Tax Regimes

Tax cuts and austerity have been a central feature of American politics in recent decades—just recently, the Build Back Better bill was blocked under the guise of fiscal responsibility. The work of Robin Einhorn, Preston Hotchkis Professor in the History of the United States at UC Berkeley (emerita), makes sense of these dynamics. Through a broad historical perspective, Einhorn has shed light on Americans’ complicated relationship to taxes: from the colonial period, through the American Civil War, to the tax revolts of the 1980s.

Einhorn’s 1991 book, Property Rules: Political Economy in Chicago, 1833-1872 examines the fiscal history of Chicago in the nineteenth century and shows that a period traditionally associated with the rise of American democracy was in fact dominated by the interests of property owners. Chicago’s city government prioritized the developmental priorities of this group and avoided the democratic politics of redistribution. Einhorn’s second book, American Taxation, American Slavery, argues that hostility to taxation in America originated with slaveholders who worried about protecting their property from non slaveholding majorities. Whereas northern colonies developed comprehensive property tax systems, enforced by local officials, southern colonies create a lenient tax code friendly to the growth of slavery, with long term consequences for American state institutions. More recently, she has been working on the origins of the Federal Income Tax and the rise and fall of American tax regimes in the twentieth century.

In this post, Noam Maggor interviews Einhorn on the role of regionalism in shaping the history of the American fiscal state.

An interview with Robin Einhorn

NOAM MAGGOR: How did you first become interested in the history of tax policy?

ROBIN EINHORN: I grew interested in taxes the historian’s way: I discovered it in an archive. While writing my dissertation, the Illinois State Archives uncovered the archives of the City Council, which were thought to have been destroyed in the Great Chicago Fire of 1871. They were not yet calendered or indexed, so to know what was in them, I had to read through them. I started where they started, in 1833. By the 1840s and 1850s, an over whelming number of documents were about a tax policy I had never heard of, called “special assessments.”

Chicago was growing explosively during that period, and required significant infrastructure investment: streets, bridges, sidewalks, lighting, grading, and paving. Most of this was paid for through “special assessments,” which, I discovered, were levied or collected from property owners who were expected to benefit in higher property values as a result of the investments. Beyond financing, property owners developed decision making procedures around which industries and projects deserved funding and how. The title of my first book, Property Rules: Political Economy in Chicago, is based on the fact that Chicagoans did not calculate the number of people taxed for a project, but how much property they owned. 

As a result of special assessments, municipal government functioned very differently from what the historical literature at the time described. This made me realize that the structure of tax policy is a blueprint for understanding the functioning of government, and of politics. Special assessment, and the process of decision making around it, weres designed to avoid interest-based politics. It was an economist’s dream—a system that sought to avoid distribution and avoid a politics of redistribution.

NM: Why were they so worried about the politics of redistribution?

RE: In mid-nineteenth-century America, many aspects of government were structured in a manner which bypassed public debate. One of the most highly regarded state-level laws among economists was the “uniformity clause,” which stated that all forms of property had to be assessed the same way and taxed at the same rate. Well, why would you want to do that? Economists in the twentieth century argued that the clause would ensure that industry paid its fair share. This was a story about democracy in the West, in line with Frederick Jackson Turner’s famous frontier thesis. 

I made a list of the order in which states inserted this clause into their constitutions, and found that the economists had it wrong. The first state to develop this rule was Maryland, in 1776. A series of southern states, along with Illinois, which had slavery at the time, followed. When I looked at the language, I noticed new peculiarities: in Tennessee, the clause stated that “no one species of property on which a tax shall be collected, shall be taxed higher than any other species of property of equal value.” As a nineteenth century historian, I knew that the term “species of property” was a reference to slavery. Through this process, I realized how important slavery was to these uniformity clauses in state constitutions. 

NM: It is useful to think of fiscal history as a story of struggle over the demarcation of spheres for legitimate public debate. This is especially interesting in the American context, where propertyless citizens had the right to vote, and consequently we see the emergence of these protected decision-making spheres. We could frame the entire fiscal history of the United States in the nineteenth century around the efforts of those who own the property to shield themselves from public arenas where they would be forced to negotiate with the rest of the population over how to distribute burdens and rewards.

RE: The upper South states in the 1830s and 1840s are a perfect case of that. With the elimination of property qualifications for suffrage, a growing number of non-slaveholding yeomen in the western parts of North Carolina, northern Georgia, or eastern Tennessee, were enfranchised. They demanded more representation in the legislature. They want reapportionment, which slaveholders feared would lead to the abolition of slavery. The yeomen wanted roads and schools, the slaveholders worried they would tax slavery out of existence. This is the fear expressed by Hinton Helper in the Impending Crisis, a book which spread through the South in 1857. 

The deal became that reapportionment in the legislature could take place only if the non-slaveholders agreed that their land and livestock would be taxed at the same rate as slaves and land and livestock. They could try and get their roads and schools, but not by taxing slavery at a higher rate. 

