Economic History Association
Special Interests and the Adoption of the Income Tax in the United States
Author(s): Bennett D. Baack and Edward John Ray
Source: The Journal of Economic History, Vol. 45, No. 3 (Sep., 1985), pp. 607-625
Published by: Cambridge University Press on behalf of the Economic History Association
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Special Interests and the Adoption of
the Income Tax in the United States
BENNETT
D.
BAACK AND EDWARD
JOHN RAY
Perhapsno single element involved with the rapidassumptionof economic power
by the federal governmentwas more importantthan the passage of the income
tax, the means by which the increasing role of governmentwas financed. We
explain the political and economic interests that came together to successfully
pass the income tax, and we provide extensive empiricalevidence regardingthe
determinantsof the passage of the Sixteenth Amendmentto the Constitutionof
the United States.
THE
purposes of this article are two. First, we explain the coalition
of political and economic forces that led to the passage of the
income-tax law of 1894. Second, we explain the pivotal role of federal
transferpayments in securing passage of the Sixteenth Amendmentin
1913.Transferpayments took the form of army pensions and growth of
peacetime defense spending, particularlythe militarybuild-upbetween
1883and 1913.
Passage of the income-tax law of 1894preceded the emergence of big
government in the United States by almost 50 years. Adoption of the
income-taxamendmentpreceded it by 20 to 30 years. Income taxes did
not cause the federal budget to grow rapidly. The dramaticjump in
federal spending relative to GNP did not come until World War II; it
then persisted throughoutthe post-warperiod. Duringthe same period,
from 1941to 1980,income taxes accounted for 59 percent of the federal
budget. Income-tax revenues became an effective means of financing
the rapidlyexpandingfederal budget. The income tax remainedvirtually
unchallengedat the nationallevel until the tax reformsof 1981. For that
reason alone it would be worthwhile to understand why the United
States adopted a federal income-tax system in 1913.
I. THE LEGISLATIVE HISTORY OF THE INCOME TAX: 1812-1913
The originsof the income tax in the United States can be tracedto the
Warof 1812with England. The federal governmentrelied primarilyon
Journal of Economic History, Vol. XLV, No. 3 (Sept. 1985). ? The Economic History
Association. All rightsreserved. ISSN 0022-0507.
The authors are Associate Professor and Professor of Economics at Ohio State University,
Columbus,Ohio 43210.
We wish to thank this JOURNAL'S editor and anonymousreferees for their helpfulcomments.
Earlier versions were given at the Public Choice Conference and the Western Economic
AssociationConferencein 1983.We also want to thankRandyOlsen for econometricscounseling
and Joe Denekampfor tireless researchassistance.
607
608
Baack and Ray
the tariffsystem passed by Congress in 1789for its revenue. In a special
report on the state of finances, Secretary of the Treasury A. J. Dallas
proposed an income tax to generate revenue for the war effort, the first
instance of a government official publicly recommending a federal
income tax.' Congressional consideration of the proposal did not last
long, however, as the war concluded in a few months and the issue was
dropped. Incidentally, Britaindid use an income tax to help finance the
Napoleonic Wars and adopted a permanentincome tax in 1842.
It was not until the Civil War that the U.S. federal governmentonce
againconsideredand for the first time adoptedan income tax. Given the
all-out military effort required by the war, the government needed to
reorganizeits entire fiscal structure.The result was a tax system more
comprehensive than ever before enacted. It incorporated all of the
special excise taxes used by the government during the War of 1812.
Internaltaxes which heretofore had been levied only at the state level
were made a part of the federal tax structure.Stamptaxes were applied
to an enlarged list of legal documents. Given that the income tax was
only one part of a restructuredpackage of new and increased taxes, is
not to say that it was passed and implementedwithout problems.2
Two importantlessons were learned. The first was that the income
tax generatedan impressive amount of revenue. By 1866revenue from
the tax reached nearly $73 million, almost 30 percent of all internal
revenue collected that year. The second lesson was that the burdenof
the income tax fell only on a few states. New York alone paid about one
thirdof the entire tax. Massachusetts and Pennsylvaniaeach contributed about 13 percent. Thus, approximately 60 percent of the total
revenue collected came from only three states.3
Duringthe two decades following the expirationof the income tax in
1872, political support persisted for its enactment. By 1878 the Greenback movement joined with the Labor Reform party and adopted an
income-taxplatform.As a result of these and other activities 14different
income tax bills were introducedinto the House between 1873and 1879
by representatives from the East North Central and South Atlantic
regions. Because of the opposition of several key congressmenfrom the
industrialNortheast, the full House was not able to consider most of
them. Two attempts were made, however, to force an income-tax bill
through against the will of the House leaders. In both cases support
came from the lower-income East North Central and South Atlantic
regions.
In 1889 the Southern Alliance adopted a platform demanding that
"SpecialReporton the State of the Finances, January17, 1815,"AmericanState Papers, vol.
7 (1832),pp. 885-87.
2
For an in-depthdiscussion of these problemssee HarryE. Smith, The UnitedStates Federal
Internal Tax History From 1861 to 1871 (Boston, 1914), chap. 3.
3 Report of the Commissioner of Internal Revenue (Washington, D.C. 1872), p. 115.
Adoption of the U.S. Income Tax
609
taxation should not be used to serve the interest of one class at the
expense of another. At the same time the NorthernAlliance declaredits
support for a graduatedincome tax and reduction of tariffs.4In 1890
Alliance members won control of several southern state legislatures;
others were elected as governors, representatives,and senators. In 1892
the growing Alliance movement officially became the Populist party.
