The federal income tax was established to help pay for the Civil War, but it was never solely a mechanism for raising revenue. Deductions have always been there, and deductions are policy.
The state and local income tax deduction, for example, was consubstantial with the first federal income tax. According to the Tax Foundation, it’s not completely clear why this was so paramount, but concern for preservation of states’ ability to tax, “first addressed in the Federalist Papers, appears to have held sway.” Other deductions wavered in and out. The 1862 Act exempted federal employees from income tax. Act of July 1, 1862, ch. 119, § 90, 12 Stat. 473, 473. The Act of 1864 ushered in deductions for business expenses, repairs, rent, and the rental value of homesteads. In 1870, casualty losses were codified. That language is still preserved today, which is why shipwrecks are explicitly deductible in the current version of the Code. Act of July 14, 1870, ch. 255, §§ 6-14, 16 Stat. 257-60. That version was also the first to consider interest and other capital gains-ish income to be income.
All this is prologue: the Supreme Court held that income tax was unconstitutional in 1895. Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895). The Sixteenth Amendment, which said, yes it was, was ratified over the first decade of the 20th century, and the real income tax as we know it settled in in 1913, with the Revenue Act of 1913 and the establishment of the Bureau of Internal Revenue—now the IRS. That Act also established depreciation deductions. The charitable deduction is from 1917; medical deductions began in 1942, and then the standard deduction started up in the 1960s.
Deductions are Distortions
Most of the really bitter disagreements that surround attempts to reform the tax code deal with the elimination or preservation of particular deductions. This makes sense, because deductions are intentional distortions to what, prior to their introduction, was purely efficient. Once a tax code has a particular set of structural deductions, all the stakeholders pick up and realign in the universe in which that deduction has existed, has always existed, and removing it would send them into freefall. They have internalized the distortion, which is the rational response. It also means that the political discussion of particular deductions comes from a place where the existence of the deduction is treated as the purely efficient setup. (See, e.g., everything about health insurance premiums).
There are so many examples of this, and each one is cloaked in the same kind of language. When a deduction is beneficial, a proponent treats it not like a piece of the tax code but a standalone policy objective in its own right—for example, the deduction for teachers who buy classroom supplies is conflated with policy support for teachers. Teachers, currently, get a $250 above-the-line deduction for buying supplies. The House bill eliminates it, the Senate bill currently doubles it. Therefore, it’s argued, the House bill is financially anti-teacher. In one way, that’s obviously the case. Giving a tax break to teachers who buy their own supplies is articulating an explicit financial preference in which teachers have government support for buying their own supplies. That’s done mostly by making the loophole teacher-specific. Teachers, which includes principals, counselors, and school aides, receive different treatment from other professionals who work with children and spend out of their own pocket to help them. But that’s not really the point. The point is, while saving individual teachers a hard maximum of $100 each, the tax code is making a specific value-driven statement about teachers.
What’s illustrative about this is it shows the position of the tax code in daily life, especially daily political life, as a series of claims about what kind of people we are, as opposed to either government revenue or government spending. The real anger about eliminating this deduction isn’t actually that teachers need that money (According to Rep. Roskam, it’s an average of $37—again, not nothing, but not worth all this). It’s that tax reform shakes out the whole blanket. Eliminating a deduction doesn’t stand alone; it stands in concert with other changes to tax treatment. And pairing a step down the ladder for teachers with, oh, lowering the corporate rate is really easy messaging, no matter how tiny that step down the ladder will be. This thematic argument is powerful, and it’s hard to gain purchase against it, not the least because you need a working theory of economics in order to explain it, and second, because Republican messaging is bad.
The teachers’ deduction is slightly more relevant than a lot of other circular gunfights because the teachers’ deduction is taken above the line, which means teachers don’t have to itemize to claim it. That means lots of teachers can actually take the deduction, as opposed to the 29.6% of all Americans who itemize, many of whom are not teachers.
People say they want simplicity in the tax code, and they do—but simplicity means broadening the base. Broadening the base means making more money tax-eligible. That means eliminating deductions. That series of small (and big) deals has been slipped into the code since the very first Act of 1861. And no one wants their deal cut. This is true of the teachers’ unions, but it’s also true of health insurers, tech startups, mortgage companies, Olympians, horse trainers, graduate students, mine owners, Nobel Peace Prize winners, and anyone else who gets specific tax treatment. A driving reason of the complexity of taxes is the fact that it’s your money they’re taking from you, so if simplicity results in higher penalties for you, which it often does, there is a huge disincentive to want simplicity.
Taxation is where the force of the government is brought to bear in a way it isn’t anywhere else, apart from state violence. Every decision you make has tax implications. What kind of animals you own, whether you get married, whether you make more money than your spouse, the number of children you have. People don’t generally make those decisions for the tax consequences, but they all have serious tax consequences. This is combined with the fact that the federal government is simultaneously the most efficient and the most wasteful spender of dollars. And it’s your money being spent on these inefficiencies.
In this atmosphere, then, not only are deductions a claim about what kind of person you are, they are a claim about your livelihood. Both what it’s worth to you, and what it’s worth to those who have power over you.