Whether we like it or not, income tax plays an integral role in our relationship with the money we earn. While it may be difficult to conceptualize a time before its existence, income tax has been a fabric of everyday America for less than 80 years. It all changed in 1943 thanks to the government, World War II…. and Donald Duck. Before I explain, I’d like to rewind a few centuries.
In theory, taxes are intended to solve fundamental issues regarding the allocation of resources in national and local communities. At our nation’s formation, this was achieved primarily through tariff revenue. In fact, income tax was not a part of the US constitution nor a system designed by the Founding Fathers. However, as you can imagine, relying on income primarily from imports is a delicate business. In wartime, this is the first source of revenue to suffer. It was for this very reason that during the War of 1812 US Treasury Secretary Albert Gallatin first introduced the concept of taxing earned income of Americans. As cabinet members discussed the logistical and legal hurdles of implementing such a system, it was quickly dismissed as unviable.
That is, until the Civil War. Congress was in desperate need of funds to feed and supply Union soldiers, and so the Bureau of Internal Revenue was created. Only the wealthiest Northerners were required to pay this new income tax to the bureau. In order to hold high earners accountable, tax returns were made public. This meant that citizens could whistle blow any neighbors who were believed to be underreporting (sounds like a surefire way to make some enemies in your town!). The Confederacy also attempted its own income tax system, but it was riddled with inefficiencies and ultimately failed. As burdensome as income taxes may feel, its success in the North played an imperative role in the deciding the fate of today’s America as a sovereign nation.
Where the wealthy were compliant in paying income taxes during the Civil War, their patience quickly wore thin thereafter. In 1895, the issue of income tax made it all the way to the Supreme Court. The wealthiest members of America argued that the current tax system was unconstitutional. After a dramatic vote (including the summoning the terminally ill and bedridden Justice Robert Jackson to break a 4/4 tie), taxing only the wealthy was deemed unconstitutional. However, with the rise of major industrialists like JP Morgan, John D. Rockefeller, Andrew Carnegie, and Henry Ford, it was difficult to ignore the astronomical income the ultra-wealthy were receiving all tax free. So, in 1913, the 16th amendment was established to clearly state that Congress shall have power to lay and collect taxes on incomes (which surely came in handy in World War 1).
If we fast forward to World War II, following the attack on Pearl Harbor, the government was in desperate need of revenue to support wartime efforts; and so they tapped the pockets of everyday Americans. For the first time, the middle and lower class saw the government as a tax collector. It was clear a well-loved spokesperson was imperative to ensure the income tax system was embraced. In 1942, the government hired Donald Duck to explain how Americans can do their part by paying “taxes to bury the Axis”! While we might scoff and dismiss the cartoon as wartime propaganda today, a 1944 poll indicated that 90% of Americans thought the income tax code was fair, a level of embrace that is pretty remarkable considering majority of Americans had never paid any form of tax up until that point.
While our income tax system has developed significantly since 1943, its broadest adoption all started with the biggest quack of them all: Mr. Donald Duck.
“I believe in fostering a relationship with your personal finances. Once you begin to understand what deeply matters to you, the way you put your dollars to use becomes an expression of those values. When you can orient yourself to view your spending as a reflection of who you are, you’re able to exercise control over how your money moves; there is great power in that.”