The party declared its approval of a graduatedincome tax, and James
Weaver of Iowa became its candidate for president.5
The response of the Republican-controlledCongress in 1890 to a
reduction of the federal treasury surplus was to pass the McKinley
tariff.Increasedtariffrates encouragedthe Populistpartyto press for an
income tax. The McKinley tariff increased agrarian support for the
Populist party and solidified the Democratic party behind tariffreform.
The Democratswon the congressionalelection of 1890and the presidential election in 1892. The stage was set for serious considerationof an
income tax.
In 1894 an income-tax amendmentwas attached to the Wilson tariff
bill. On the floor of the House opposition to the tax was led by
representatives from Massachusetts, New York, and Pennsylvaniathe same three states which together had paid 60 percent of the total tax
revenue generated by the Civil War income tax. The results of the
House vote are given in Table 1. The sectional division of the vote set
the lower-income South Atlantic and East North Centralstates against
the higher-income Northeast and some of the Pacific states. The
subsequentSenate vote also reflected supportfor the tax from the South
Atlanticand East North Centralstates, with oppositioncomingfrom the
Northeast and Pacific states.
In terms of the majorparty votes in the House, 196 Democrats and 8
Populistsvoted for the income tax; 122 Republicans, 17 Democrats and
I Populist voted against the income-tax law of 1894. The fact that
political support for the Democrats in the post-Civil War period was
stronglyidentifiedwith low-income per capita, agriculturalstates in the
South means that the rise in power of the Democratic party, and the
increased support for the income tax occurred simultaneously. Our
focus is primarilyon the mix of economic forces that led to eventual
success in passing the income-tax amendment.We have no explanation
for either the rise in strengthof the Democratic party independentlyof
the economic variableswe analyze or for the significanceof any implied
shift in American ideological thinkingthat it represented.
In 1895 the Supreme Court ruled in the case of Pollock v. Farmers
Loan and Trust Co. that the 1894 income tax was a "direct" tax and
therefore unconstitutional. But the income tax remained a major
4 John D. Hicks, ThePopulist Revolt (Minneapolis,1931),pp. 97, 124, 428-29.
5
Hicks, Populist Revolt, pp. 223-29, 435-39.
610
Baack and Ray
TABLE I
THE EXTENT OF STATE SUPPORTFOR THE INCOME-TAXLAW OF 1894
States by
Region
Northeast
Connecticut
Maine
Massachusetts
New Hampshire
New Jersey
New York
Pennsylvania
Rhode Island
Vermont
North Central
Illinois
Indiana
Iowa
Kansas
Michigan
Minnesota
Missouri
Nebraska
North Dakota
Ohio
South Dakota
Wisconsin
% Yes
Vote in
House
% Yes
Vote in
Senate
50
0
25
0
62.5
28.1
41.2
50
0
0
0
0
0
50
50
0
0
0
50
84.6
10
71.4
41.7
42.9
81.3
60
0
50
0
60
50
100
0
50
0
0
100
50
50
0
50
100
States by
Region
South
Alabama
Arkansas
Delaware
Florida
Georgia
Kentucky
Louisiana
Maryland
Mississippi
North Carolina
Oklahoma
South Carolina
Tennessee
Texas
Virginia
West Virginia
West
Arizona
California
Colorado
Idaho
Montana
Nevada
New Mexico
Oregon
Utah
Washington
Wyoming
% Yes
Vote in
House
% Yes
Vote in
Senate
100
100
100
100
100
90.9
34
83.3
100
88.9
100
100
50
100
50
100
100
100
100
100
85.7
87.5
100
100
100
50
100
100
100
50
50
0
0
0
0
0
0
0
0
0
0
0
0
100
0
0
Sources: Congressional Quarterly, Guide to U. S. Elections (Washington, D. C., 1975); Congres-
sional Record, 53rdCongress, 1st sess., (Washington,D. C., 1894).
political issue in the presidential campaign of 1896 as the Democrats
under the Populist Bryan included the principle of the income tax in
theirpartyplatform.The RepublicanpartyunderMcKinleyon the other
hand rejected it, and when McKinley won the election it appearedthat
pressure for the income tax would subside. The issue emerged once
again, however, during the Spanish-American War in 1898. While
considering alternative revenue measures to finance the war, House
Democrats proposed an income tax in defiance of the Supreme Court.
Arguing that the Court's decision of 1895 was "a legal anomaly, a
political anachronism, and an economic blunder," the Democrats
proposed a tax of 3 percent on incomes over $2,000.6The proposallost
by a vote of 171 to 134. One factor that may have contributed
significantlyto the defeat of the income-tax law in 1898that was absent
6
Congressional Record, Apr. 29 session (Washington,D.C., 1898),pp. 4457-59.
Adoption of the U.S. Income Tax
611
in 1894was the constitutionalissue. Supportin Congressfor an incometax law was somewhat softened by the certainty of a confrontation
between Congress and the Supreme Court if the law were passed.
Nearly fifteenyears elapsed between the SupremeCourt'sdecision to
reject the income tax in 1895 and the passage of a constitutional
amendmentby Congress in 1909. Whenthe income-taxamendmentwas
passed by Congress the votes in the House and the Senate were almost
unanimous,and in most states the amendmentpassed with substantial
marginsfrom 1909 to 1913.
