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Happy Anniversary

February 3, 2013

Here’s the start an op-ed piece by Ryan Ellis, tax policy director at Americans for Tax Reform. There’s some interesting history in it.

The income tax: A century of bigger government

On February 3, 2013, taxpayers will celebrate a very dubious centennial: the 100th anniversary of the Sixteenth Amendment’s ratification. The Sixteenth Amendment gives Congress the power to levy income taxes.

We can derive a couple of lessons from this somber occasion.

First, taxes which are foisted upon us by politicians with the promise that they will only be assessed on “the rich” will eventually fall on much of the population, including the poor.

Second, higher taxes lead to more government spending and even more and higher taxes.

Update (2/4/13). Dan Mitchell chimes in

The 100th Anniversary of the Income Tax…and the Lesson We Should Learn from that Mistake

[…] Let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.

The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.

But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.

Here’s a chart, based on data from the Office of Management and Budget, showing the burden of federal spending since 1789.

Since OMB only provides aggregate spending data for the 1789-1849 and 1850-190 periods, which would mean completely flat lines on my chart, I took some wild guesses about how much was spent during the War of 1812 and the Civil War in order to make the chart look a bit more realistic.

But that’s not very important. What I want people to notice is that we enjoyed a very tiny federal government for much of our nation’s history. Federal spending would jump during wars, but then it would quickly shrink back to a very modest level – averaging at most 3 percent of economic output.

US-spending-vs-GDP

So what’s the lesson to learn from this data? Well, you’ll notice that the normal pattern of government shrinking back to its proper size after a war came to an end once the income tax was adopted.

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