Happy Returns

April 15, 2005
Peter Dobkin Hall

New York Times
Cambridge, MA — By the early 1890's, the annual incomes of tycoons like John D. Rockefeller and Andrew Carnegie were greater than the tax revenues of most states. Concerned about the implications of such a concentration of wealth, in 1893 Congress enacted a federal income tax. Almost immediately, a debate arose among the wealthy over how to respond.
A memorandum to Rockefeller from his lawyers began with a question: ''Shall Mr. Rockefeller make any return at all?''
The consensus was yes. Otherwise, the lawyers argued, government officials ''will assess Mr. Rockefeller at some outrageous figure and add the penalties.'' By filing his own return, they concluded, Rockefeller's payment ''would be far less than anything they would put down.'' (Rockefeller's response, penciled in the margin of the memo: ''Yes.'')
Yet his lawyers also suggested Rockefeller file his return, and make any payments, ''under protest,'' noting that their boss ''has never known any money to be recovered from the government unless a protest was entered at the time of payment.'' (To which Rockefeller's marginal response was, ''Protest.'')
The income tax legislation left many questions unanswered. A single page of small print summarized ''instructions relative to annual returns''; the full legislation and accompanying regulations totaled a mere 40 pages. The Rockefeller memo raised a host of technical questions like what kinds of income (rental from real estate, insurance proceeds, etc.) needed to be declared, and how to treat depreciation of assets and investment losses.
Rockefeller's first tax return reported a total income of $1,247,252.65 for 1894 — at a time when the annual income of most Americans was less than $1,000. That total included $40,577.51 in ''gross receipts, credits, earnings, and gains from any business''; $30,000 in ''income from any profession, trade, or other employment''; $284,601.67 from interest ''upon all notes, mortgages, or other forms of indebtedness bearing interest''; $739,626.63 ''from interest or coupons paid or accrued on any bonds''; $147,130.07 from dividends and interest ''on the stock, capital, or deposits of any corporation''; and $5,316.77 as the ''income of wife or minor children.''
Rockefeller claimed deductions of $499,183.26 — including a $4,000 standard deduction, $87,171.52 in interest, $20,317.11 in state taxes, $42,679.75 in business expenses, $143,672.75 in business losses and $201,344 in bad debt.
The return was filed in March 1895. Taxed at a rate of 2 percent, the richest man in the world paid $14,961.39 in federal income tax. His return totaled four pages in length.
During the following months, opponents of the tax mustered their forces. In 1896, the United States Supreme Court declared the tax illegal. Nonetheless, confronting the 1894 tax seems to have profoundly shaped Rockefeller's attitude toward public claims on his fortune.
Two decades later, on the strength of a constitutional amendment, the federal government again levied an income tax. Rockefeller — far wealthier and more embattled politically than he had been in 1895 — set forth his thoughts on his responsibilities as a taxpayer. In 1916, his secretary left the following instructions for his tax preparers:
''Mr. Rockefeller desires not so much to reduce the amount of the tax which he pays as to pay what the law requires him to pay, no less and no more. He desires, above all things, for us to have the report as accurate as possible. On questions where we have such a reasonable doubt as to be justified in taking a stand to our advantage, he desires us to take it, but where there is no such doubt, we should not take a stand, but follow the plain law and rulings of the department.''

Peter Dobkin Hall teaches at the Kennedy School of Government at Harvard.


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