II. ANALYTICAL FRAMEWORK
The agrarianmovement achieved political strengthand consolidated
that strengthin the formationof the Populistpartyduringthe 1880sand
early 1890s. Populists and Democrats realized substantialsuccess in the
election of 1892 and combined behind the nomination of William
Jennings Bryan for President in 1896. Both Populists and Democrats
supportedan income tax as a replacementfor tariffsand excise taxes.
And, as the vote in Congress in 1894 indicated, representatives split
along party lines in both the House and Senate on the income-tax law.
Populists and Democrats generally supported the law, while Republicans opposed it.
TraditionalDemocratic support came from the South. But the ultimate merger of the agrarianPopulist movement with the Democratic
partyalso suggests that duringthe 1880sand early 1890ssupportfor the
politicalobjectives of the Democratscame from Midwesternagricultural
states. Therefore, we expect to find that supportfor the income-taxlaw
by representatives and senators in 1894 was positively related to
whether legislators were from states in the South and to the share of
agriculturalproduction in a given state relative to overall economic
activity in that state.
The fact that the income tax should have been expected to fall more
heavily on earned money income and that it would be a progressivetax
intendedto fall more heavily on the rich than the poor, led us to expect
one additionalfactor to significantlyeffect the House and Senate votes
on the income-tax law in 1894.7We expect to find representativesand
7The 1894bill stipulateda 2 percenttax of incomein excess of $4,000.The 1898bill stipulateda 3
percent tax on income in excess of $3,000. The 1909 vote was, of course, on the Sixteenth
Amendmentto the Constitution.The first tax bill passed after the adoptionof the amendmentin
1913set forth the following:
$50,000to $75,000
I percent
4 percent
$75,000to $100,000
$100,000to $250,000
5 percent
6 percent
$250,000to $500,000
7 percent
>$500,000
CongressionalRecord, Feb. I session, (Washington,D.C., 1894);April29 session, (1898);July 12
session, (1909);and Ist session (1913).
Baack and Ray
612
TABLE
2
FUNCTIONAL RELATIONSHIPS AND EXPECTED SIGNS
Equation
2
South
Income per capita
Share of agriculture in state's
economy
State support for the incometax law of 1894
Veterans' pensions per capita
in target states
Naval construction in target
states
3
4
5
House Support
for Income-Tax
Law of 1894
Senate Support
for Income-Tax
Law of 1894
State Support for IncomeTax Amendment
1909 to 1913
+
+
0
0
+
+
+
+
+
+
+
+
+
Source: See text.
senators from high-incomeper capita states opposed to the income tax
and those from low-income per capita states in favor of the income tax.
Recall that by 1866, 60 percent of the income-tax revenues raised from
the Civil War income tax came fromjust three high-incomeper capita
states: Massachusetts, New York, and Pennsylvania. In summary,the
functionalrelationshipsused to estimate voting supporton the incometax issue in Congress across states in 1894, with the expected sign of
each independentvariable are given in Table 2 as equations I and 2.
The SupremeCourtrulingin 1895that the income tax was unconstitutional made it apparentto most observers that a federalincome-tax law
could only be adopted through a constitutional amendment (except
perhaps as a wartime emergency tax as had been the case during the
Civil War).The failureof Congress to pass an income-taxlaw duringthe
war in 1898 removed any doubt about the necessity of a constitutional
amendment to enact an income-tax law. The failure partly reflected
Congress's unwillingness to challenge the Supreme Court.
In 1894, the same year Congress passed the income-tax law, federal
revenue failed to exceed expendituresfor the first time since the Civil
War, and the federal budget showed a deficit for six consecutive years.
From 1900 to 1914 the number of annual budgets having a deficit
approximatedthose having a surplus.
Estate and gift taxes were collected between 1899and 1907to finance
the federal government and totaled more than $22 million. The estate
tax was passed the same day that Congressfailed to pass the income-tax
law in 1898. Stamp-tax revenues, which were minimal prior to 1894,
equaled $382,000 in 1895. Between 1898 and 1902, stamp taxes totaled
almost $140 million. Congress was clearly scramblingafter the Supreme
Adoption of the U.S. Income Tax
613
Court ruling in 1895 to find additional and permanent sources of
revenue. Congress was not yet committedto an income tax, but it was
committedto raising revenues.
Why didn't Congress reduce federal spending to eliminate deficits?
And, if political pressure to reduce tariffs was so strong, why didn't
Congresssimplyreduce both tariffrates and federalspending?Spending
cuts it appearswere precludedby several relatedand rapidlyexpanding
federal programsinitiated in the 1880s and 1890s. And, those expenditure programshelped enlist additionalsupport for an income tax on a
state-by-statebasis that would be necessary to secure the adoptionof an
income-tax amendment.
The MilitaryBuild-Up
Following the Civil War, the Army maintaineda force just sufficient
to police the Indianfrontierand little else, and the Navy was reduced to
a few wooden sailing ships. As the government began to implementa
policy for foreign intervention,it began to revitalize its militaryforces.8
In 1883 Congress voted appropriationsfor three light cruisers and the
beginning of a new steam and steel Navy. The same year Congress
established the Army-Navy Gun Foundry Board to assess how the
United States could catch up in naval technology with the major
European powers. A year later the Navy established the Naval War
College and in 1890 Congress authorized construction of the first
battleships for the Navy. Between 1870 and 1892 naval expenditures
totaled approximately$425 million while between 1892and 1914 naval
expenditures totaled $1,749 million.9 In the ten years before the
Spanish-AmericanWar, expenditures on the Navy increased 128 percent. By the time PresidentRoosevelt sent the Great White Fleet on its
voyage around the world in 1907, the battleship strength of the
AmericanNavy had already attained second place among the imperial
fleets.
