Fiscal History Workshop

A Nation of TaxpayersConsent, Coercion, and the Modern U.S. Tax StateJoseph J. ThorndikeTax AnalystsFalls Church, VA

Nevada senator Pat McCarran, D-Nev. and ardent anticommunist (McCarran Internal Security Act)1What Do We Know About the History of Taxpaying in the United States?

History matters: Not for affirmationNot for predictionsBut because its extends our view. Expands our notion of the possible; limits our expectation of the likelyThe missing historyWe know quite a bit about the creation of tax policy.[CLICK]But very little about the operation of the tax system, at least beyond broad measures of revenue collectionDont need to tell anyone here: tax administration matters, to the state but also to the taxpayerBut it scares people, especially historiansAlso, a thin paper trail.

2The taxpayers lived experience

Dont know much about what it meant to be a taxpayer in the past, especially with regard to the individual income tax.Voluntary elements of compliance make that story importantThe tax looms large in popular cultureBut not in our historical memoryHard story to tell. Sources are scarce, like many aspects of social and cultural historyBut too important to ignore3The United States has a system of taxation by confession. That a people so numerous, scattered and individualistic annually assesses itself with a tax liability, often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of self-government.

--Justice Robert Jackson, United States v. Kahriger, 1953

Taxpaying from the bottom up is important if we want to understand complianceThe United States has a system of taxation by confession. That a people so numerous, scattered and individualistic annually assesses itself with a tax liability, often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of self-government. What surprised me in once trying to help administer these laws was not to discover examples of recalcitrance, fraud or self-serving mistakes in reporting, but to discover that such derelictions were so few.

4The ConundrumFor a nation borne of a tax revolt, Americans are remarkably good about paying their taxes

The conundrumSomething of a straw manBut there is an undeniable strain of anti-statism and anti-tax ideology in American political culture. Not making claims to national exceptionalism; all countries hate taxesBut not every country makes tax resistance such a central part of their shared historical memory, from the Boston Tea Party to Shays Rebellion to Proposition 13. And yet: Americans report higher tax morale than most peer nations and tax collections (when measured as a percentage of theoretical tax liabilities) are among the highest in the world, totaling 83.1 percent, according to the IRS. Oliver Wendell Holmes once observed that "taxes are what we pay for civilized society," and for more than 200 years, Americas compliant taxpayers have been remarkably willing to pony up.5But Why Do We Pay?Jacksons notion of confession is helpfulTax complianceand by extension, tax consentis a function of both voluntarism and coercionSometimes in tension, but usually complementary

Confession with a priest? Confession with a detective?6The Project

Taxation in the crucible: critical periods of consent creationEvaluates the durability of consent

Wars are a special case but also an important caseMoments of creationIdeally, we could look at peacetime periods as wellAnd I offer some thoughts on peacetime complianceBut its a mammoth undertaking really a comprehensive history of the IRS7Coercion and VoluntarismArgues that consent was a function of both coercion and voluntarismFocuses on administration but does not ignore policyAccommodates blurred lines, interactions, and contradictionsConcludes that durable consent depended heavily on blending coercion with taxpayer assistance

Focuses on administration but does not ignore policyPolicy design was an element of voluntarism: since fairness perceptions were crucial to consentPolicy design was also an element of coercion, since lawmakers chose some taxes because they were easier to collect than othersTries to accommodate blurred lines and interactionsSome forms of coercion (withholding), obviated the need for voluntarism (and actually had voluntaristic qualities themselves)Some forms of voluntarism (social norms in wartime) are at least a little coerciveConcludes that coercion cut two waysFostered voluntarism by reassuring taxpayers that they werent chumpsUndermined consent by embittering taxpayersEspecially true during the Civil WarConcludes that durable consent especially after WWII depended heavily on aspects of tax administration that blended coercion and taxpayer assistanceWithholding is obviously coercive: take the money without askingBut also a boon to taxpayers, who it relieves of administrative difficultyEspecially important for complex taxes, like the income taxAlso, coercion, as a bar to free riders helped maintain consent

8Voluntarism: Civil WarPolicy designIncome tax designed to bolster fairnessPerceptions of fairness considered a prerequisite for consent (and therefore compliance)DecentralizationNumerous collection districtsLocal face on a federal taxPatronage

Ways and Means Chair Thaddeus Stevens, R-Pa.Worries about a rich mans war and a poor mans fightColfax: "There is no stress of weather which can induce me to vote for the bill as it now stands. I cannot go home, and tell my constituents that I voted for a bill that would allow a man, a millionaire, who has put his entire property into stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax." 9PatriotismChase: The most sacred duty of the American people at this moment requires the consecration of all their energies and all their resources to the reestablishment of the Union on the permanent foundations of justice and freedom.Voluntarism: Civil War

