MAKING THE MODERN AMERICAN FISCAL STATE: LAW, POLITICS, AND THE RISE OF PROGRESSIVE TAXATION, 1877-1929
Vol. 24 No. 9 (September 2014) pp. 496-499
by Ajay K. Mehrotra. Cambridge University Press. 2013. 428pp. Hardback $90.00. ISBN: 978-1-107-04392-3.
Reviewed by Jonathan Chausovsky, State University of New York at Fredonia, chausovs[at]fredonia.edu
Ajay Mehrotra has chosen to follow the money. In this case, it is in the form and distribution of taxation burdens that accompanied the transition to a more modern bureaucratic American state. His method is historical, and in the finest tradition of James Willard Hurst, contextual and complex. The narrative of MAKING THE MODERN AMERICAN FISCAL STATE is divided in three parts, bisected by POLLOCK v. FARMER'S TRUST AND LOAN (1895) which declared an income tax unconstitutional, and by the Sixteenth Amendment, ratified in 1913, that effectively reversed that decision. Surrounding these two points is a rich intellectual history of responses to industrial development, situated in the political structures of the Gilded Age and Progressive Eras. The initial context of unfair burdens of indirect taxes was intensified with the advent of corporate capitalism. Intellectual academics articulated a new ability to pay, termed the faculty theory of taxation. They sought to replace the extant theory of taxes paid for government services delivered, termed the benefit theory. Lawmakers navigated the political waters to put these theories into laws, alternately in the states, and at the Federal level. Finally, a bureaucratic turn administered the new Federal tax policy, and contributed to a new industry of tax lawyers.
Part one traces the structure of taxation policy and its resulting antagonism in the period following Reconstruction. Federal income depended largely on tariffs on imports, and on various fees for services rendered. Scholars debated who ultimately bore the burden of the tariff, with Thomas Cooley, in particular, claiming it fell primarily on the ultimate consumer, and thus principally on laborers and agricultural workers (pp. 38-9). Local property taxes became increasingly regressive, as intangible and financial assets proliferated in the new industrial economy. Judicial oversight was minimal. The deterioration of the old system resulted from alterations in social conditions, including immigration, industrial urbanization, and increased inequality. Wealthy persons and corporations with new intangible assets were increasingly able to hide their wealth from taxation. Local tax administration controlled by the parties led to favoritism, complete with an incentive to hide assets from the state.
The causal arrow in this narrative runs from these social changes through the hands of German-trained academic intellectuals, who articulated the new “faculty” theory. The three most influential included Richard T. Ely, Henry Carter Adams, and in particular, Edwin R.A. Seligman. Seligman contended that the benefits theory supported an outmoded theory of citizenship. His theory of taxation was not individualistic, but rather conceived of the individual as a member of society. Eventually this would lead to a new concept of fiscal citizenship. These efforts informed the legislative effort resulting in a mildly progressive income tax in 1894. Mehrotra nicely details the machinations of clever lawyers that distorted Seligman's research to construct a clever argument that a colonial era Massachusetts income tax was the sort the uniformity clause was intended to forbid. In POLLOCK five Supreme Court Justices were convinced.
The second part details the response to POLLOCK, and the path to the Sixteenth Amendment. Reformers intensified their articulation of underlying philosophical principles. When the Democratic Party absorbed populists in 1896, it also absorbed the populist demand [*497] for progressive taxation. Academic reformers identified three elements of a progressive regime: first, a more equitable allocation of the tax burden; second, development of an ideology of fiscal citizenship; and third, construction of administrative authority. Their challenges included defining the ability to pay, linking progressivity to the faculty theory, and deflecting claims faculty theory amounted to socialism. Seligman drew on colonial history to claim that the faculty tax indeed comported with American ideals, and on John Stuart Mill's claim that ability to pay should be based on equality of sacrifice, noting that wealth produces more wealth. This results in a corresponding increase in tax obligation.
Mehrotra portrays the states as laboratories of experimentation in tax policies. States had relied on property taxes more than other revenue streams. The rise of free education, dependent care, and urban industrialism stressed their expenditures. Some reform efforts were misplaced. Ohio, for example, was among the states that sought to outsource tax collection, but the collectors themselves were often corrupt. State imposition of assessors from outside the locality removed local control, but required increased legibility by the state. The search for new revenues led to centralization, classification, and separation of types of revenue for the different levels of government. For example, Henry Carter Adams argued property taxes should be assessed locally, to reduce under assessment, while corporations should be assessed at the state level (pp. 214-15). California did so, and saw a substantial increase in revenue. But this led to a dependence on business conditions: in a recession, state tax revenues waned. Wisconsin was the first to adopt the progressive income tax under the leadership of Robert La Follette, as an element of the Wisconsin Idea, including state constitutional reform eliminated a uniformity clause (pp. 230-32).
The third part details the imposition and then entrenchment of the new taxation system. The “tectonic shift” (p. 294) occurred during and after the Great War. The narrative shifts from academics and legislators to lawyers and bureaucrats at the Treasure Department. They built the administrative foundations of a new fiscal policy by constructing networks, developing legal skills and professionalism, and formulating new policies. Wartime statism was funded by tax increases, borrowing via Liberty Bonds, and easy money policies that led to inflation. The need to increase tax receipts led to higher marginal rates, up to 77% at the war's end, and well as a much lower exemption. It also led to an “excess profits” tax, itself controversial as it implies a “normal” rate of profit. The Treasury lawyers acted as entrepreneurs to impose what from their view was a function and fair system, a classic case of bureaucratic autonomy (Carpenter 2001).
