It's Long Past Time To Abolish Income Tax
A quick history lesson in why we need to replace this 19th century vestage ...
Introduction
The evolution of taxation in the United States reflects the nation's changing economic landscape and governmental needs.Initially, the federal government relied heavily on tariffs and excise taxes for revenue, minimizing direct taxation on citizens. This approach aligned with the limited scope of federal responsibilities and the administrative capacities of the 19th century. However, as the nation industrialized and its economic activities diversified, the limitations of this system became evident.
The first federal income tax was introduced during the Civil War in 1861, imposing a flat 3% tax on incomes over $800 to meet wartime expenses. This tax was repealed in 1872, but the concept resurfaced in 1894 with the Wilson-Gorman Tariff Act, which included a 2% tax on incomes over $4,000. However, the Supreme Court deemed this tax unconstitutional in 1895, citing it as a direct tax not apportioned according to state populations.
The ratification of the 16th Amendment in 1913 granted Congress explicit authority to levy income taxes without apportionment among the states. This pivotal change led to the Revenue Act of 1913, establishing a progressive income tax system starting at 1% for incomes above $3,000, with higher rates for greater earnings. This shift marked a significant transformation in federal revenue generation, reflecting the government's expanding role in societal affairs.
James C. Scott's "Seeing Like a State" offers a framework to understand this evolution. Scott posits that states strive for legibility—simplifying complex social and economic practices to enhance governance. The implementation of income tax exemplifies this, as it required standardized financial reporting, making individual incomes more transparent and taxable.This standardization facilitated the state's capacity to manage and mobilize resources effectively.
In the contemporary era, the economic environment has evolved with technological advancements and complex financial systems. This complexity challenges traditional income tax structures, urging a shift toward transaction-based taxation. Such a system would align more closely with modern economic activities, ensuring that all beneficiaries of the market infrastructure contribute equitably to the maintenance of mutually beneficial programs.
The Pre-Income Tax Era: Tariffs and Excises
In the early years of the United States, the federal government relied heavily on import tariffs and excise taxes as primary revenue sources. Tariffs—taxes levied on imported goods—were particularly effective due to their ease of administration and political acceptability, as they taxed foreign products rather than directly burdening American citizens.Excise taxes, imposed on specific domestically produced items like whiskey, sugar, and tobacco, also contributed significantly to federal income. Together, these taxes formed the backbone of federal finance throughout the 18th and much of the 19th century. Notably, from 1789 to 1862, nearly all federal revenue was derived from customs duties.
This taxation system aligned with the nature of the federal government at the time, which operated with a limited central authority. The early American republic emphasized state and local autonomy, resulting in a federal government lacking the bureaucratic infrastructure and constitutional authority to efficiently collect direct taxes. There was no Internal Revenue Service, widespread payroll system, or federal database of individual earnings. Tax collection was concentrated in visible locations—mainly custom houses in port cities like New York, Boston, and Charleston—where customs officers enforced import tariffs. This structure required minimal administrative overhead and limited intrusion into citizens' daily lives.
Excise taxes, such as the whiskey tax of 1791, were more contentious but remained manageable from the state's perspective. Targeting the manufacture and sale of specific goods, enforcement could focus on identifiable producers or distilleries, which were relatively easy to locate and monitor. However, excise taxes occasionally provoked resistance—most notably during the Whiskey Rebellion of 1794, when Pennsylvania farmers protested against what they perceived as an unjust federal tax on small-scale distillers.
James C. Scott’s concept of legibility—this idea that states attempt to simplify and codify complex social and economic realities to make them governable—illuminates why tariffs and excises were ideal revenue mechanisms for the early U.S. state. Trade, shipping, and industrial production were inherently public and observable activities, already documented for commercial and logistical reasons. Customs logs, shipping manifests, and commercial licenses rendered these sectors legible to the state without necessitating new layers of bureaucracy.
These revenue sources also reflected the agrarian and commercial economy of early America. The majority of Americans lived in rural areas, engaging in subsistence or small-scale market agriculture. Taxing their incomes—often in the form of barter or sporadic cash flow—would have required a level of bureaucratic surveillance and enforcement that the young republic lacked. Instead, focusing on external and luxury goods, which passed through centralized ports or required formal licensing to produce, offered a rational and administratively feasible path for federal finance.
Moreover, these early revenue mechanisms aligned with the broader ideological commitments of the time. Founding-era Americans were deeply skeptical of standing armies, centralized authority, and invasive taxation—memories of British rule and the Stamp Act remained fresh. Tariffs and excises, by contrast, avoided direct taxation of individuals and limited the federal government’s footprint in everyday life. This contributed to a political equilibrium where revenue collection was effective without being intrusive, a balance that became increasingly difficult to maintain as the federal role in economic life expanded.
