A Club to Beat Down the Tariff: The Political Economy of Tax Swaps and the Interest Group Origins of the 16th Amendment

Abstract

Historical interpretations of the 16th Amendment usually attribute its genesis to a progressive intellectual movement aimed at addressing growing wealth inequality and the claimed excesses of 19th century “laissez-faire.” This article presents an alternative theory rooted in an interest group explanation of the income tax movement. Drawing upon an implicit recognition of Tullock’s dual-rent characteristic of the tariff, a group of mostly Democratic free-traders pursued a “tax swap” at the constitutional level in a conscious attempt to undermine protectionist rent extraction during the Payne-Aldrich Tariff revision of 1909. Though neglected in a historical literature that is overwhelmingly disposed to the progressive interpretation, the “tax swap” strategy is extensively referenced in the legislative history of the income tax movement. Empirical evidence from the stock market further validates this alternative thesis. Publicly traded import-competing firms are shown to have been acutely sensitive to the income tax’s advance through Congress, whereas firms with little political investment in the protective tariff system were not. These findings call for a revision of conventional accounts of the income tax’s origins and alter our understanding of its political economy on a constitutional level, particularly with respect to its unanticipated effects on the federal tax base and subsequent deployment as a revenue extraction device.

Keywords: Income Tax, 16th Amendment, Rent Seeking, Tariffs, Protectionism, Constitutional Political Economy

JEL Classification: N11, D72