What Trump Got Right—And Wrong—About the Income Tax

The other day—‘Liberation Day,’ to be exact—President Trump said some things about the history of American taxation that struck many in the mainstream media and mainstream economics as patently insane. “Trump [is] Rewriting American Economic History,” groaned CNN, which went on to cite a variety of academic economists supporting this “obvious” contention and pointing out that Trump had no idea what he was talking about. Among those CNN cited was Douglas Irwin, a Dartmouth economics professor, who grumbled on Twitter/X, “We have a 20th-century president in a 21st-century economy who wants to take us back to the 19th century.”

Now, to be fair, much of what Trump said was unorthodox, to say the least. But that doesn’t necessarily mean that all of it was wrong. Indeed, whether the “experts” will acknowledge it or not, some of what Trump said was spot on and should be recognized as such. He said:

[I]n 1913, for reasons unknown to mankind, they [the federal government] established the income tax so that citizens, rather than foreign countries, would start paying the money necessary to run our government.

Then, in 1929, it all came to a very abrupt end with the Great Depression, and it would have never happened if they had stayed with the tariff policy. It would have been a much different story.

In response to this, CNN and everyone else cited the Smoot-Hawley Tariff Act of 1930, insisting that this disproves Trump’s claim. It doesn’t. Smoot-Hawley was, as its name indicates, enacted in 1930, eight months after the Great Crash and the start of the Depression. One may argue—credibly—that Smoot-Hawley protectionism was a terrible idea once the Depression had begun, but that’s not what Trump said. He said that the Depression could have been avoided if the federal government had not enacted an income tax and had stuck with its pre-1913 tax system. Again, this is unorthodox, but it isn’t necessarily false.

The causes of the Great Depression were numerous, varied, and, in some cases, are still hotly debated. Inarguably, however, the factors that played the greatest role in the Depression’s formation were financial corruption and attendant speculation. Money was plentiful, which meant that it was treated carelessly and was spent and invested frivolously and recklessly. Part of the reason money was plentiful was the fact that the United States escaped World War I largely unscathed while Europe was devastated. But that was not the only reason. Consider, for example, what we know about income taxes and their effect on the federal government.

Just weeks before Woodrow Wilson was inaugurated as the nation’s 28th president, William Howard Taft’s Attorney General (Philander Knox) signed the 16th Amendment to the Constitution, which read in its entirety, “The Congress shall have power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Wilson, being Wilson, encouraged Congress to pass, and then he immediately signed the country’s first constitutionally approved income tax law only a few months later. That plan contained a flat tax of 1% on all income over $3000 and a steeply graduated “additional tax” that kicked in at $20,000. In short, it was both a progressive tax and a Progressive dream. And it was only the beginning.

During World War I, the domestic state apparatus grew exponentially. Federal expenditures skyrocketed between 1910 and 1920, as did federal revenues. Indeed, between 1917 and 1919 alone, federal revenues grew by 400%. Despite this growth, however, the government didn’t even come close to covering the cost of its expansion. A massive amount of government borrowing was also needed, and the federal debt grew a staggering 2000+% between 1916 and 1919.

The historical conventional wisdom has always been that the war was the specific and sole cause of this growth in government spending and debt and that as soon as the war was over, both returned to pre-war levels, as did the government’s expanse. It wasn’t until the Great Depression and the New Deal that domestic government power and expenditures really grew swiftly and unmanageably.

This is a myth. While it is true that overall spending dropped dramatically between 1920 and 1925, domestic spending remained inflated. The foreign affairs, transportation, and defense costs of building an army and shipping it across the Atlantic were enormous, and so the money saved by reversing the process was also significant. But while those costs fell significantly enough to shrink the federal budget overall, the domestic budget nonetheless increased, meaning that outside of the War Department, the federal government actually grew during this alleged “downsizing.”

Moreover, spending rose extremely quickly after 1925. The economist Randall Holcombe has suggested that the domestic federal spending patterns in the 1920s indicate that the Republicans who preceded Franklin Roosevelt were fairly big spenders in their own right. “The 1920s,” Holcombe has noted, “was a decade of increasing government activity, in expenditures, in regulation, and in attitude, as the federal government was increasingly willing to expand its role in the economic lives of its citizens.” Indeed, Holcombe argues that the foundations of the New Deal were set long before FDR came to power and that his supposedly massive expansion of the state was not particularly massive at all. It was, more or less, perfectly in line with the trend that prevailed for much of the previous decade. “The New Deal,” Holcombe concluded, “was really an extension of the type of government growth that occurred in the 1920s.”

Would a tariff system have prevented the Depression, as Trump claims? Well… maybe. The then-unprecedented expansion of the domestic government—and the massive concomitant fiscal stimulus to the economy—was facilitated almost exclusively by the new income tax. One cannot say for certain that the financial corruption and speculation of the 1920s would have been avoided without the 16th Amendment, but one can make that argument, and certainly, that is not outside the realm of realistic possibility.

Unfortunately, that brings us to the bit in his statement that Trump got wrong, and that largely renders his entire argument moot. Recall that he said that the federal government pushed the 16th Amendment and passed the first income tax law “for reasons unknown to mankind.” That’s just wrong. We all know their reasons—and they are detailed above. In 1913, the American government was in the throes of the Progressive delusion. It enacted an income tax specifically to curtail Americans’ attachment to private property and to expand the size and scope of the federal government. John Dewey—one of the godfathers of Progressivism and one of the most aggressive advocates of power-consolidation in world history—wrote the following as World War I raged and American Doughboys were in harm’s way: “Legal possession and individ­ual property rights have had to give way before social requirements. The old conception of the absoluteness of private property has received the world over a blow from which it will never wholly recover….[I]t has been made clear that the control of any individual or group over their ‘own’ property is relative to public wants, and that public requirements may at any time be given precedence by public machinery devised for that purpose…. The immediate urgency has in a short time brought into existence agencies for executing the supremacy of the public and social interest over the private and possessive interest which might otherwise have taken a long time to construct.”

In other words, the federal government is here to take what was once yours, to make it theirs, and then to distribute it as it sees fit for the public and social interest.

That’s the catch right there. The income tax exists (in theory) to fund the federal government, which exists to confiscate Americans’ private property for the “public interest” by means of the income tax, which exists to fund the federal government, which exists to…well, you get the point. The world Trump wants to return to via his tariff regime no longer exists. Moreover, it cannot be reconstructed without dismantling the entire federal government, as well as the debt and income measures by which it is currently funded.

There are some folks—libertarians, mostly—who would argue that those are great ideas and that we should get started sooner rather than later. Most of us, however, understand that this is not going to happen and that the best we can do is slice away at the size and scope of the federal government over time. The tariff regime Trump so admires simply cannot be re-created. Even if one believes that reciprocal tariffs are economically preferable to free trade, there is no way that they can raise enough revenue to fund today’s federal leviathan. And as Reagan found out the hard way, “starving the beast” works better in theory than in practice.

Trump is not, contrary to the mainstream press and academia, wrong about everything, but in this case, he is fighting an unwinnable battle.