NM: You are describing an interesting dialectic between elites who were trying to protect themselves from redistribution, whether they were in Chicago or Maryland, and democratic constituencies who are bent on expanding government spending, building infrastructure, and providing education. What were the differences between this sort of legislative infrastructure in the North and South? 

RE: As early as the seventeenth century, Northern colonies had sophisticated regimes of property taxation. Local assessors, who assessed property values for the purposes of taxation, struck deals with local property owners to develop rules that were fair enough and served public purposes. Assessment has been described as both an art and a science—I think it’s a politics. 

In the South, the laws did not make room for local politics. They did not assess the value of real estate before the American Revolution at all. Instead, they had flat rates per acre, which meant that high value property paid the same as low value property. They had flat rates per slave, sometimes in age and sex categories. These were rules set by the legislature, not local assessors. Why didn’t they do the assessment? My answer was that they couldn’t do local politics.

NM: What were the long term implications of this divide between North and South for American institutions? You, and others, have argued for the resilient legacy of slavery in modern America. I am more skeptical, because the South lost the Civil War and the northern bourgeoisie grew immensely powerful.

RE: Waging and losing a bloody civil war had consequences. One consequence was the protective tariff, which was a huge redistributive engine from South to North. We joke that the South won the Civil War, because they established white supremacy within a couple of years. At the same time, the North constructed this tariff designed to protect and foster Northern industry at the expense of Southern cotton growers and Western wheat producers. At this point, the tariff constituted half of all federal revenue, yet it was still a small part of an expansive subsidy system. Douglas Irwin has done brilliant work on this and found that a full 8 percent of US GDP was redistributed, mostly from the South to the Northeast. The West was paid off with a system of pensions for Civil War veterans, but the veterans of the treasonous army of the Confederacy were not included. So as a result of losing the war, the South had to help subsidize American industry.

NM: This is striking because the Jim Crow system increased the South’s political power in Congress —they now counted all African Americans for purposes of representation instead of three fifths of the slaves. Additionally, as Ira Katznelson showed, the South often voted together as a unified bloc in Congress. And yet, they were not powerful enough in those decades between the end of the Civil War and going into the twentieth century to overturn the hegemony of the pro-industrial Republican Party. Were there important legacies of the antebellum tax systems?

RE: During Reconstruction, Southern state constitutions were rewritten such that their property taxes resembled Northern property taxes. Southern local government was reformed. However, voting rights were narrowly circumscribed. By the 1890s, African American men could no longer vote in the South among other disabilities that were imposed on them. But you are not going to find continuity in the tax instruments.

NM: This brings us to the origins of the modern income tax. Scholars liked Elizabeth Sanders and Monica Prasad have traced the origins of the progressive income tax, alongside other reforms such as antitrust, corporate regulation, and the Federal Reserve, to the agrarian periphery, to the West and especially the South, Sanders points in particular to the Democratic triumph in the election of 1912. In her telling, the “Roots of Reform” originated there. 

RE: The early income taxes, like the Income Tax Act of 1894, the one voided by the Supreme Court in the Pollock case, and the one enacted after the Constitutional amendment in 1913 were not like our income tax. They were levied only on the rich. Southern politicians understood correctly that these early income taxes would not affect the South, because there were few income taxpayers there.

In 1916, New York State paid 45 percent of the personal income tax—this was its purpose. Southerners viewed it not as a working class triumph, but as a way to offset the redistribution of the tariff, by redistributing from the wealthy industrialized corporate North to the agrarian South. So there were two different political regimes favoring this federal income tax: the industrial working class in the North, and the Southern victims of the tariff regime. 

NM: The South as a whole in this period was also poor, so redistribution across regional and class lines went hand in hand. The transition to an income tax, in US and elsewhere, has been viewed is pivotal for the emergence of modern states. Could the tariffs have generated the revenues for a welfare state?

RE: The tariff was equipped to provide a massive pension program for Northern veterans. It produced budget surpluses every year that were quite embarrassing to Republican protectionists. They were desperate to invent ways to spend it, and that’s one reason why these pensions were so generous. The tariff also financed a massive naval build up, and most of the cost of the imperialism of the Spanish American War. So the problem with the tariff was not insufficient revenues. 

Additionally, advocates for the income tax did not necessarily envision it providing a new scale of government revenue or supporting a modern welfare state thirty years later. The financial revolution that made the welfare state possible was the Second World War, when the income tax transformed from a tax on the very rich to a tax on just about everybody.

NM: Nevertheless, it is difficult to downplay the significance of the income tax as a major pivot in the emergence of modern states, in the United States but also elsewhere. What do you make of the constitutional amendment that was necessary to enact the income tax? 

