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Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929

Author(s):Mehrotra, Ajay K.
Reviewer(s):Magness, Phillip W.

Published by EH.Net (November 2014)

Ajay K. Mehrotra, Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929. New York: Cambridge University Press, 2014. xvi + 429 pp. $90 (cloth), ISBN: 978-1-107-04392-3.

Reviewed by Phillip W. Magness, Institute for Humane Studies, George Mason University.

In 1918, only five years removed from the ratification of the federal income tax amendment, economist Edwin R.A. Seligman (“The War Revenue Act,” Political Science Quarterly) summarized its consequences this way: “Never before, in the annals of civilization, has an attempt been made to take as much as two thirds of a man’s income by taxation.”  His observation reflected the rapid pace by which an initial top marginal rate of 7 percent had ballooned to upwards of 67 percent on the highest earners, its growth fueled almost entirely by the revenue demands of the First World War. Coming from a primary intellectual architect of the income tax movement, Seligman’s astonishment also conveyed hints of unease, or at least awareness that the trajectory of the policy had exceeded his original case for a new revenue device at an astronomical pace. Perhaps more telling is a near-contemporaneous assessment by Joseph Weldon Bailey, the former senator from Texas who set the Sixteenth Amendment into legislative motion in April 1909 and a man whom no less than Cordell Hull credited with forcing the income tax onto the national stage (see Cordell Hull, Memoirs of Cordell Hull, 1948, Vol. 1, p. 60 and Roy G. Blakey and Gladys C. Blakey, The Federal Income Tax, 1940, p. 30).  “While I have always favored an income tax,” Bailey reflected, “no intelligent and sincere student of the question could approve of a law such as we have today. Its rates are so high as to compel the conclusion that it was framed to encourage extravagance or to penalize prosperity” (speech reprinted in the Mexia Weekly Herald, April 23, 1920).

There can be no doubt that the Sixteenth Amendment induced a transformative shift in the fiscal order of the United States, though not always as anticipated. In Making the Modern American Fiscal State, legal historian Ajay K. Mehrotra takes up the task of tracing the intellectual origins of the events that brought the income tax into being and supplanted a previous tariff and excise-based tax system as the dominant fiscal mechanism of the federal government. Mehrotra’s argument follows the progressive disposition that typifies income tax historiography, although with a new twist that places intellectual rather than political figures at the center of the story.

Briefly summarized, the income tax movement traces to an emergent cohort of academic economists typified by Seligman, Richard Ely, and Henry Carter Adams who spent almost four decades mounting a sustained challenge to the prevailing “benefits theory” of taxation — the notion that revenue should be extracted according to a low, limited, and reciprocal provision of government services to the taxpayer. These intellectuals offered an alternative theory of taxation premised upon the “ability to pay” and the civic obligation implicit therein, providing an intellectual basis for redistributive direct taxation unchained from tangible benefits received. Their legacy continues in the expansive fiscal state of the present day.

In providing a guide to the normative justifications of progressive tax theory, Mehrotra has done historians a great service. He capably navigates these discussions through an impressive assemblage of archival and print sources and illustrates the dissemination of progressive academic influence into the policy sphere. Yet he also shares a pronounced enthusiasm for the results of this effort, which at times limits his ability to dispassionately assess unfolding historical events.

The book’s treatment of Pollock v. Farmer’s Loan & Trust (1895), invalidating the 1894 income tax, is illustrative. The author’s recounting of the case is at times difficult to differentiate from what he describes as Seligman’s own “neutral” brand of academic suasion as an “expert” consultant and critic. This pits Mehrotra and Seligman alike against anti-tax adversaries who invariably offer “selective” examinations of constitutional intent and “legal fictions” to reverse a century of precedent that “consistently interpreted” the Constitution’s limitations on direct taxes in ways that would not preclude the income tax (131, 135-36). While Pollock is a complex decision of mixed historical legacy, its core contention actually derived from a dearth of direct judicial consideration of the tax power since the founding era’s disjointed Seriatim decision in Hylton v. United States (1796), the “consistent” interregnum actually being a handful of obscure cases that only indirectly touched the relevant tax powers. A more measured assessment might turn to the open ambiguities of the income tax’s resemblance to acknowledged founding era direct taxes as opposed to teasing out favored claimants to originalist “truth,” or turn to the explicit primacy that the Constitution’s framers placed upon revenue derived from excises and tariffs as a point of contrast for a “new” revenue system that entered constitutionally uncharted territory save for a brief Civil War era experiment.

Mehrotra begins his inquiry with the older tariff system — the dominant federal revenue source of the nineteenth century — and thoroughly documents its role as a source of economic agitation. After the Civil War, tariff policy settled into a stable pattern of entrenched trade protectionism in the political service of predominantly northeastern industrial interests. This gave direct credence to the charge that the tariff-based tax system imposed its burdens upon consumers, agricultural exporters, and the poor while delivering massive benefits to wealthy industrialists by insulating them from international price competition. Thus a formative precept of “ability to pay” theory grew out of frustration with the tangible rent-seeking enterprise of the fiscal system’s status quo. It warrants mention that this assessment of the tariff system presents an under-acknowledged tension with the aforementioned repudiation of “benefits theory.” It is not difficult to see how the protectionist cronyism is far removed from an exemplar of benefits-based taxation — it is if anything an inversion of benefits reciprocity coupled with heavy, proactive government price manipulation — and yet the reader finds the tariff somewhat carelessly summarized as an extension of a vague benefits-enveloped laissez-faire status quo.

