[intro music] (host) What if there were no taxes?

The first federal income tax in the U.S. was implemented to support the Civil War, so what was the government relying on before then, and how would no federal income taxes affect the U.S. today?

If the old adage remains true, and the only certain things in life are death and taxes, then it's no wonder a lot of us feel like we're dying around April 15th.

But, even though taxes have been a cornerstone of the United States, and, prior to that, the colonies of the Americas since its inception, federal income taxes weren't always a part of that equation.

So, for this episode, I wanted to dive into an alternative history that asks the question: What would the U.S. look like if we didn't have a federal income tax?

So, for the first part of this experiment, we have to ask: What preceded the federal income tax, and how did it come into place?

Well, as I mentioned before, taxes are even more American than your favorite flavor of pie.

There were colonial taxes imposed on the 13 colonies by Great Britain's Parliament, but they weren't based directly on the amount of income a person made per year.

Instead, they were focused on the indirect taxation of goods and services, like the Stamp Act of 1765 that taxed all paper goods.

Some of these were designed to collect revenue to enrich the Crown and pay for military defense in the colonies.

But they weren't exactly popular, leading to cries of: "No taxation without representation!"

and a bunch of tea getting tipped overboard into the Boston Harbor, among other things.

But once the 13 colonies became an independent nation, they didn't do away with taxes altogether because waging war and building a central government is kind of a spendy business.

So they looked to other ways of using indirect taxation to cover these new costs and also to pay off some of the debts they had inherited from the revolution.

This included the Estate Tax of 1797, which took a portion of wealth passed on to heirs from deceased relatives.

And there was a consistent use of tariffs and taxes on certain goods, like tobacco, liquor, sugar, legal documents, and whiskey.

Check out the info on the 1794 Whiskey Rebellion to learn more.

Okay, so I bet you're thinking: That's all well and good, Danielle, but that was also a pretty long time ago.

When did the federal government start taking home a huge chunk of change out of people's paychecks?

Well, the terrible thing about war, outside of death and devastation, is that it's expensive, and it's pretty much always been expensive.

The first federal income tax in the U.S. was implemented by President Abraham Lincoln on August 5, 1861, in large part to help pay for the Civil War.

But this new tax didn't impact everyone immediately.

Instead, Lincoln and the Congress passed the Revenues Act, which took a 3% tax on anyone with an annual income of over $800.

And this law defined "income" relatively broadly to include "income derived from any kind of property "or any professional trade, "employment, or vocation, "carried on in the United States or elsewhere, or from any source whatever."

And while you got to love a legal definition that ends in "whatever" like a teen from "Clueless," the law was eventually repealed in 1872.

There were a couple of subsequent attempts to get an income tax on the books, but they were generally unsuccessful and unsustainable.

But we still weren't done with federal taxation.

In 1909, the federal income tax reared its head one more time in the form of the 16th Amendment, which was later ratified in 1913, and this marked a huge shift in the way the government was able to rake in the dough.

Prior to this, there was a sentiment that the government should not be aware of citizens' private financial affairs.

So, a clause was added in 1916 to make sure that this information on tax filings was kept confidential.

Also, unlike today, most people weren't even paying taxes.

Less than 1% of Americans ended up having to fork over any money in those early income-tax days because of generous exemptions and the fact that it was only intended to tax people making over $3,000 a year.

And the graduated rates started at 1% of income and were as high as 7% for those with an annual income over $500,000.

But, comparatively speaking, that's still pretty low.

But "war, what is it good for?"

Definitely taxes.

And, sing it again, y'all, because during World War I, the federal government was in need of funds after declaring war on Germany.

Starting in 1917, Congress passed a series of war revenue acts that did away with a lot of prior exemptions and raised the tax rates.

This meant that about 5% of Americans had to start paying taxes.

And FDR's New Deal and the onset of World War II also saw the increase in federal income tax collection.

And, although it's gone up and down, run at a surplus and deficit, and remained a point of contention among those who have to pay them, federal income taxes have, in fact, remained as inescapable as death throughout the 20th and 21st centuries.

But that brings us to our third question and the hypothetical portion of the episode-- What would happen if there were never any federal income taxes?

Let's start with the Civil War.

The federal government is denied the ability to create direct taxes.

So, if Lincoln and Congress's plan to establish a federal income tax had been denied, this would have set an important historical precedent, essentially denying the federal government the right to extract direct taxes from its citizens.

As a result, regardless of the outcome of the Civil War, the idea of states' rights would have become more important.

If the South had won, then there's a precedent for states having the right to self-autonomy whenever they decide.

And if the North still won, there's a precedent that the federal government doesn't have the right to collect income taxes in any situation, even when the U.S. was on the verge of implosion.

As a result, the states would become more independent, and the federal government would be weakened.

But to figure out the larger historical impact, we have to figure out what most of your federal income tax dollars are even paying for.

Well, the federal budget is not synonymous with the federal income tax, but income taxes does make up a big portion of the government's annual revenue.

And there are three categories of spending that are covered under the federal budget.

First, there's interest on debt, which usually is the smallest portion of the budget.

Next is mandatory spending, which covers programs like Social Security, Medicare, and Medicaid, and currently makes up the majority of the government's federal budget every year.

And this is determined by statutory criteria that's mandated by law.

And, lastly, there's discretionary spending, which is what Congress makes decisions on annually during the Appropriations process.

Currently, the largest percentage of your tax dollars under Discretionary Spending goes towards military spending and defense.

And since the debate about if the federal government had the right to collect taxes was always hottest when there were times of war and increased military activity, I wanted to dive back into the timeline to see how no federal income tax would affect the U.S., especially around its military history.

Which brings us to our second big impact-- decreased military activity in the first half of the 20th century.

In our alternate timeline, denying Lincoln the right to create a federal income tax sets a legal precedent.

So, there's no grounds for the 16th Amendment, which means that the federal income tax isn't a constant factor in the running of the government.

And without an increased collection of federal taxes during World War I, many of the social safety-net programs that sprung up as a result of the New Deal wouldn't have had federal funding.

Plus, there many have been a different economic history that didn't even result in the Great Depression.

Heck, there may not have even been a World War II without the completion of the first one.

As a result, the U.S. never considers military intervention at other junctures in the 20th century because they simply couldn't afford to on a unified national level.

Lastly, without federal taxes, the United States is a lot less unified.

Because federal income taxes are collected by the central government and redistributed amongst the 50 states, there is a certain amount of collective and political logic that goes into who gets what.

For example, in 2014, South Carolina got $7.87 for every $1 its citizens paid in federal taxes.

But without federal taxation, each state's economy would be much more independent, and that's because state wealth varies wildly, with Mississippi, Arkansas, West Virginia, Alabama, and Kentucky ranking on the tail end of the poorest states in 2015, while Maryland, Hawaii, Alaska, New Jersey, and Connecticut were on the high end based on median household income.

So, over the course of the 20th and 21st century, federal income taxes that went towards paying on the national debt would likely be eliminated in favor of taking on just state debts.

And the other categories, like education and social programs, would also vary based on the wealth of the relative states.

So, how does it all add up?

Well, the federal income tax is strangely symmetrical.

It was enacted at different points in U.S. history to pay for war efforts, and, even today, the biggest percentage of federal discretionary spending goes towards military and defense.

But without this boost of money at various points in the historical timeline, the federal government would likely be much weaker, and we'd have more independent states.

But, what do you think?

If federal income taxes hadn't been made into the permanent law of the land with the 16th Amendment, how would that impact the timeline for the U.S.?

Would we have states ruling, or would the federal government have survived?

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