The consolidation of the fiscal regime occurred after the war. Lawyers who had built the system during the war built private taxation practices after the war, and presented a potent new lobby. With legacy Treasury administrators, and the remaining congressional progressives, they successfully resisted efforts to remove the income tax. Andrew Mellon's tenure as Treasury Secretary in the 1920's oversaw the retrenchment. Marginal burdens were reduced on the very wealthy, even as the effective rates remained, due to wealth increases. Progressives strategically sacrificed the excess profits tax in order to maintain an income tax. In a trade off between fairness of progressive taxation and the simplicity of a sales tax, the former won out. This was reinforced, with the Supreme Court's decision in EISNER V. MACOMBER (1920) that stock dividends did not amount to taxable income, and that only with “realization” could profits be treated as income (pp. 367-70).
The narrative in this work is detailed and impressive. It covers a wide range of history, and cuts across literatures in a number of areas. It skillfully deploys ideas developed by scholars in recent decades, such as bureaucratic autonomy or path dependency. For those most interested in the constitutional/public law elements, the rich use of sources that is compiled  here provides useful context for legal change. For those interested in administrative state building, Mehrotra provides a useful case study to contrast with the many others drawn from this same period. For those advocating reforms to establish a consumption tax (as Mehrotra appears to favor), it is an invaluable resource. It will prove useful for contemporary debates over tax code alterations. Thomas Piketty (2014) can advocate redistributive taxation, but Mehrotra explores the vagaries the law and politics that must be navigated for a purported implementation.
Mehrotra identifies corporate capitalism as a significant cause of constitutional change, as opposed to existing narratives that identify elite actions. To be fair, Mehrotra's narrative does identify elites, but they are different elites: his elites are academic advocates in the Progressive Era. Whether, as he claims, Progressive Era developments were more significant than New Deal administrative developments would seem to still require a direct comparison. Clearly the New Deal built on Progressive Era developments, but the extent to which its departures really broke new ground deserves direct attention.
A more provocative claim is that Seligman's tactics of privileging faculty theory and disparaging benefits theory severed the link between spending and revenue collection. Mehrotra claims that Seligman undercut the possibility of redistribution by focusing on taxation, and not on spending. This wades into the longstanding question of “why no socialism?” in America. Obviously, many explanations have been proposed, ranging at least from Hartz's (1955) depiction of irrational mass Lockeanism, to Bensel's (2000) analysis of a bifurcated party system, or Lieberman's (1998) analysis of racial intransigence during the New Deal, to pick three prominent examples. Beyond this, it was not until the Keynesian revolution that purposive budget deficits were fully articulated. Keynes' advice confounded many: don't save in a crisis, go into debt! During the 1930's the Federal government did not run particularly large deficits: that took a world war. Following the war, politicians typically kept deficits somewhat in line. An additional severing came with the Reagan revolution, when large deficits were justified using supply side theory, rather than demand side. Mehrotra does suggest Mellon's policy proposals resembled Reagan's supply side policies, but there does not seem to be any direct lineage. In any case, Mehrotra argument does complicate these debates, it does not replace them.
The assertion of a critical juncture where stigmatization of consumption taxes precluded their inclusion in a full-ranged holistic federal tax policy rests in part upon path dependence theory (Pierson 2004). Mehrotra claims that efforts to privilege progressivity focused exclusively on the taxation side, and “limited the imagination of future American tax theorists and lawmakers” (p. 17). Evidence of the resistance to changing the path came from the failure of proposals for sales taxes in the 1920's. The result, Mehrotra argues, was to close off the path to a European style welfare state that would include substantially more redistributive spending, an assertion similar to that by Monica Prasad (2012).
The reliance on path dependency theory here seems less helpful than a traditional analysis of combat with entrenched interests. Path dependency theory is built in part on increasing returns to scale. But the legislative battles consisted of entrenched interests that maintained pressure on the political system, and warded off efforts to impose a different system of taxation. These efforts can be depicted as negative feedback by an entrenched interest against efforts of change, rather than by increased returns to scale via drastically increased numbers of persons and interests locked unwittingly into a system lacking a value added tax. The new tax lawyers lobby was far more influential than its mere numbers would suggest.
That said, Merhotra's contribution offers rich fodder for these debates. It is an exemplary work that deserves close reading. [*499]
Bensel, Richard Franklin. 2000. THE POLITICAL ECONOMY OF AMERICAN INDUSTRIALIZATION, 1877-1900. New York: Cambridge University Press.
Carpenter, Daniel P. 2001. THE FORGING OF BUREAUCRATIC AUTONOMY: REPUTATIONS, NETWORKS, AND POLICY INNOVATION IN EXECUTIVE AGENCIES, 1862-1928. New York: Cambridge University Press.
Hartz, Louis.1955. THE LIBERAL TRADITION IN AMERICA: AN INTERPRETATION OF AMERICAN POLITICAL THOUGHT SINCE THE REVOLUTION. New York: Harcourt, Brace.
Lieberman, Robert. 1998. SHIFTING THE COLOR LINE: RACE AND THE AMERICAN WELFARE STATE. New York: Cambridge University Press.
Pierson, Paul. 2004. POLITICS IN TIME: HISTORY, INSTITUTIONS, AND SOCIAL ANALYSIS. Princeton, NJ: Princeton University Press.
Piketty, Thomas.2014. CAPITAL IN THE TWENTY-FIRST CENTURY. Cambridge MA: Belknap Press.
Prasad, Monica. 2012. THE LAND OF TOO MUCH: AMERICAN ABUNDANCE AND THE PARADOX OF POVERTY. Cambridge, Mass: Harvard University Press.
EISNER v. MACOMBER, 252 U.S. 189 (1920).
POLLOCK V. FARMERS' LOAN & TRUST CO., 158 U.S. 601 (1895).
© Copyright 2014 by the Author, Jonathan Chausovsky.
Vol. 24 No. 9 (September 2014) pp. 496-499