Making the Modern American Fiscal State is a recent addition to Cambridge’s Historical Studies in American Law and Society series. This volume focuses on major changes to American fiscal policy from roughly 1870 to 1930, with a view to explaining the transition from a fiscal system that relied on indirect taxes and import/export duties to one distinguished by a “progressive” graduated income tax. In keeping with the series’ title, Mehrotra approaches the topic as both legal and social historian, with quite a bit of history of economic thought thrown in for good measure. He does so in an attempt to “uncover the contested roots and paradoxical consequences of this fundamental transformation in tax law and policy and to explain how and why this new fiscal polity came to be” (pp. 8–9).While seemingly every scholar who has concerned himself or herself with the growth of the American state appears to agree that the turn of the twentieth century holds key answers to many of our questions, a satisfying explanation of why the transition took place remains elusive. In the case of tax policy, Mehrotra argues that growing concerns about shifting demographics and economic inequality pushed academics, activists, and policy makers toward a more formal and bureaucratic state structure.
Mehrotra does a great job of bringing the story to life by focusing on the underlying social tensions that drove the development of an administrative tax regime. This leads to an engaging and, perhaps, timely, conclusion that progressives’ privileging of the “ability-to-pay rationale” created a “fiscal myopia that continue[s] to afflict American policy analysts, legislators, and interest groups well into the twentieth and twenty-first centuries” (p. 17).
Mehrotra builds his case over seven chapters that are divided into three parts: “The Old Fiscal Order,” “The Rise of the Modern Fiscal State,” and “Consolidating the New Fiscal Order.” Part One explores the challenges tax reformers faced in the early decades of the push for an overhaul of the American fiscal state. Drawing on academic articles, court cases, speeches, periodicals, and books, Mehrotra points out how reform-minded academics and political activists gradually challenged the old system of “courts and parties” in which the political parties vied to control tax policy while the judiciary largely stood aside. A diverse coalition (of sorts) of farmers, suffragettes, the urban working class, and activists concerned about growing economic inequality gave teeth to reformers’ efforts and gradually challenged the benefits theory of taxation that undergirded the old system. Pollock v. Farmers’ Loan & Trust Company serves as a crucial turning point and a pivot to the book’s second section. Faced with this deflating setback, Mehrotra argues, progressive reformers doubled-down and refined their case for a system of taxation based on the “ability-to-pay” rationale.
This focus on connections between intellectuals, political activists, and policy makers pays off particularly well in Part Two, where Mehrotra illustrates the challenges faced by reformers seeking a balance between conservative and radical proposals and drills down to the state tax reform movements to illustrate the importance of these “factories of fiscal innovation.” State tinkering with tax policy provided academics and activists (not necessarily distinct categories) with the intellectual ammunition necessary to pursue a constitutional amendment to overturn Pollock and impose a national tax system based on the “ability-to-pay” rationale. The pain of the Panic of 1907 and the emergence of big business, an easy-to-hit target, helped seal the passage of the Sixteenth Amendment in 1913—the crucial turning point in the fight for a “modern” system of taxation.
Part Three drives home an important nuance of Mehrotra’s study. Establishing the legal foundations of the new fiscal order was only part of the battle for progressive political economists and reformers. The methods of tax collection and the conduct of fiscal governance were equally important. Mehrotra concludes his study by examining the dramatic expansion of the state’s tax-collecting apparatus during the Great War and subsequent, failed, attempts to turn back the clock of progressives’ fiscal reform project. Although the Mellon Plan successfully eroded the graduated tax structure, it endorsed the notion of a scientific administration of tax laws that ultimately ensconced the “ability-to-pay” justification of tax policies.
The lack of a bibliography is disappointing, but the thoughtful footnotes will be appreciated, given frequent references to the many articles, court cases, and books that help tell the story. Those familiar with the cast of characters Mehrotra explores can readily follow along and those encountering them for the first time can easily track down the sources necessary to learn more.
Making the Modern American Fiscal State will most obviously appeal to scholars of the Progressive Era and American fiscal policy, but also holds value for those with a general interest in policy, business, and economic history. Those unfamiliar with early twentieth-century public policy will likely find it challenging, but accessible and rewarding. Mehrotra has produced a coherent, engaging narrative that encourages us to dig deep into the early twentieth-century tax reform movement in order to properly understand the dynamics of present-day debates about flat taxes, 99 percenters, and fiscal cliffs. One could argue that the parallels are superficial, given dramatic differences between then and now. Regardless of what one decides, this book readily facilitates such considerations.
