The Invention of Income

• In Event: Tax Theory

Abstract

Why do governments impose taxes on “income” rather than other things? Large literatures answer versions of this question. For example, literatures in economics and law consider the policy tradeoffs of taxing income versus consumption. Another literature considers what conditions make adoption of an income tax likely—such as war-fighting or the extension of the franchise. And the story of the rise of the income tax has been told in a specific countries. Yet virtually nothing has been written about an antecedent question: How did “income” become available as a tax base in the first place? We describe what makes this question important and offer answers. We make several points. First, income taxes are a relatively recent historical phenomenon—and so is the underlying concept of income. Before the eighteenth century, there are virtually no discussions of the income concept in English-language scholarly work. Second, there was a time—from the middle of the eighteenth century into the nineteenth—in which income was identified as an ideal tax base but considered administratively impossible to pursue, highlighting changes in administrative technology. (Adam Smith, for example, considered income taxes ideal but impossible.) Third, we describe the improvements in administrative technology that were central to the rise of the income tax—most notably new accounting technologies and the rise of salaried wage earners. Fourth, we describe some implications of this history for debates over tax policy and the income concept today.

Authors

• Conor Clarke, Washington University in St. Louis

• Edward Fox, University of Michigan

• Wojciech Kopczuk, Columbia University