Ajay K. Mehrotra (Indiana-Bloomington) presents Building the Modern American Fiscal State: Progressive-Era Economists and the Intellectual Foundations of the U.S. Income Tax today at Northwestern as part of its Tax Policy Colloquium.  Here is the abstract:

At the turn of the twentieth century, the U.S. system of public finance underwent a dramatic transformation. The late nineteenth century structure of indirect national taxes, associated mainly with the tariff and regressive excise taxes on alcohol and tobacco, was eclipsed in the early decades of the twentieth century by a federal income tax that soon accounted for more than half of all federal tax revenues. A similar, albeit less pronounced, shift occurred at the state-level where the income tax soon came to challenge the dominant reliance on property taxes. This shift in U.S. tax policy towards the direct and progressive taxation of income marked the emergence of a new fiscal polity – one that was guided not simply by the functional and structural need for government revenue but by concerns for equity and economic and social justice.

Among the forces that helped build this modern American fiscal state, none was perhaps more important than the intellectual movement supporting the rise of the income tax. The turn-of-the-century structural transformation in American public finance was guided mainly by a paradigm shift in the legal and economic theories that undergirded tax policy. It was academic political economists, trained predominantly in Germany, who led the intellectual charge for the income tax in the United States. This paper focuses on how these German-trained American intellectuals were able to apply historicist German social theory to the application of American tax policy. More specifically, this paper contends that this group of American intellectuals was able to supplant the “benefits theory” of taxation, and its concomitant vision of the state as a passive protector of private property, with a more equitable principle of taxation based on one’s “ability to pay” – a principle that promoted a more active role for the state in the distribution of fiscal burdens. In so doing, these theorists were able to use the growing concentration of wealth and the ascendancy of new economic theories at the time as justifications for using a progressive income tax to redistribute the fiscal burdens of financing the emerging regulatory, administrative, welfare state. Led by the likes of Richard T. Ely, Henry Carter Adams, and Edwin R.A. Seligman, these political economists were at the forefront of the intellectual battle not only to dismantle the orthodox theories of laissez-faire, but also to advance the adoption of new, more effective forms of taxation.