To furtherthe rebuildingof the Navy, Congressauthorizeda program
in 1891to subsidize the United States merchantmarineso that commercial ships could be converted to naval cruisers in time of war. Although
these ships were privately owned, construction was supervised by the
Navy. From an initialsubsidy paymentof $82,000, yearly programcosts
were over $1 million per year by 1897.10
The notion that the United States militarybuild-upwas simply a byproductof the "Age of Imperialism"ignores anotherimportanthistori8 For a detailedaccountof the Americanmilitarybuild-up,see Russell Weigley, TheAmerican
Wayof War(Bloomington,Ind. 1977).
9 Department of the Treasury Annual Report of the Secretary of the Treasury (Washington,
D.C., 1947); and Statistical Appendix to Annual Report of the Secretary of the Treasury
(Washington,D.C., 1971).
10 Paul Studenski and Herman Krooss, Financial History of the United States (New York, 1952),
p. 215.
614
Baack and Ray
cal trend. During the period the United States emerged as a major
partnerin world trade, which garnered substantialpolitical support in
Congress for a larger navy. U.S. commodity exports increased nearly
300 percent between 1888and 1908, and U.S. share of world exports of
manufacturedgoods increased from 4 percent to 13 percent. Concurrently, the geographical pattern of trade shifted; the share of U.S
exports to Europe declined while exports to Canada,CentralAmerica,
South America, Asia, and the Pacific increased. In addition,the United
States switched from being a net recipient of foreign investments after
the Civil Warto being a net investor in the rest of the world by the mid1890s.U.S investments abroadincreased257 percentfrom 1897to 1908,
and income from such investments increased 185 percent from 1900 to
1910.
Given these developments, it is not surprising that much of the
discussion in Congress on naval expenditures focused on the need to
protect the growingfinancialstake that the United States had in foreign
trade and investment." The argument was put quite simply by the
secretaryof navy in 1885, "It is largelyfor the purposeof protectingthe
mercantile marine and for assisting its healthy development that the
Navy exists."12
Veterans' Pensions
Accompanying the first major U.S. military build-up during peacetime was a new important method of redistributingincome by the
federalgovernmentin the form of public works and veterans' pensions.
From an average annual rate of $14 million prior to 1890, expenditures
on public works were nearly doubled to an annualrate of $26 millionby
1896.'3 More significantly, and at the same time, Congress set about
liberalizing the veterans' pension program. Between 1878 and 1888,
pension paymentstripled;paymentsdoubledagainin the next five years
to a total of $134.6 million.'4The repaymentto the northernstates of a
portion of the income taxes collected duringthe Civil War was one of
the more interestingexpendituresthe federal governmentmade during
this period. The enabling legislation was passed in 1889, and Congress
overrodePresidentCleveland's veto in 1891.Then a lump-sumpayment
of over $15 million was made to the states.'5 Between 1879 and 1910,
military expenditures plus pension payments increased from $90.7
millionto $564.4 millionor from 34 percent of the total federalbudgetin
1879to 81.4 percent of the federal budget in 1910.
" For a summaryof the congressionaldebateson navalmatterssee RobertSeager, "Ten Years
Before Mahan: The Unofficial Case for the New Navy," Mississippi Valley Historical Review
(Dec. 1953), pp. 491-512.
12 U.S. Congress,Annual Report of the Secretary of the Navy (Washington,D.C., 1885),p. xvii.
13
Studenskiand Krooss, Financial History, p. 214.
14
Departmentof the Treasury,AnnualReport (1947), and StatisticalAppendix(1971).
Is Studenski and Krooss, Financial History, p. 205.
Adoption of the U.S. Income Tax
615
The rapid growth in U.S trade and foreign investment along with
federalantitrustlegislation, income redistribution,and other institutional changes were so profound and pervasive in the American economy
duringthe late nineteenth century that we do not believe the changes
were mere products of political manipulationby Congress. In supporting programslike the military build-up or the expansion in veterans'
benefits, legislators were no doubt respondingrationallyto constituent
demands. We believe that the expenditure requirements of those
expandingfederal programsadded to the pressureon Congressto find a
new source of permanentfunding for the federal government.
When the income-tax law was passed in 1894,only 21 of the 44 states
provided50 percent or more supportfor the law in both the House and
the Senate. Supportfrom 33 states would have been requiredto ratify a
constitutional amendment. Using the 1894 vote as an indication of
probable state passage of an income-tax amendment, it is no wonder
that Congress did not rush to submit an amendmentto the states after
the 1895 Supreme Court decision. Before 1908 two more states, Utah
and Oklahoma, joined the Union, and they eventually split on the
income-tax amendment vote. Arizona and New Mexico joined the
Union after 1908and eventually supportedthe income tax. Withoutany
other shifts the total supportfor the amendmentwould still have been 12
votes short at 24. Eventually, Virginia and Florida defected from the
pro-income-taxcoalition.
We contend that the new spending initiatives, military spending
(particularlynaval construction), and income redistributionthroughthe
veterans' pension programprovidedCongress with the means to forge a
coalition that was successful at passing the income-tax amendment.To
support this contention we provide evidence that naval construction
expenditures and veterans' pension payments in what we refer to as
targetstates (states that opposed the income-taxlaw of 1894)contributed significantlyto state-level supportfor the income-tax amendment.
