American Business Leaders and the Making of Tax Policy: Elites, Crises, and the Ambivalent Approach to Fiscal Citizenship

Ajay Mehrotra, American Bar Foundation and Northwestern University
Joe Thorndike, Tax Analysts

American business leaders have frequently been portrayed in U.S. history as singularly self-interested elites who regularly use their disproportionate influence over politics and policy making to mold laws in their favor. There is perhaps no other area of lawmaking where this notion of private interest over public welfare is more prominent than in the making of U.S. national tax policy. Yet during moments of crisis, particularly national emergencies such as wars, American business leaders have been more ambivalent about their beliefs and commitments to taxation. In this paper, we analyze two such historical instances when American business elites set aside or at least deferred short-term pecuniary gains in the name of long-term commitments to fiscal citizenship. The first instance occurred during and immediately after World War I when some business leaders supported the adoption of an “excess-profits tax,” and resisted post-war attempts to replace the profits tax with a broad-based, national sales tax. The second case study explores business beliefs and actions during and after World War II, when industrial elites played a pivotal role in the adoption of income tax withholding for the newly created mass income tax. In the early years of the modern income tax, lawmakers had provided for withholding of individual taxes by employers and financial institutions. But that experiment ended after only a few years when business groups complained about its administrative burdens. In the 1940s, however, key business leaders helped facilitate adoption of withholding, crafting a political compromise that made withholding feasible. In doing so, they helped make the mass-based individual income tax a durable centerpiece of national finance.

No extended abstract or paper available

 Presented in Session 14. Taxes, Business, and Society