Voluntarism: Civil WarPublic anxiety in regard to the construction of the law induced a large amount of correspondenceAt first, the commissioner answered all such letters personallyBoutwells first principle: to levy a tax in those cases only which are clearly provided for by the statute, and, consequently, whenever a reasonable doubt exists, to rule against the government and in favor of the individual

George Boutwell, first Commissioner of Internal RevenueAdministration from the Ground UpBoutwell began with nothing; in his first manual for taxpayers, noted that he started by reading the law which I had not before seenWithin a few days the Secretary assigned me a clerk, then a second, then a third, and from time to time additions were made, till he clerical force now numbers one hundred and forty persons.

11Coercion: Civil WarAn Army of OfficialsFederal rather than stateSweeping powersdefault assessmentsarrest and imprisonmentbountiesprivate collectors

Taxpayers at the Assessor's OfficeRep. Roscoe Conkling, R-N.Y.: "one of the most obnoxious -- perhaps the most obnoxious -- of all it features is that which creates an army of officers whose business it is to collect this tax." Stevens: "It is unpleasant to send the tax gatherer to the door of the farmers, the mechanics, and the capitalists of the country to collect taxes for defraying the expenses of this war," he granted. Stevens insisted, however, that the new officers were a necessary evil, an administrative necessity given the range of new taxes under consideration C.G. (37/1), 247.

12Public disclosureCommissioner: "The object of the law seems to have been to afford every tax-payer an opportunity of ascertaining what returns his neighbors have made. He is interested in these returns, because the burden of the national duties is a common one, and every person should be required to pay his due proportion of it.Withholding

Coercion: Civil War

Those who pay are the exception, those who do not pay are millions; and the whole moral force of the law is a dead letter. The honest man makes a true return; the dishonest hides and covers all he can to avoid this obnoxious tax. It has no moral force. This tax is unequal, perjury-provoking and crime encouraging, because it is at war with the right of a person to keep private and regulate his business affairs and financial matters. Deception, fraud, and falsehood mark its progress everywhere in the process of collection. It creates curiosity, jealousy, and prejudice among the people. It makes the tax gatherer a spy.13Transience of Civil War ConsentCoercion cut two ways, both against the income taxToo weak to prevent evasionToo strong to tolerate for law-abiding taxpayersVoluntarism largely successful but inadequate to maintain consentPatriotism was an effective rhetorical exhortationDecent administrative support for taxpayersPocketbook complaints merged with coercion complaints to undermine the tax; declining revenue needs created the opportunitya tax bill like this which goes into every house, into every business, every neighborhood, which taxes everything a man eats and all that he wears, which enters into the consideration of every man engaged in every business of the country, which puts a tax upon every conceivable subject of taxation; such a tax bill has never before appeared in this country. an function of tax design, but also administration14Voluntarism: World War IIPolicy design: fairness as a tool of consentSoaking the rich justified taxing the middle classNo sales taxPatriotism: sacrificeMass media made propaganda more efficient. Familiar calls to sacrifice.Information, taxpayer support

Income tax no longer a balancing toolNo sales tax was the fairness selling point15Voluntarism: World War II

Most taxpayer support was gentle. No overt threats. Of necessity because no admin capacity (Carolyn Jones) SEE NEXT SLIDE16Coercion: World War IICoercion requires either a small scale (Civil War tax) or impressive administrative capacityThreats were extant but underdeveloped during the warAdministrative weakness made such talk dangerousTreas. Sec.: Suppose we have to go out and try to arrest 5 million people?Postwar, a different storyAbsent wartime exhortation, BIR turned to threats

Near end of war, more talk about pursuing people17Coercion: World War II

Withholding changed the equationCoercion with a velvet glove

Durability of ConsentWWII tax proved durableProgressivity and perceptions of fairness were keyMass tax, by virtue of its embeddedness, was tenaciousIncreasingly, elements of the postwar state were delivered through the tax systemWithholding was crucial

Survived the GOP resurgence19Complexity and ConsentComplexity: Everyones second highest priority for tax reform.Really? Taxpayers?Withholding was obviously coerciveBut conceived as benefit to both government AND taxpayersFacilitating voluntarismLimiting possibilities of catastrophic error Policymakers worried that taxpayers would withdraw consent from a system they found confusingFear is the enemy of consent. Complexity breeds fear, especially when combined with coercive forms of enforcement.

I Paid My Income Tax TodayDanny Kaye200685786.68eng - SID5092