RE: The passing of the 16th amendment is an amazing story. First of all, why did the United States need it? The answer is of course the three fifths clause of the Constitution: “Representatives and direct taxes shall be apportioned” according to the number of free persons “plus three fifths of all other persons.” The direct taxes that were contemplated in the framing of the Constitution were slave taxes. It was the same as the uniformity clause debates in the States. This remnant of slavery in the Constitution was upheld by the Supreme Court in 1895. In the case of Pollock versus Farmers Loan and Trust Company in 1895, the Supreme Court said that Southern Democrats could not tax the fruits of Northern industry.

NM: The Constitution was a pro slavery document, and it made the enactment of the income tax difficult, hence the need for an amendment in the first place. Nevertheless, I am struck by the irony that Southerners were begging for a progressive income tax, and a Supreme Court dominated by Northerners used the clause as grounds for nullifying it. Your own essay on the income tax demonstrates that the earliest states to ratify the Sixteenth Amendment were from the South, with Alabama famously being the first. Opponents of the Amendment used the race card to try to scare southern legislatures. They argued that a Federal government that could scrutinize income would also be able to interfere with Jim Crow, but this did not work. The economic redistributive implications of the income tax mattered more. Wasn’t the income tax part of a broader legislative package that aimed to empower the federal government in new ways?

RE: In different ways. Much of American history proceeds as if the late nineteenth century is somehow characterized by laissez faire. The ‘Gilded Age’ is assumed to be the heyday of business unfettered by regulation. More accurately, the late nineteenth century was a heyday of laissez faire theorizing, primarily by people who hated the tariff. Men like William Graham Sumner were not stating that we have laissez faire, but that we want laissez faire because we have extensive government control over large swaths of the economy. Somehow, we confuse these demands with what actually existed. We assume that the construction of the welfare state was the origin of government intervention in the economy, but this is incorrect. It was a change in the form of intervention. 

For a period of several decades in the middle third of the twentieth century, there was downward redistribution, which was unique. The welfare state was not a departure at the level of active governance. There was pro-industry government intervention throughout this heyday of laissez faire theorizing.

NM: Stefan Link and I have also argued that the United States has an incredibly effective “developmental state” in the late nineteenth century. Why is it, incidentally, that critics of protectionism like Sumner or Edward Atkinson or David A. Wells were not Southerners?

RE: Before the Civil War, Boston and New York were the centers of international trade. As centers of international trade, they were allied with the South before the Civil War. They were opposed to the tariffs later because import and export is a major business which was harmed by trade barriers. Generally, the late nineteenth century was not a period in which major thinkers were from the South; Sumner was at Yale.

NM: You have outlined three different tax regimes: the antebellum regime that preceded the Civil War, the Republican regime of the late nineteenth century, and a Democratic regime that came into being in the early decades of the twentieth century. This is quite a complicated arc, and it seems like Southerners supported or opposed taxes depending on their economic interests. 

Let’s skip forward a bit, to the end of the New Deal fiscal regime. How should we understand its demise? 

RE: Several developments led to the tax revolts that began in 1980.  In the second half of the twentieth century, there had been massive redistribution toward the South through the New Deal, rural electrification, and the military industrial complex in the South and the West. 1980 was the first year in which Southern states paid as much federal individual income tax as the rest of the country. The South no longer benefited disproportionately from the federal income tax, and their interests changed. Another thing that happened by 1980 was the civil rights revolution. Public facilities had to be open to Black people, and this led to retrenchment at the state and local level throughout the South. 

NM: Every tax regime you have described had its own internal contradictions. Here we see a New Deal state investing disproportionately in the periphery, and in doing so sowing the seeds of its own destruction. As the South became part of the prosperous Sun Belt, affluent voters there began to act more like affluent voters in other parts of the country and moved away from their support for the income tax. 

RE: Historians of the South in the second half of the twentieth century such as Matthew Lassiter have argued against Southern exceptionalism, as well they should, because this is the period when the South indeed became less exceptional.

NM: My last question is about situating the US in comparative perspective. Thomas Piketty has found, perhaps to his surprise, that the US in the twentieth century had higher tax rates than Germany and France. How do we square this with the pervasive idea of the US as particularly averse to taxation?

RE: The American federal tax system is still more progressive than the tax systems of its European counterparts. It has become much less progressive than it was when the marginal rate on the highest incomes was 90 percent, but it’s still more progressive. The reason it is more progressive is that the United States does not have a value added tax. Value Added Tax has been a tremendously productive revenue engine in Europe. Many scholars view the VAT as part of the social democratic consensus—workers pay this regressive tax in exchange for the benefits from a welfare state. Republicans in the 1920s came close to replacing the income tax with a national sales tax, but they narrowly missed being able to do that.

Piketty wants to say: you introduced progressive taxation before, you can do it again. But we cannot have the alignment of the early twentieth century today. The past is a record of things that have been tried and coalitions that have been built, but trying to rebuild a coalition from the past is not going to work. 

NM: There is clearly no point, or desire, to resurrect old coalitions, but our conversation has shown that the history of taxation is incredibly dynamic.  The goal should be to look for new alignments and opportunities.

RE: A progressive coalition for today has to emerge from the way the country is shaped today.