Conor Clarke (Washington University) presents What Made Income Taxes Possible (co-authored with Edward Fox and Wojciech Kopczuk) at Duke today, as part of its Tax Policy Seminar hosted by Larry Zelenak:

Why do governments impose taxes on “income” rather than (and in addition to) other things? Large literatures in economics, history, and political science answer versions of this question. For example, a literature in economics and law considers the policy tradeoffs of taxing income versus consumption. Yet another literature considers the conditions that are likely to make a government adopt an income tax in the first place—such as war-fighting or the extension of the franchise. And numerous histories tell the story of the rise of the income tax in specific countries. But relatively less has been written about related but antecedent questions: How did “income” become identified and available as a tax base in the first place? We describe what makes this question interesting and suggest some possible answers. We make several points. First, income taxes are a relatively recent historical phenomenon—and, in some respects, so is the underlying concept of income itself. Prior to the eighteenth century, there are virtually no sustained discussions of the income concept in English-language scholarly work. Second, there was a period of time—from the middle of the eighteenth century into the early nineteenth—during which income was identified as a desirable tax base, but also considered politically and administratively infeasible to pursue. Adam Smith (and many of his contemporaries) considered income taxes ideal but impossible. Third, we hypothesize about the changes in the economy and improvements in administrative technology that were most significant for the rise of the income tax—most notably, the emergence of large financial institutions and firms, which allowed for withholding (a legal development that emerged piecemeal over the nineteenth century) at scale. In the case of Britain—which is distinctive for the earliest and most influential national income tax—we show that these developments allow the early income tax to capture a surprisingly large share of national income (especially capital income) in the nineteenth century. Fourth, we sketch some implications of this theory and history for debates over tax policy and the income concept, most notably for the relationship between administrative technology and the tax base, and for tax policy in developing countries today.