The Contributionof Federal Spending to Adoption of the Income-Tax
Amendment
Elsewhere we have documented the consistent and early supportfor
the naval build-upby the manufacturingstates of the Northeast and the
opposition of Democrats in Congress to naval appropriation bills
throughoutthe period 1882to 1908.16Funds for naval constructionwent
to states that traditionally opposed the income tax, like New York,
Pennsylvania, and Massachusetts. Veterans' pension funds also went
disproportionatelyto those states. Whethercoincidentalor not, the fact
thatfundingassociated with new federalexpendituresduringthe 1890to
16 Ben Baackand EdwardJohnRay, "The PoliticalEconomyof the Originsof the U.S. MilitaryIndustrialComplex," this JOURNAL, 45 (June 1985), pp. 369-75.
616
Baack and Ray
1910period went disproportionatelyto states previouslyopposed to the
income tax must have softened their opposition. We have no irrefutable
proof of a congressional conspiracy to buy support for an income-tax
amendment.We do have evidence that naval constructioncontractsand
veterans' pension payments significantly influenced the income-tax
amendmentvote by states.
We begin by assuming that states that provided at least 50 percent
support in both houses of Congress for the income-tax law in 1894
would have supported an income-tax amendment. With no shifts in
exogenous variablesand in the parametricspecificationto explain state
votes on the income-tax amendment, we expect that state support for
the income-tax amendmentfrom 1909to 1913 would be positively and
highly correlatedwith previous state supportfor the income-tax law of
1894 as given by equation 3 in Table 2.
To the extent that state characteristicsincluded in our explanationof
the 1894income-taxlaw vote changed, we expect the changedvalues to
alter the pattern of support for the income-tax amendment in the
presence of the 1894 state-supportvariable. Those variables, with the
exception of the South which is fixed, should have the same signs as
they did in the 1894 vote, holding previous support constant. The
relationshipwe estimate in Section III is thereforegiven by equation 4
in Table 2.
With respect to states that did not provide majoritysupport in both
houses of Congressor for targetstates we test for two additionaleffects.
We expect that veterans' pension payments per capita and the value of
naval construction contracts added supportfor the income-tax amendment. The incrementalimpact of those target expenditureprogramson
the extent of state support for the income-tax amendment can be
measuredby comparingthe previous regression results with the results
in equation 5, Table 2.
III. EMPIRICAL EVIDENCE ON SUPPORT FOR THE INCOME TAX
Estimates of equations 1 through5 appear in Table 3. As expected,
supportfor the income-tax law of 1894was stronglyassociated with the
South. Supportfor the income-tax law was negativelyrelatedto income
per capita by state in both the House and Senate although the income
effect was not highly significant in the Senate vote. The share of
agricultural production in a state's economy proved to be either
negative or insignificant in explaining support for the income tax in
either branchof Congress. Since southernstates were highly dependent
upon agriculture,the presence of a South dummyvariablein equations 1
and 2 may explain the lack of significanceof the agriculturevariable.
Both President Theodore Roosevelt and his successor WilliamTaft
Adoption of the U.S. Income Tax
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Baack and Ray
endorsed an income tax. But Congress did not pass an income-tax
amendmentto the Constitutionuntil 1909. The vote was 77 to 0 in the
Senate and 318 to 14 in favor in the House. 17 The measurewas then sent
to the states for approval, and in 1913 the income tax was approvedas
the Sixteenth Amendmentto the Constitution.
Traditionalstate support for the income-tax law of 1894 contributed
significantly to the explanation of final support for the Sixteenth
Amendment. Holding prior support for an income tax constant, differences in state income per capita and South did not contributeadditional
supportfor the income-tax amendment.Results for the South variable
simply reflect continued and fairly solid southernsupportfor an income
tax, but little additionalsupportwas possible. The marginalexplanatory
power for income per capita at the state level was also insignificantand
may partly reflect substantialeconomic change between 1896and 1914.
During that period, changing market conditions achieved for farmers
most of what they had tried and failed to achieve earlierin the political
arena. The coefficient of variationin state income per capita fell from
59.1 percent in 1880to 36.1 percent by 1900. The dramaticrise in farm
income coincided with the decline in the agrarianprotest movement.
State elections in 1898 were a disaster for the Populist party.
In contrast to these results, the share of agriculture contributed
positively and significantly to additional post-1894 support for the
income-tax amendment. Between 1890and 1910the work force shifted
heavily toward the urban sector. The significance of the agricultural
variablemay partly reflect the sharpeneddistinctionamong states with
regard to agriculturaland urban economic interests outside of the
South. To the extent that agriculturalinterests favored tariffreductions
and adoption of a progressive income tax, a sharperdichotomy among
states with respect to agriculturaland urban interests would tend to
raise the explanatorypower of the agriculturalproductionvariablefor
the 1909to 1913amendmentvote comparedto the income-tax law vote
of 1894.
Given the pattern of voting on the income-tax issue in the Congress
(Table 1), it is not surprisingthat states like Connecticut,Rhode Island,
Pennsylvania, and Delaware rejected the Sixteenth Amendment and
that southernstates like Alabama,Kentucky, Mississippi, North Carolina, and South Carolinawere among the first to adopt the amendment.