By the mid-19th century, however, the limitations of this system became apparent. As the nation industrialized, engaged in large-scale wars, and assumed more governance responsibilities, reliance on tariffs and excises proved insufficient.During the first century of American governance, they served as practical solutions for a state that was limited in scope, minimal in reach, and legible in structure—mirroring the type of state Scott describes. The transition to income taxes required both a new philosophy of federal authority and the emergence of institutions capable of measuring and extracting value from a far more complex and individualized economic landscape.
The Emergence of the Income Tax
The financial demands of the Civil War prompted the United States to implement its first federal income tax. In 1861, Congress enacted a flat 3% tax on annual incomes over $800 to support war expenses. This measure was part of the Revenue Act of 1861. However, this initial tax was short-lived, being repealed in 1872 as the war's financial pressures subsided.
The constitutionality of federal income taxation remained contentious in the following decades. In 1894, Congress passed a flat-rate federal income tax, but the Supreme Court declared it unconstitutional in 1895, ruling that it was a direct tax not apportioned according to state populations. This decision underscored the need for a constitutional amendment to authorize such a tax.
The ratification of the 16th Amendment in 1913 provided the legal foundation for a permanent federal income tax. This amendment granted Congress the authority to levy taxes on incomes without apportionment among the states or regard to any census. Consequently, Congress enacted the Revenue Act of 1913, imposing a 1% tax on net personal incomes above $3,000 and a 6% surtax on incomes exceeding $500,000.
The establishment of a permanent income tax necessitated the development of an administrative apparatus to manage tax collection and enforcement. The Bureau of Internal Revenue, later renamed the Internal Revenue Service (IRS), was established to oversee these functions. The IRS played a crucial role in standardizing tax collection processes and ensuring compliance.
During World War II, significant changes were introduced to enhance tax collection efficiency. In 1943, Congress passed the Current Tax Payment Act, instituting a system of tax withholding. This required employers to deduct income taxes directly from employees' wages and remit them to the government, thereby improving compliance and providing a steady revenue stream.
The implementation of withholding, along with requirements for employers and financial institutions to report wages and interest income, increased the state's capacity to monitor individual incomes. This enhanced "legibility" made wage labor more visible and taxable, aligning with the concept of state simplification for governance. Consequently, the federal income tax system became more efficient and comprehensive.
Why Income Tax Made Sense in the 19th/20th Century
The establishment of the federal income tax in the late 19th and early 20th centuries was a strategic response to the evolving economic and administrative landscape of the United States. During this period, the nation experienced rapid industrialization, leading to significant economic growth and the accumulation of substantial wealth among individuals and corporations. Traditional revenue sources, such as tariffs and excise taxes, became insufficient to meet the expanding financial needs of the federal government. Implementing an income tax provided a more equitable and efficient means of generating revenue, aligning taxation with individuals' ability to pay.
The transition to an income tax system was clearly influenced by the limitations of previous methods. Tariffs and excise taxes disproportionately affected consumers, including those with lower incomes, as these taxes were often passed on through higher prices for goods. In contrast, an income tax allowed for a progressive taxation structure, where tax rates increased with higher income levels, promoting a fairer distribution of the tax burden.
The administrative capabilities of the federal government had matured by this time, enabling the effective implementation of an income tax. The establishment of the Bureau of Internal Revenue, later known as the Internal Revenue Service (IRS), provided the necessary infrastructure to administer and enforce the new tax system. This development marked a significant expansion of the federal government's role in economic affairs, reflecting its increased capacity to manage complex administrative tasks.
The introduction of income tax withholding during World War II further enhanced the efficiency of tax collection.Employers were required to deduct taxes directly from employees' wages, ensuring a steady flow of revenue to the government and reducing the likelihood of tax evasion. This system also made wage labor more visible and taxable, aligning with Scott's notion of legibility by simplifying the process of income reporting and tax collection.
In summary, the adoption of the income tax in the 19th and 20th centuries was a logical progression in the United States' fiscal policy. It addressed the inadequacies of previous taxation methods, accommodated the nation's economic growth, and leveraged the government's enhanced administrative capabilities. Through the lens of Scott's concept of legibility, the income tax can be seen as a tool that not only generated revenue but also facilitated a more organized and transparent economic system.
This Idea Again! The Automated Payment Transaction Tax
The Automated Payment Transaction (APT) tax proposes a comprehensive restructuring of the taxation system by imposing a minimal levy on all economic transactions. This model aims to replace traditional taxes—including income, corporate, excise, and estate taxes—with a uniform, low-rate tax applied universally. The tax would be automatically deducted at the point of transaction through financial institutions, leveraging modern technology to streamline tax collection and reduce administrative burdens.
Implementing the APT tax could positively influence personal savings rates. Under current income tax structures, individuals may be disincentivized from saving due to taxation on interest earned from savings accounts. By eliminating income taxes, the APT tax removes this deterrent, potentially encouraging higher savings rates among individuals.Increased personal savings can lead to greater capital accumulation, fostering investment and economic growth.
