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Wisconsin, birthplace of America’s modern income tax
Wisconsin became the first state to launch a successful modern income tax, targeting the wealthy to combat Gilded Age inequality.
MILWAUKEE - Benjamin Franklin famously said, "Nothing can be said to be certain, except death and taxes." And you can thank Wisconsin for one of those certainties.
As the country celebrates 250 years, the semiquincentennial, Wisconsin has left a lasting impact on the history of the country, including as the birthplace of the country’s modern income tax.
Taxes before 1911
What we know:
"There was no income tax that was effectively collected until Wisconsin in 1911," says Ajay Mehrotra, a professor at Northwestern University who is also a research professor with the American Bar Foundation, and author of Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877–1929.
Mehrotra says before that, there was a temporary federal income tax during the Civil War. During peacetime, the federal government relied on excise taxes on tobacco and alcohol, as well as tariffs, while the states turned to property taxes.
Push for change amid inequality
Dig deeper:
After all the changes of the Industrial Revolution, workers and farmers pushed for their own changes.
"There was also a push from rural areas to shift somewhat away from the property tax, and toward an income tax, which I think benefited rural areas more than urban areas," explained Jason Stein, president of the Wisconsin Policy Forum.
Property tax was supposed to apply to a lot of intangible property, like stocks and bonds, Stein added.
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"The Vanderbilts and the Astors and all the super wealthy actually had a lot of their wealth, not just in land, but also in this other form of property that was hard to collect, frankly. And so Wisconsin really became the first state in 1911 to have an effective income tax at both the personal and business level," Mehrotra explained.
"It really was a social movement, a kind of bottom-up populist movement. William Jennings Bryan and some of the other populists of that time period and Progressives really turned to the income tax as a way to address that growing concentration of wealth," said Mehrotra.
Income tax as a targeted "class tax"
What we know:
At the time, most in Wisconsin were exempt from the new state income tax, because they didn't make enough money.
"The income tax really was a class tax," Mehrotra says. "It had a very high exemption level and relatively low graduated rates, so it really was targeted at the wealthy."
"You had the wealthy who said this was going to lead to the migration of the millionaires, that everyone was going leave and businesses were going to leave," Mehrotra added.
Wisconsin’s innovation: First successful state income tax
Local perspective:
The country’s first successful, modern income tax showed the country what was possible.
"Part of the challenge was administering that program. So, you have to come up with a way of determining what people's incomes are and what amount of tax they owe. And the
state was innovative in coming up with practical, workable solutions for doing that," said Stein.
The Wisconsin Policy Forum reports 90% of that first state income tax went back to cities and counties.
National impact of Wisconsin’s income tax
Dig deeper:
Two years after Wisconsin’s state income tax, the country approved the 16th Amendment in 1913, allowing for a federal income tax.
"National lawmakers, it’s pretty clear from the historical record," Mehrotra said, "are looking to Wisconsin and saying, ‘Look, it seems to be working there.’"
"Other states also looked to Wisconsin and learned from Wisconsin. So, there was a transmission of these ideas and these administrative infrastructures that really did help other states implement a state-level income tax," he added.
"Laboratory of Democracy"
What we know:
1911 was a big year for Wisconsin. It led the country with the first successful income tax and worker's comp, and was also home of the country's first registered apprenticeship program.
Stein says Wisconsin was a "hotbed" of innovation at that time.
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"There was state capacity. So, at the UW Madison and within state government, you had very capable, far-thinking administrators and professors and other people who just had the intellectual capacity to put some of these ideas into practice," said Stein.
It's part of what's called the "Wisconsin Idea," where UW research was put to work making practical changes. It is what has been called the "Laboratory of Democracy."
As part of that "laboratory," Wisconsin’s income tax has been in effect for 115 years, fueled by work like yours.
The Source: Information in this post was procured from interviews with scholars, experts on taxes.