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Tax History: Why Do Americans Pay Taxes?

Posted on Mar. 16, 2020

Two myths seem to dominate thinking about American tax politics. The first is that we are a nation of tax resisters. From the Tea Party of 1773 to the Tea Party of 2009, our history is peppered with tax revolts. We are a nation of small-state, antitax yeoman farmers, in origin and sympathy if not in modern practice. Or so the theory goes.

The second, competing myth — much weaker than the first but still evident in contemporary political culture — sees America as a nation of willing taxpayers. While not exactly eager to part with a dollar, Americans have nonetheless accepted a growing tax burden as the price of a growing government. As a people, we have judged the security and services provided by that government to be worth its rising cost.

It may seem dismissive to describe these competing historical narratives as “myths.” But myths aren’t always simply false, even when they comport only loosely (or not at all) with historical facts; like many works of fiction, they can manifest important truths. Consider how the American Heritage Dictionary defines a myth:

A traditional, typically ancient story dealing with supernatural beings, ancestors, or heroes that serves as a fundamental type in the worldview of a people, as by explaining aspects of the natural world or delineating the psychology, customs, or ideals of society.

Used in this sense, myths function as an organizing principle. And for American taxation, they help describe how a new nation came to view one of the most important functions of its fledgling government.

Imperfect History

That said, the myths of American taxation aren’t especially useful for understanding the actual lived history of American taxation. While each of the two myths described above captures elements of the complex historical reality, each also distorts and exaggerates them to make a contemporary political point.

However, that doesn’t mean the two myths are equal in their historical accuracy. Or that either one provides a consistently better description of American fiscal politics in every period of U.S. history.

In my view, the antitax, anti-state myth comes closest to the historical truth during the early years of the republic, when popular suspicion of centralized power ran strong in the new nation. Even then, however, it tends to obscure the pro-tax, pro-state views popular with many of the nation’s founders, including luminaries like Alexander Hamilton and his federalist colleagues.

Meanwhile, the “willing to pay” myth does a better job explaining the 20th century, especially the resilience of big-state social welfare programs. If Americans are truly a nation of tax haters, why have they been willing to shoulder the taxes that pay for those programs, not to mention the growing enormous military commitments of a global superpower?

Yet they have been willing. Not happy, perhaps. And not without some second thoughts, constraints, and reversals. In broad strokes, however, they have left the fiscal regime established during World War II largely intact, including not simply its spending levels but its taxing instruments.

Americans may not like paying taxes, but they’ve been willing, at least, to tolerate them.

New Research

The “willing to pay” argument has been bolstered in recent years by some fascinating and compelling research. One of the best and most recent contributions has come from Vanessa Williamson at the Brookings Institution. In her 2017 book, Read My Lips: Why Americans Are Proud to Pay Taxes, Williamson offers a persuasive rebuttal to the simplistic notion that Americans detest taxes, everywhere and always. “The idea that ‘Americans hate taxes’ has become a truism without the benefit of being true,” she wrote. (Prior coverage: Tax Notes, Apr. 3, 2017, p. 17.)

In the hands of a careful scholar like Williamson, the “willing to pay” argument is nuanced and convincing. She contends that taxpaying isn’t simply an exercise in painful sacrifice, but an act of civic faith: “The act of taxpaying taps into Americans’ fundamental political values: their sense of fellowship with other people and their feeling of representation by the government.”

All true. But it’s important not to lose sight of a crucial fact: No one actually likes paying taxes. In fact, it’s the distasteful nature of taxpaying that makes “shared sacrifice” such a powerful component of citizenship. Sharing something we enjoy — fireworks on the Fourth of July, for instance, or a Memorial Day parade — is certainly pleasant. But real national solidarity comes from the painful stuff. Fighting wars, to be sure, but paying taxes, too. It’s the “sacrifice” in “shared sacrifice” that builds cohesion.

The shared nature of fiscal sacrifice is also why tax avoidance is such a powerful issue in American politics. Ultimately, Americans may not much like paying their taxes. But what they really hate is other people not paying their taxes. That sort of shirking involves not simply the shift of monetary burdens, but a betrayal of the bonds of citizenship.

Compliance

In recent years, scholars of comparative politics have also weighed in with “willing to pay” arguments about American taxation. In cross-national comparisons, Americans often rank among the most compliant of taxpayers — their famous reputation for tax resistance notwithstanding. As political scientist Sven Steinmo has observed, “Americans do appear willing to pay. Or at least, they are willing to follow the rules.”

