Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

When Lawmakers met Progressives. Debating the Federal Income Tax in America

San Julian Arrupe Javier, University of Barcelona

In 1894 the American Congress (the House and the Senate) passed a 2% tax on incomes over 4,000 US dollars at the federal level, as part of a bill originally designed to reduce trade tariffs. Setting an income tax was an important step in the struggle for a fairer tax system, a demand led by American farmers and workers, aware of the increasing inequalities of American society and claiming that the federal tax system, grounded on indirect taxation, was harmful to them. Their claims found a strong support in the new generation of progressive American economists, who were sponsoring a rearrangement of the whole tax system on the idea of equality of taxation understood as equality of sacrifice, and on an organic view of the State as a community of brethren animated by common interests. The beginning of the decade of 1890 witnessed the dissemination of this opinion among lawmakers, so that a majority of them at the House of Representatives embraced the idea of setting a federal income tax to advance in that direction. Even if struck down by the Supreme Court, the federal income tax of 1894 was an economic milestone in the Progressive Era, mirroring new social concerns. This paper examines the debates on the federal income tax in the House. Through an analysis of the House records, focusing on the uses that representatives made of political economy sources, it aims at providing evidence to test this hypothesis: Representatives accepted the arguments of progressive economists for the reform of the tariff and the creation of a tax on incomes. Political economy played a central role in the debate as an instrument to confer legitimacy and reputation to representatives’ arguments for the income tax, crucially aiding to the building of consensus for the reform. However, and in order to reinforce the latter function, most supporters of the income tax would not quote the Progressives’ texts, but used the works of other American economists, politically less controversial.

Area: Eshet Conference

Keywords: Tax policy, Income Tax, Progressive Era, America, progressivism

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