Predictable,too, perhaps was the early adoption by Midwesternstates
like Illinois, Indiana, Michigan, and Ohio. But, based on earlier votes,
the near unanimous and early support for the amendment in eastern
states like Maine and New York and western states like Colorado,
Idaho, Iowa, Oregon, and Washington represent substantial political
reversals. Those eastern and western elements of the coalition to adopt
17
CongressionalRecord, July 12 session, (Washington,D.C., 1909).
Adoption of the U.S. Income Tax
619
the income tax througha constitutionalamendmentwere absent in 1894.
Therefore, we are particularly interested in the additional factors
discussed earlier that may have contributedto the successful adoption
of the income-tax amendment. Did Congress take an active role in
forginga coalition for adoption of the income-tax amendment?
To improve the probability of passing an income-tax amendment
Congresscould targetsome expendituresto win over recalcitrantstates.
One example of a possible targeting strategy was the program for
veterans' pensions. Governmentagents had wide latitude in certifying
and setting pension levels for veterans. The pension programgrew from
$35.1 millionin 1879to $160.7 millionin 1910,which correspondedto an
increase in the pension share of federal expendituresfrom 13.2 percent
in 1879 to 23.2 percent in 1910. If pension payments were targeted
toward winning support for the income-tax amendment, we would
expect pension payments per capita across states in 1910to be greatest
in states that did not supportthe income-taxlaw in 1894. State veterans'
pensions per capita in 1910 were negatively and significantlyrelated to
previous congressional support on the income-tax law.'8 More to the
point, we estimated the impact of pension paymentsper capita to states
that opposed the income tax law of 1894 on state approval of the
amendment, and the effect was significant and positive. Our finding
does not prove that pension payments were intendedto buy supportfor
the income tax, but the veterans' pension program did deliver new
supporton the income-tax issue.
The targeting of military expenditures to buy state votes is also
difficultto prove given the lack of data on the distributionof military
funds by state. Using naval construction expenditures by state from
1883 to 1913 we find that the flow of funds to states for naval ship
constructionbetween 1902and 1913minus previous allocations (that is,
the extent to which naval ship constructionexpenditureswere redirected after Teddy Roosevelt, who favored the income tax, took office)
benefited only six states: Connecticut ($0.5 million), Massachusetts
($30.5 million), New Hampshire ($0.5 million), New Jersey ($48 million), New York ($47.9 million)and Virginia($3.4 million).19Massachusetts and New York would benefit further from government naval
contracts once future funding was secured through adoption of the
income tax, and they broke ranks with the solid northeasterncoalition
that had blocked previous attempts to pass an income-tax law. The
18 To estimate the extent to which state pensions per capita in 1910 were biased toward low
probabilityof supportstates, we estimatedthe followingrelationship:
Statepensionpercapitain 1910= 1.712- 0.331 (Congressionalincome-taxsupport1894-1898)
(11.65)
(2.16)
Absolute value of t-statisticsare in parentheses;R2 = 0.0921.
'9 T. A. Brassey, ed., The Naval Annual (Portsmouth,N.H., 1902);Annual Report of the
Secretary of the Navy (1883-1913).
620
Baack and Ray
general relevance of naval construction contracts awarded to states
traditionallyopposed to the income tax for approvalof the income-tax
amendmentis indicatedby the positive and significantcoefficienton the
naval construction in the target states variable in equation 5 of Table
3.20
Table 4 indicates the target and nontargetstates based on the House
and Senate votes on the income-tax law of 1894. As indicated, naval
constructionexpendituresbetween 1902and 1913totaled $171.9 million
(59.4 percent) in target states comparedto $117.6 million(40.6 percent)
in nontargetstates. Virginiaand New Jersey supportedthe income-tax
law in 1894. Those two states received all nontarget state naval
construction money between 1902 and 1913. As noted earlier, the
redirectionof naval constructionexpendituresmainlybenefitedMassachusetts, New York, and New Jersey but not Virginiawhich ultimately
did not ratify the amendment.
Table 4 also indicates the distributionof veterans' pension funds by
state in 1910. Target states received $87.8 million (56.6 percent) and
nontargetstates received $67.3 million(43.4 percent). In the regressions
in Table 3 we used pension payments per capita to reduce any bias
associated with larger payments being received by heavily populated
states.
Other special interests in the Northeast supportedtax changes, and
they were becomingincreasinglyimportant.Exportersof manufactured
goods along with eastern banks and individualsinvolved in U.S. foreign
direct investments were very interested in supportingnew methods of
fundingthe federalgovernmentthat would avoid the deficitproblemand
permit a reduction in tariffs. The fact that the income-tax amendment
was submittedto the states in 1909and that U.S. tariffswere substantially reducedwas neithercoincidentalnor without historicalprecedent.
Britain,for example, reduced tariffs substantiallyafter the adoption of
the income tax in 1842.
The effects of possible targetingof militaryexpenditurescan be seen
20 One referee pointed out that the labor movement representeda source of supportfor the
income tax. Therefore,we tried to test for union effects.
The 1890smarkeda turningpoint for union membershipin the United States, Duringthe early
years of the decade membershipexperienceda generaldecline. Among the hardesthit were the
unionsfor steel workers,carpenters,and bricklayers.Moreover,the membershipof the Knightsof
Laborwhich had been over a half millionin 1887declinedto less than 75,000 by 1893.Therefore,
we did not expect labor-unioninterests significantlyto affect the vote on the income-taxlaw of
1894.
Duringthe later years of the 1890s, however, union membershipunderwenta rapidexpansion.
