Many political observers rue this day in history. To them, the income tax embodies all that is wrong with the modern federal government. By encouraging some economic activity more than others, they say that the income tax, like much federal regulation, dampens economic growth and stifles entrepreneurial creativity.

Far worse, in their eyes, is that the income tax makes the federal government possible. It funds bloated services and enables all sorts of social and economic meddling in the sacred workings of the free market. But what would the past 100 years have looked like without the Sixteenth Amendment? Certainly not much like a free market--unless something else had come along to get rid of tariffs and tariff politics, which had been restraining the economy.

For much of the 19th century, the federal government had deliberately exercised its taxing power to affect the economy profoundly. The first substantive act of the First Congress--signed into law on July 4, 1789* -- imposed duties on tea, salt, beer, candles, sugar, cider, nails, shoes, soap, and other essentials. Since the country's founding, these fees had not only funded the government, but also had served to protect fledging American industries from foreign competition. Such tariff duties were imposed to ensure high prices--frequently as much as 50 percent higher--for foreign goods and thus to encourage US consumers to buy domestic. By shielding our markets from competition - and by making foreign soap and shoes too expensive for many to buy--these tariffs restrained trade and raised the cost of living for rich and poor alike.

The U.S. federal government had, since its earliest moments, behaved as if it was good to intervene this way in the economy. Battles over which industries deserved how much protection (which frequently amounted to fights over which Congressmen would end up most beloved by their most influential backers) often dominated federal politics. Up until the beginning of the twentieth century, such tariffs had sustained the federal government, except during the Civil War, when warships closed ports and made trade difficult. The knowledge that Congress would impose protective tariffs encouraged lobbyists and drove Washington debates. These lobbyists had always triumphed over those concerned about whether such tariffs hurt consumers without really benefitting the economy. The greed of the lobbyists and their clients was limited only by the fact that if the trade protection they sought was too successful, prices would be raised too high, consumers would refuse to buy, and there would be no imports and thus no federal revenue.

Progressive politicians embraced the income tax as way to raise money for the federal government without burdening the average household with the high living costs imposed by duties. Anyone who believed in free trade, who wanted to end protectionism and allow American markets to develop without obstruction, had to offer some revenue that didn't come from tariffs. Ratification of the Sixteenth Amendment let reformers finally welcome an alternative source of tax revenue: American incomes. And for at least a few years, the income tax would clear out the lobbyists, raising revenue evenly across every industry and depriving Congress of reasons to favor one industry over another.