Steinmo cites an 85 percent overall compliance rate to bolster his assertion, a figure consistent with other leading estimates. (The Urban-Brookings Tax Policy Center pegs the tax gap at something between 15 and 18 percent over the past 30 years.) But there are problems with such numbers, at least when they are paired with a word like “willing” that implies a lack of coercion.

Tax compliance in the United States is notably better when third parties are involved in reporting income and collecting taxes. As Treasury Inspector General for Tax Administration J. Russell George told Congress last May, “the IRS estimates that information reporting and withholding requirements are significant drivers of tax compliance.” This was something of an understatement, as George’s next two sentences made clear:

For instance, when there is information reporting and withholding at the source, tax compliance is approximately 99 percent. When there is information reporting, tax compliance is approximately 93 percent. When there is neither withholding nor information reporting, the IRS believes tax compliance is as low as 37 percent.

Those numbers point to a problem with any “willing to pay” arguments rooted in top-line compliance numbers. Americans aren’t paying their taxes simply because they are happy to do it. They aren’t settling down at their desk in late January, firing up TurboTax as soon as the filing season starts, and cheerfully making their contribution to the price of civilization.

Instead, American taxpayers are logging in to see how much money the federal government has already extracted from their paychecks, casting about for ways to get some of it back, and sitting back to wait for a relatively small refund (if they did their planning carefully).

Americans pay their taxes because they must. Because those taxes are paid for them, and because not paying their taxes carries heavy penalties. I’d like to believe that obligation, citizenship, and duty play a part. And in fact, I believe those factors matter. They matter about 37 percent.

Still Willing

Cynicism aside, I think the “willing to pay” view of American tax culture is still useful. There are other ways to measure “willingness” than tax compliance in the absence of withholding, third-party reporting, and other forms of enforcement and coercion. Specifically, willingness can be measured in political terms. And in that sense, the “willing to pay” argument stands up quite well.

If Americans found the income tax intolerable, they would have long since dispensed with it through political means. They did something similar with burdensome tariffs in the early 20th century, as well as regressive excise levies in the wake of World War II. By contrast, Americans have tolerated the existence of the income tax for more than a century, rebuffing efforts to replace it or even reform it fundamentally.

To be sure, they have implicitly endorsed many gradual changes that have added up over time, including transformations of both its base and rate structure. But in broad strokes, Americans have proven “willing to pay” the income tax for 107 years — and I, for one, see no major changes on the horizon.

The individual income tax’s political durability derives from many factors. French historian Romain Huret unravels several of them in a piece for Steinmo’s 2018 edited essay collection, The Leap of Faith: The Fiscal Foundations of Successful Government in Europe and America. Huret explains American fiscal politics using a “triangular framework” that includes citizens, civil servants, and governmental institutions. Together, these historical actors have operated within a “common ground model” that emphasizes the nonconfrontational, reciprocal interactions between institutions and social groups.

“Everybody agrees that citizens are more likely to comply when they perceive institutions as procedurally fair in both decision-making and implementation processes,” Huret writes. “Neither citizens nor the state are abstract individuals and institutions. Instead, they interact in spaces that render possible both tensions and compromise, resistance and compliance.”

Essentially, Huret rejects the notion that coercion lies at the heart of American tax compliance. Instead, he describes a three-part model of accommodation. Americans have accepted the growth of the modern federal state — and the taxes that pay for it — thanks to three aspects of its modern fiscal system: (1) an acceptance of the social and political legitimacy of the state; (2) a consensus on how to define and measure income; and (3) the creation of room for negotiation between taxpayers and tax collectors.

I’m dubious about several of the elements in Huret’s analysis, beginning with his insistence on minimizing the inherently coercive nature of taxpaying. But there’s still much to be learned from his analysis of the more consensual aspects of American fiscal history.

Huret, like others in the “willing to pay” school, is correct to emphasize the element of acquiescence that has marked American taxpaying. Americans complain about taxes, but that hardly makes them unique; people in every country complain about taxes all the time. Americans also sometimes vote for politicians who promise to reduce taxes. And they have been known to even reelect politicians who have actually passed sweeping tax cuts.

But neither those politicians nor the voters who have elected them have ever seriously challenged the fiscal underpinning of the modern American state. In broad political terms, Americans have continued to manifest a willingness to pay — and sometimes even a determination to pay, especially when political leaders have raised the possibility of tax cuts that might threaten cherished entitlement programs.

If we understand willingness in its broadest sense — not as a willingness to pay our individual taxes but as a willingness to leave our fiscal institutions basically unchallenged — then the “willing to pay” school has something important to teach us about America’s fiscal history.

And perhaps its fiscal future.

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