Additionally, the APT tax could serve as a mechanism to reduce excessive market speculation. By imposing a tax on every transaction, the cost of frequent trading activities would rise, discouraging high-frequency trading and speculative behaviors that contribute to market volatility. This aligns with the objective of promoting market stability and ensuring that financial markets function more effectively in allocating resources.
Despite its flat-rate structure, the APT tax exhibits progressive characteristics due to the distribution of transaction volumes across different income groups. Wealthier individuals and entities typically engage in a higher volume of transactions, particularly in financial markets. Consequently, they would incur a larger absolute tax burden under the APT system, aligning with principles of tax equity and progressivity.
Moreover, the APT tax simplifies the tax system by eliminating the need for complex tax filings and reducing opportunities for tax avoidance. The automatic collection mechanism ensures compliance and transparency, minimizing administrative costs for both taxpayers and the government. This efficiency could result in significant cost savings and a more straightforward taxation process.
Adopting the APT tax presents a transformative approach to taxation, with potential benefits including increased personal savings, reduced market speculation, and a more equitable tax burden distribution. By leveraging modern financial systems for automatic tax collection, the APT tax offers a streamlined and efficient alternative to traditional taxation methods, aligning with the evolving dynamics of the 21st-century economy.
Objections & Responses to the APT Tax
Regressive Nature of Flat Transaction Taxes
A common critique of flat transaction taxes, such as the APT tax, is their potentially regressive impact. Flat taxes impose the same rate on all transactions, which can disproportionately affect lower-income individuals, as they spend a larger portion of their income on taxable transactions. This means that, relative to their income, lower-income individuals may bear a heavier tax burden compared to higher-income individuals.
Addressing Regressivity
While the APT tax is flat in rate, it is progressive in effect because wealthy individuals and institutions engage in vastly more—and larger—transactions than lower-income households. Every stock trade, real estate deal, fund transfer, or asset shift by high-net-worth individuals triggers the tax, meaning their total contribution far exceeds that of someone making routine purchases or payroll deposits. This structure ensures the wealthy pay more without complex rules or loopholes, and any remaining regressivity can be addressed through straightforward digital rebates to very-lower-income earners.
Political Resistance from Established Interests
Transitioning from an entrenched income tax system to a transaction-based tax faces significant political resistance.Stakeholders accustomed to the current system, including tax professionals, certain industries, and policymakers, may oppose such reforms due to uncertainty or potential loss of benefits. However, proponents argue that, despite initial resistance, a transaction-based tax could lead to a more resilient and fair taxation system in the long term. Simplifying the tax code and broadening the tax base may enhance compliance and reduce administrative costs, benefiting the economy as a whole.
International Implications and Alignment
Implementing a transaction-based tax has international ramifications, especially in a globalized economy where financial transactions cross borders. Aligning such a tax with global digital tax initiatives is crucial to prevent issues like double taxation or tax evasion. Organizations like the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) are actively discussing digital taxation frameworks to address these challenges. Coordinating with these international efforts ensures that a transaction-based tax integrates smoothly into the global financial system, promoting fairness and efficiency.
Bottom Line
While the APT tax presents challenges, mostly political resistance, thoughtful policy design incorporating progressive measures and international coordination can address these concerns. By so doing, a transaction-based tax system will offer a simplified, equitable, and robust alternative to traditional income taxation, better suited to the complexities of the modern economy.
See my account of a broader justification for ATP tax here:
Conclusion: Is Income Still the Right Lens for Taxation?
In today’s digitized economy, every financial transaction is already legible—recorded in real-time by banks, payment processors, and digital platforms. Unlike the 19th-century world that gave rise to the income tax, we now possess the technological infrastructure to track economic activity with precision. And yet, we continue to tax income—a crude, outdated lens—while the ultra-wealthy have mastered legal strategies to avoid ever showing it. By using tools like asset-backed loans with ultra-low interest rates (which are not considered taxable income), billionaires can finance lavish lifestyles without ever triggering a conventional income tax bill. The current tax code effectively shields massive wealth behind a curtain of technicalities and loopholes.
In contrast, an Automated Payment Transaction (APT) tax shifts the burden to where activity actually occurs. For the average household, which spends roughly $72,967 per year, the total transaction tax paid would be far lower than what they currently contribute through income, payroll, and sales taxes. Only the top 1%—whose wealth is in constant motion across financial markets, trust structures, and asset swaps—would see a larger bill. And even then, they have a choice: save and invest for the long term, as supply-side theory has long promised, and their transaction tax burden drops accordingly.
To further empower those with resources to contribute responsibly, the APT framework could include a National Debt Reduction Credit. Every time someone makes a direct payment toward reducing the national debt, they would receive a tax credit equal to double the APT rate that would otherwise apply to a comparable cash withdrawal or disbursement. It’s a tangible way to encourage patriotic investment in fiscal sustainability.
The tools are here. The data is legible. The only thing outdated is the lens. It’s time to stop chasing notional income and start taxing what actually flows: transactions. This is how we create a simpler, fairer, and more future-ready tax system.
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