The Rise of Progressive Taxation: What Does it Mean to be Progressive?

                Ajay Mehrotra is a leader of a new generation of tax historians and a pioneer in the field of fiscal sociology.  Befitting his richly interdisciplinary training and acculturation, Ajay’s work is not merely a history of the tax laws, but offers an almost anthropological peek at the development of the fiscal architecture in this country.  Indeed, Ajay is one of those writers where I’m tempted to read the footnotes before I read the main text.  His citations to authority often provide an unparalleled literature review of the field.  As an added bonus, many of his footnotes actually have pinpoint cites, unlike some historical books where the reader is left to wonder whether the author has actually read the books he is citing.  With Ajay, there is no such worry.  He reminds me of fellow tax historian Assaf Likhovski of Tel Aviv University in his polyglot-like fluency in the literature of multiple disciplines.

In Making the Modern American Fiscal State:  Law, Politics, and the Rise of Progressive Taxation, 1877-1929, all of the best qualities of Ajay’s work are on display.  The book is careful, nuanced, informative, and comprehensive.  Although Ajay is not the first to observe this, the book beautifully describes how the revenue system was radically re-made over this period and beyond, shifting from a system focused on regressive customs duties and excise taxes (based upon the “necessity to consume”) to a system primarily based on taxing incomes and intergenerational wealth transfers (based upon the “ability to pay”).  As befitting someone steeped in the Elliot Brownlee tradition of economic history, Ajay devotes ample time to profiling the pioneering public finance economists who Ajay gives credit for this progressive transformation, including Henry Carter Adams, Richard T. Ely, and Edwin R.A. Seligman.  Perhaps his greatest contribution is in the book’s detailed description of the centralization of fiscal authority and the concomitant development of the administrative apparatus to operate the new system.

 

What I fear what may be lost amidst the subtitle and the momentous nature of the transformation is the extent to which the progressivism involved in the shift was more contextual, political, and contingent than the rhetoric might suggest.  Although there were certainly those who envisioned a radically redistributive type of progressive taxation, they weren’t exactly the winners in this debate.  Arguably, the prevailing theory of income taxation was one that is hardly ever discussed today and I did not see mentioned in Making the Modern American Fiscal State – one Edwin Seligman called the “special compensatory theory.”  This was distinguished from the general compensatory theory, which posited that the income tax was necessary to offset “the inequalities consecrated by custom and by law” whereby “the legal conditions of society naturally favor the rich.”  Under the special compensatory theory, the revenue system is viewed as a whole and one form of taxation is made progressive to make up for the regressive effects of another specific form of taxation.  As Seligman wrote in the 1908 edition of his treatise on Progressive Taxation in Theory and Practice, the income tax and other similar direct taxes are “designed to act as an engine of reparation” against the regressivity of the customs duties and excise taxes.  “In order to obtain equal treatment the regressive indirect taxes must be counterbalanced by the progressive direct tax.” (Seligman, pp. 144-146)

It’s not that Ajay ignores this part of the story.  For example, Ajay explains that in 1894 “[income tax advocates . . . reminded their opponents that the proposed income tax was merely a supplement to a larger tariff regime, and that national taxation was just one part of a broader fiscal order that included many forms of regressive taxation.” (p. 128).  It’s just that Ajay characterizes this as a political compromise that served as a weigh station on the road to the true progressivity of an income-centric tax system, rather than being a part of the design itself.  Under this latter perspective, the transformation in the revenue system that began during this period envisioned an income tax in which the base and the rates ratcheted up or down based on the makeup of the remainder of the system.  Indeed, during the debates over the first post-Sixteenth Amendment income tax bill in 1913, Senator John Sharp Williams, the leader of the Democratic caucus, argued that “when the good day comes – the golden day – when there will be no taxes upon consumption at all . . . and no import duties at all except countervailing duties to offset them [then] everybody will pay in proportion to his income,” meaning a flat rate.  In effect, the transformation Ajay describes was important and it was progressive (in no small part due to the advance of fiscal citizenship that is one of Ajay’s themes), but it was not necessarily designed to lead to progressive income taxation as a permanent feature of the revenue system.

Perhaps this is why the “retrenchment” Ajay describes in the 1920s was not really a retreat from the principles of progressivity that helped motivate the original income tax.  Instead, it was more a reflection of the post-World War I return to the mean for income taxation in its service as a mild counterbalance to the continued presence of regressive features, including, in more modern times, the regressivity arising from the unequal distribution of tax evasion opportunities.  In many respects, the fundamentally moderate or even conservative underpinnings of the original income tax continues to describe the tax system and frustrate reformers, such as those who see Thomas Piketty’s recent tome as a clarion call for new forms of wealth taxation.