Whathad been a total union membershipof 447,000in 1897reached2,184,200by 1910.A major
beneficiaryof this expansion was the AmericanFederationof Labor (AFL). Unfortunately,we
lack labor-uniondata at the state level. Therefore,we used the numberof labor strikes in states
between 1901and 1905as a proxy for union strengthacross states at the time of the vote on the
amendment.Union activity in targetstates was positive but insignificantin explainingapprovalof
the income-taxamendmentat the state level.
621
Adoption of the U.S. Income Tax
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622
TABLE
5
ARMY PERSONNEL EXPENDITURES BY DEPARTMENT
Department
East
Lakes
Missouri
Dakota
Columbia
Gulf
Texas
Colorado
California
Total
1894
$
%
1897
t
1904
2,767,580
1,751,606
3,528,034
2,411,871
1,160,015
14.8 $ 3,260,169
9.3
1,792,127
18.8
3,595,701
12.9
1,741,332
6.2
1,035,213
18.4 $ 12,331,555
10.1
2,090,861
20.3
8,403,855
9.8
2,801,926
5.9
3,195,466
674,331
2,372,983
2,904,174
1,153,396
3.6
12.7
15.5
6.2
4.0
12.0
13.2
6.3
18,724,890 100
703,258
2,128,375
2,327,261
1,112,478
17,695,914 100
3,707,357
3,053,061
2,476,703
6,270,657
%
1908
27.8 $ 18,414.144
4.7
4,228,224
19.0
11,323,200
6.3
3,036,096
7.2
7,104,384
8.4
6.9
5.6
4.1
44,331,441 100
5,285,952
4,748,352
3,354,624
7,844,928
65,339,904
%
28.2
6.5
17.3
4.6
10.9
8.1
7.3
5.1
12.0
100
Sources: U. S. War Department Annual Reports (Washington, D. C., 1894-95, 1897-98, 1904-05,
1908-9). The first five departments (East through Columbia) are those which include states that
consistently voted against income-tax legislation prior to the passage of the amendment in 1908.
The last four departments (Gulf through California) are those which do not include such states.
Included in personnel expenditures are the following: pay of the Army, subsistence of the Army,
regular supplies, barracks and quarters, and clothing and camp and garrison equipage.
in other programsas well. There are several types of militaryexpenditures that may have been targetedbut for which we could only generate
regionalas opposed to state-level data. For those programswe provide
fragmentaryevidence in three additionaltables. A case in point is the
geographicaldistributionof U.S. Army personnel expenditures which
increased nearly four-fold from 1897 to 1908. Table 5 lists the departments or geographical regions which together made up the Army
Command. The first five departments reported in the table include
among others those states which consistently voted against income-tax
legislationbefore the amendmentwas submittedto the states in 1909.Of
the total increase in expenditures, 68.6 percent was allocated to these
five departments. During the same period 31.8 percent of the total
increase went to the Army's Departmentof the East which raised the
shareof total expendituresspent in the East from 18.4 percentin 1897to
28.2 percent in 1908.
Correspondingto the shift in its geographicalpattern of personnel
expenditures, the Army also changed its pattern of expenditures on
arsenals, posts, and public works. First of all, total expenditures on
these items rose from an annual rate of $13 million before the SpanishAmericanWarto $25 million in 1908. Nearly 75 percent of the increase
in the annual budget between 1897 and 1908 was spent in those states,
identified as block A in Table 6, that consistently voted against the
income tax. As a result, the share of the annual budget spent in that
block of states rose from 34.2 percent in 1897 to 52.9 percent in 1908.
Adoption of the U.S. Income Tax
TABLE
623
6
WAR DEPARTMENT EXPENDITURES ON ARMY ARSENALS, ARMY POSTS, AND
PUBLIC WORKS
Total expenditures
Share spent in
block A states
Share spent in
block B states
Block A states
Block B states
Total
1894
1897
1903
1908
$ 13,207,966
36.2%
$ 13,625,279
34.2%
$ 17,137,099
46.7%
$ 25,184,898
52.9%
63.8%
65.8%
53.5%
47.1%
Increase in Annual
Expenditures, 1897-1908
Share of Increase,
1897-1908
$ 8,635,246
$ 2,924,373
$ 11,559,619
74.7%
25.3%
Notes: The block A states are the 17 states that consistently voted against income-tax legislation
prior to the passage of the amendment in 1908. The block A states include: Connecticut,
Masachusetts, Maine, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont,
Michigan, Ohio, Iowa, South Dakota, Wyoming, North Dakota, Minnesota, Washington, and
Oregon. The block B states are all other states.
Sources: U. S. War Department Annual Reports for 1894-95, 1897-98, 1903-4, and 1908-9.
While it was raising and targeting expenditures on the national
military,Congress directed similarefforts at the state militiasystem. As
indicated in Table 7, federal appropriationsfor the state militia rose
nearly 17-fold between 1897 and 1908. The share of the militia budget
spent in the block of states that consistently voted against the income
tax rose from 38.9 percent in 1897 to 67.6 percent in 1908.
While the 1894 income-tax bill included measures applicable to
corporations, corporate profits had not been subject to taxation since
the Civil War. Amid the growingpolitical pressurefor an income tax, in
1909PresidentTaft sent a message to Congress proposingthe adoption
of a corporationincome tax and an income-taxamendmentto be ratified
by the states. The president's proposalfor a corporationincome tax was
introducedto Congress under the leadership of RepresentativeSereno
Payne and Senator Nelson Aldrich in the Payne-AldrichTariff Act.