Far more curious though is the continuous diminishing of the tariff issue as the book progresses from the formative intellectual debates of the 1880s to the successful introduction of an income tax amendment in 1909. The amendment’s legislative adoption receives only four scant pages in which the tariff issue lightly appears. This oversight is substantial, as the amendment was actually an outgrowth of a heated public debate over protectionist logrolling that captured the ongoing Payne-Aldrich Tariff revision of that year. Indeed, derailing this tariff was the original objective of the income tax rider proposed by Bailey and so favorably referenced years later by Cordell Hull as the public turning point in the income tax debate. As the argument went, an income tax would flank the tariff interests by decoupling the trade policy from its revenue function and allow the country to “divorce this alliance” between revenue and trade protectionism, to borrow a phrase from MIT’s Davis R. Dewey (“Would a Federal Income Tax Be Fair to New England?” Boston Globe, January 16, 1910).

The tariff story is both crucial to understanding the complex political dynamics that produced the amendment and in many ways a complementary pattern of the academy’s diffusion into the political mainstream. Bailey’s strategy was a direct descendant of a briefly-referenced (p. 65) proposal three decades prior by Yale’s William Graham Sumner, a classical liberal free trader whom Mehrotra somewhat carelessly paints with the same “conservative” moniker that he elsewhere attaches to the 1909 tariff’s arch-protectionist and anti-income tax namesake, Senator Nelson Aldrich. Anti-tariff backers of the income tax similarly enlisted the trade theory work of Harvard’s Frank Taussig in the Senate floor debate, prompting Aldrich’s denunciation of this “dean of the free traders” for bringing university influence to bear upon congressional processes (Congressional Record, Vol. 44, p. 1537).  These and other free trade academic forebears of the income tax movement present an unaccounted complexity to Mehrotra’s story, which is dominated by such figures as Seligman and Ely, both progeny of German Historical School influences and far from free trade purists. Instead of this fuller and more complex story of academic diffusion into policy, we find only a more detailed and intellectually focused retelling of redistributive ideological conventions wherein the complex events of 1909 are almost wholly explained through vague appeals to the progressive tropes of “heightened social anxieties surrounding the power of Big Business and increasing economic inequality” (p. 264).

In fairness, Mehrotra openly identifies his objective in telling the progressive intellectual history of the income tax and the resulting work succeeds on that count. As a work of constitutional law and distinctively progressive political economy it functions well and will likely be a source guide for many years to come. Yet, with a few exceptions, it also does not venture far from these progressive precepts. Thus a full accounting of the consequences of the income tax movement, and particularly its constitutional political economy, are similarly partial toward its redistributive consequences and “professionalized” administrative implementation. Other consequences go all but unnoticed, such as the political windfall the Sixteenth Amendment provided to the Eighteenth wherein the supplanting of federal tax dependency on alcohol tariffs and excises also inadvertently removed a fiscal obstacle to Prohibition (see Donald J. Boudreaux and A.C. Pritchard, “The Price of Prohibition,” Arizona Law Review, 1994).  The amendment’s influence on trade — highly touted at its adoption, as we have seen — also goes unnoticed after an initial liberalization tied to the new income tax in 1913 succumbed to the resurgent protectionism of the Fordney-McCumber Tariff in 1922. In dismissing this latter event as a “vain effort to restore the ancien regime” (p. 395) and omitting its more notorious and consequential successor, the Smoot-Hawley Tariff, Mehrotra misses another important income tax legacy insofar as the “new” fiscal order had misdiagnosed the political economy of the “old” leading not to its replacement but rather the simultaneous coexistence of high tariffs, high progressive taxation, and all that it entailed. It stands to reason that the intellectual wisdom or folly of each policy was not the determinative factor, but rather the political interests they cultivated and advanced.

A final note may be offered, reflecting on the wartime source of the extraordinary marginal rates that became Seligman’s later surprise and Bailey’s disgust. As Mehrotra amply documents, it was not the peacetime reordering of 1913 but the revenue demands of American entry into the First World War that provided the lifeblood of the new income tax-based fiscal system and cemented its enduring and transformative permanence. More than its redistributive designs and its facilitation of a vast array of domestic expenditures and programs, the warfare state was the most direct font and beneficiary of the income tax’s prodigious revenue generation — a result that was entirely unexpected by many of its proponents. While acknowledging the Sixteenth Amendment’s other transformative effects on our constitutional political economy, we should be prepared to accept this product as the original and arguably most consequential outgrowth of the income tax era’s fiscal upheaval.

Phillip Magness is a policy historian, focusing on trade, taxation, and slavery in the nineteenth-century United States. His work on the constitutional history of tariffs and taxation has appeared in Constitutional Political Economy, the Journal of the Early Republic, and multiple popular outlets.

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII