least he could claim that he had done everything he could to lower prices for working class Americans, while, at the same time, not having to actually do anything to openly offend his rich campaign donors.
But imagine the mobster's shock the next morning to discover that Al Capone had beat the rap for murdering the Bugs Moran's gang, but he was going to jail anyway for income tax evasion. That was the shock felt among the rich and powerful. America had returned to a national income tax. And the response was just what you would expect it would be from the rich and powerful. They sued.
The fine print of the accidental income tax law required that all stock companies pay the income tax for individuals before distributing any dividends to them. Dividends were income. And when he received his notice from the Farmers' Loan and Trust Company (because he owned all of ten shares of stock in Farmers’ Loan and Trust) Mr. Charles Pollock was very angry. He was angry enough to hire high priced Wall Street top gun lawyer named Joseph Choate, who filed a lawsuit against the bank claiming any income tax was unconstitutional.
The Massachusetts courts disagreed, as did the Federal courts. They both upheld the law. But somehow Charles Pollock found the money to appeal his lawsuit all the way to the United States Supreme Court, which, to everyone’s surprise, agreed to hear the case immediately.
On 8 April, 1895 the court ruled 5-4, in favor of Mr. Pollock. That slim majority was saying in essence that the source of income mattered; salary could be taxed, but income derived from property – rent, interest on savings or dividends paid on stock - were not “apportioned” by population, and thus the government was denied the power to tax it. It was like splitting hairs on a bald man.
The dissenting opinions were intellectually devastating. Justice Brown wrote that “This decision involves nothing less than the surrender of the taxing power to the moneyed class…Even the specter of socialism is conjured up to frighten Congress from laying taxes upon the people in proportion to their ability to pay them.”
And Justice Harlan argued that the court's majority opinion, “…declares that our government has been so framed that,...those who have incomes derived from...bonds, stocks and investments...have privileges that cannot be accorded to those having incomes derived from the labor of their hands, or the exercise of their skill, or the use of their brains.” These were both powerful arguments. But then the greedy have always been willing to lose the intellectual arguments, as long as they get to keep the money.
Middle class Americans however were outraged. They were infuriated. They were fighting mad. And it would still take 11 years before the will of the people could overcome the power of the “moneyed classes”.
In 1909 President Howard Taft proposed a Constitutional Amendment (in part because he thought it would never pass) to allow a Federal Income Tax. On 12 July, 1909 the 16th amendment passed the Congress and was submitted to the states, in part because the congress never thought the states would pass it. The amendment was brutally blunt and short. It reads in total, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Period. End of Amendment. There ain't no loop hole, rocky.
Alabama took less than a month to vote for the 16th amendment. Kentucky, South Carolina, Illinois, Mississippi, Oklahoma, Maryland, Georgia and Texas all passed it in 1910. Twenty-three more states followed in 1911, three more in 1912, and six more in 1913.
It was with the vote of the New Mexico legislature, on February 3, 1913, that made the 16th amendment the law of the land. Six states either rejected the amendment or never took it up, but that did not matter. The Constitution only requires that two-thirds of the states approve of an amendment to make it the law.
And so, when some lunatic or confidence man or woman tries to seduce you with a magical scheme to avoid paying taxes, you can now explain to them that, by placing the source of support for the government in the people’s hands, income taxes places the power there as well.
The relevancy of this tale of narcissism to your life may become clearer when you realize that on June 1, 1929 the Farmers Loan and Trust Company involved in the lawsuit which inspired the 16th amendment, changed their name to City Bank Farmers Trust. And then in 1976 they changed their name again. This time they shortened it to Citibank.
This is the same Citibank that in 2009 swallowed some $320 billion of taxpayer (meaning your) bailout dollars. Oh, and as of 1894, Charles Pollock was an employee of Farmers Loan and Trust in their Boston branch. And it seems likely to me that he sued his own employer with their connivance. Looking at history it seems to me that the limits to which the rich will go to avoid paying their fair share of government remains endless, spinning arguments to confuse, obfuscate and always to deny, so that their wealth, safe and untouchable, emerges from the process like a big umber bird. These people just think they are top of the world, ma!
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