TABLE
7
ANNUAL FEDERAL APPROPRIATION FOR STATE MILITIA
Total appropriation
Share spent in
block A states
Share spent in
block B states
1897
1903
1908
$ 189,112
38.9%
$ 973,620
40.0%
$ 3,192,281
67.6%
61.1%
60.0%
32.4%
Note: See Table 6 for definition of block A and block B states.
Sources: U. S. War Department Annual Reports for 1897-98, 1903-04, and 1908-09.
624
Baack and Ray
Proponents argued in response that such legislation would simply
enable opponents to escape popular pressure for a congressional vote
on an income tax. The strategy of the income-tax opponents was later
confirmedwhen Aldrichannounced that "I shall vote for a corporation
tax as a means to defeat the income tax."21 In effect, adoption of the
corporate income-tax law appears to have been the unintended byproductof a failed political ploy to prevent congressionalpassage of the
income-tax amendment.
Our argumentis not that Congress orchestrated events to pass the
income tax, but ratherthat times and circumstancesallowed Congress
to forge a winning coalition on the income-tax issue between 1895 and
1909. Popular sentiment reflecting support for a massive military and
naval build-up beginning in the mid-1880s, rapid growth in veterans'
pensions and other income transfer programsafter 1886, and growing
pressure to reduce tariffs, the primary source of federal revenues,
created incentives to find new and substantial sources of federal
revenues. These expenditure programsinsured a permanentand eventually an expanding role for the federal government in domestic
economic activity. Experience during the Civil War demonstrated
prospects for raisingrevenue with an income tax. Congress, throughits
use of discretionarypower in allocatingfederal expendituresamong the
states, appearsto have played a critical role in forgingthe coalition that
passed the income-tax amendment. By capturingthe support of states
like Maine, Massachusetts, and New York supporters of the amendment had the votes necessary to risk takinga constitutionalamendment
to the states.
Differentand even disparateinterestgroups ralliedbehindthe income
tax. With the adoption of the Sixteenth Amendmentin 1913the United
States entered the modern age of special-interest politics, and the
federal government secured the funding mechanism. The adoption of
the income-tax amendmentdid not compell the federal governmentto
grow rapidly,but when the events of the 1930sand 1940sinvited a more
active role for the federal government in the economy, the income-tax
system was available to provide revenues.
21
Congressional Record, 61st Cong., 1st sess. (Washington,D.C., 1909),p. 3929.
Adoption of the U.S. Income Tax
625
APPENDIX
VARIABLE DEFINITION AND SOURCES
Variable
South
Shareof Agriculturein the State's
Economy, 1890, 1910
Incomeper Capita, 1890, 1910
TargetStates
Veterans'Pensions per Capitain
TargetStates
Naval Constructionin TargetStates
House Supportfor the Income-Tax
Law of 1894
Senate Supportfor the Income-Tax
Law of 1894
State Supportfor the Income-Tax
Amendment,1909-1913
Definition
This is a dummyvariablethat has a value of I for the
followingstates and a value of 0 otherwise:Alabama, Arkansas,Delaware,Florida,Georgia,Kentucky, Louisiana,Maryland,Mississippi,North
Carolina,South Carolina,Tennessee, Texas, Virginia, West Virginia.
Total nominalvalue of agriculturalproductionby
state as a percentageof the nominalvalue of gross
state production,where gross state productionis
definedas miningproductionplus agriculturalproduction plus manufacturingproductionby state
(for 1890and 1910).
Source: Bureauof the Census, Abstractof the 11th
Census of the UnitedStates (Washington,D. C.,
1891);Bureauof the Census, Abstractof the 13th
Census, 1912.
Income per capita by state equals gross state product
dividedby state populationfor 1890and 1910.
Source: See directlyabove.
This is a dummyvariablewhich takes on the value 1
for each state that providedless than 50 percent
supportfor the income-taxlaw of 1894in both the
House and Senate, and - 1 for states that provided
50 percentor more supportfor the income-taxlaw
of 1894.
Veterans'pension paymentsin nominaldollarsin
1910by state dividedby state populationin 1910
multipliedby the targetstate variable.
Source:Report of the Commissionerof Pensions to
the Secretaryof the Interior(WashingtonD.C.,
1910),exhibit 6, p. 28.
The nominalvalue of naval constructioncontractsby
state from 1902to 1913multipliedby the target
state variable.
Source: U. S. Congress,House AnnualReportof the
Secretaryof the Navy (Washington,D. C., 19021913).
This is a (1, 0) dummyvariableto represent(yes, no)
votes by individualsin the House of Representatives on the income-taxlaw of 1894.
Source: CongressionalRecord, 53rdCongress, 1st
sess. (Washington,D. C., 1894).
This is a (1, 0) dummyvariableto represent(yes, no)
votes by individualsenatorson the income-taxlaw
of 1894.
Source: CongressionalRecord, 53rdCongress, 1st
sess. (Washington,D. C., 1894).
This is a constructedvariablethat assumes that the
intensityof state supportfor the income-tax
amendmentwas directlyrelatedto how quicklythe
state approvedthe amendment.The first state to
adopt the amendmentwas assignedthe highestdigit, 48, the last state to adopt assigneda value of 7,
and the 6 states that did not adopt the amendment
were assigneda value of 0. The index rangesfrom
0 to 48.