Paying Taxes Is Not the Worst Thing You Can Imagine

(Bloomberg View) -- In the decades after the Civil War, federal taxes and spending in the U.S. were about one-sixth or one-seventh as high as they are now as a percentage of gross domestic product. But that doesn’t really mean government was only one-sixth or one-seventh as big as it is now.

For one thing, the U.S. government gave away hundreds of millions of acres of federal land in those days in small grants to homesteaders and giant ones to railroad companies — big expenditures of government resources that don’t show up in the spending statistics. For another, the second half of the 19th century was a heyday in the U.S. of what Stanford historian Richard White calls “fee-based governance.” Here’s a description of the practice from White’s “The Republic for Which It Stands: The United States During Reconstruction and the Gilded Age, 1865-1896,” a 2017 book that I’ve already gushed about in this column:

It used fees, bounties, subsidies, and contracts with private individuals or corporations to enforce laws and implement public policy. In the immediate wake of the Civil War, what might superficially look like a bureaucracy in the General Land Office, the Office of Indian Affairs, or the Treasury Department really amounted to a collection of agents who lived on the fees they collected and the economic opportunities their jobs presented. Where fees and bounties did not suffice, the federal government routinely delegated governmental functions to corporations, churches and a variety of other independent actors. The net result was an unwieldy and inefficient system that required few taxes but was ubiquitous and often intrusive.

White then goes on to describe three adept practitioners of fee-based governance, New York Collector of Customs (and later president) Chester A. Arthur at the federal level, Erie County Sheriff (and later president) Grover Cleveland at the local one, and legendary lawman Wyatt Earp, who managed to hold federal and local offices simultaneously while relentlessly squeezing fees and bounties from both. “The system combined great legal authority, limited administrative control, and wondrous corruption,” White writes. “It contributed to the declining legitimacy of institutions.”

What got me thinking about this history was an article this week by Reason’s C.J. Ciaramella about the Chicago Police Department’s practice of aggressively impounding the vehicles of drivers suspected of even the most minor of offenses.

The program impounds cars when the owner beats a criminal case or isn't charged with a crime in the first place. It impounds cars even when the owner isn't even driving, like when a child is borrowing a parent's car.

The Chicago Police Department does this because the city has big budget problems and has turned to fees, fines and auto sales to make ends meet. This isn’t quite the same as the fee-based governance of the 19th century, since individual police officials aren’t pocketing the cash (at least they’re not supposed to!), but it does seem similar in spirit. Such asset-forfeiture programs have been on the rise all over the country in recent years. The Federal Bureau of Investigation contends that the practice is “used to disrupt, dismantle, and deter those who prey on the vulnerable for financial gain, including criminal organizations, drug dealers, terrorists, and white-collar criminals” — and I’m sure in many cases it is. But it’s also clearly a much-abused way for law enforcement agencies to pay their bills.

Another modern practice that reminds me a bit of fee-based governance is the outsourcing of government responsibilities to private firms that’s been underway since at least the 1980s, which has perhaps brought some gains in flexibility and efficiency but has also added lots of new opportunities for profiteering from work that’s ostensibly done in the public’s interest.

Finally, there’s the revolving door: Administration officials and members of Congress are (mostly) barred from enriching themselves while in office, but they can make up for that by leaving government and going to work for private employers willing to pay multiples of their government salaries in return for their connections and expertise. The chaos and legal troubles of Donald Trump’s White House appear to have closed that route for many employees of the current administration, but that seems like a temporary solution, not a permanent one.

The solution to the problems posed by fee-based governance in the 19th century developed fitfully over a period of decades, and it came in three main parts:

  1. Federal office holders were barred from contributing to political campaigns.
  2. Government work was professionalized, with salaries replacing fee income.
  3. Taxes were raised to pay for those salaries.

It’s hard to imagine today, but there was an actual popular groundswell in favor of levying new taxes in the late 19th and early 20th centuries. A lot of it was about shifting the burden to someone else, from high tariffs that burdened farmers and many other working-class consumers to property taxes and income taxes that targeted the rich. But it is nonetheless worth remembering that the personal income tax was so broadly and bipartisanly popular that it overcame a dubious Supreme Court ruling in 1895 and was ratified into the Constitution in 1913.

Over time, these changes generated some not-so-great consequences. With fee-hungry government officials out of the picture for campaign contributions, candidates turned increasingly to corporations and wealthy individuals. The professionalized government grew into a powerful administrative state that some argue is a threat to representative democracy. As for income taxes, by the mid-1950s, most Americans had become convinced they were too high.

Still, the end to fee-based governance was surely a positive development. For most of the 20th century, government functioned better and Americans’ living standards improved faster than they did in the Gilded Age of the second half of the 19th century. The backsliding over the past few decades toward arrangements similar in spirit to those of the fee-based era is unhealthy. On the whole, it seems more efficient just to levy the taxes needed to support government and pay government employees enough to do their jobs than to rely on entrepreneurial incentives to get the public’s work done. And interestingly, the most recent Gallup Poll on federal income taxes, conducted earlier this month, found a smaller share of respondents (45 percent) saying their taxes are too high than at any time since Gallup began asking the question in 1956.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

To contact the author of this story: Justin Fox at justinfox@bloomberg.net.

  1. According to Historical Statistics of the United States data on federal spending and revenue and MeasuringWorth.com's estimates of nominal GDP spending averaged percent of GDP from to revenue percent. The spending data doesn't include repayment of debts, so I just went with percent as my estimate and divided that by fiscal 2017's percent-of-GDP spending figure and percent-of-GDP revenue one.

  2. Yes, I am aware that there is a subculture of tax protesters who claim that the 16th Amendment was never properly ratified Some of their arguments are pretty funny, especially the one about Ohio not being a state until 1953

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