Once the war began, Treasury Secretary Salmon Chase feared that mounting deficits would spur inflation. Banks, which were funding the war, demanded action to ensure U.S. solvency, and tariffs, the country’s main source of revenue, had reached a peak. “Chase has no money, and he tells me he can raise no more,” Lincoln complained in 1862.
Initially 3 percent on incomes above $600 and 5 percent on incomes above $10,000, the income tax was intended to assuage class resentment of industrialists getting rich by supplying the Union. The tax was repealed after the Civil War, reenacted in 1894, declared unconstitutional in 1895, then reinstated with Theodore Roosevelt’s support. Republican William Howard Taft backed the ratification process that led to the Sixteenth Amendment, adopted in 1913. Democrat Woodrow Wilson signed the tax into law that year — and Democrats have been more inclined than Republicans to raise rates since.
2. The income tax dampens work and entrepreneurship.
In his 1990 autobiography, Ronald Reagan recalled that his longtime obsession with cutting taxes began in the 1940s, when he would stop making movies each year when his soaring marginal tax rate made it not worth the effort. Most economists agree that for many individuals and businesses, extremely high taxes discourage some economic activities. But how high must taxes be to have that effect? Liberal economists argue that taxes don’t discourage work for most people until marginal rates reach 60 or 70 percent. Conservatives disagree, saying that taxes must fall for the economy to rise.
Whether tax cuts generally spur economic growth and tax increases generally dampen it is debatable, however. Economic expansion was significant in the 1950s, when tax rates were at historic highs. Tax cuts signed by John F. Kennedy and Reagan were followed by sustained growth. But growth that followed tax increases under Presidents George H.W. Bush and Bill Clinton was greater than after George W. Bush’s tax cuts.
The nonpartisan Congressional Research Service reported in December that, for upper-income taxpayers, at least — “job creators” — cutting taxes has “little association with saving, investment, or productivity growth.” That report was revised after Republicans attacked an earlier version, but its conclusion was unchanged.
3. Taxes became less progressive because of the Bush and Reagan tax cuts.
The tax code is indeed less progressive at the top because of falling rates for the wealthy. The top marginal rate fell from 91 percent in the 1950s to 70 percent in the 1960s and 1970s, and again in the Reagan era to a low of 28 percent. It went back up to 39.6 percent in the 1990s, down to 35 percent after tax cuts under George W. Bush, and is now back up to 39.6 percent for families making more than $450,000.