The Mellon tax plan: The income tax and the penetration of marginalist economic thought into American life and law in the 1920s

This dissertation situates the Mellon tax reform plan at the fulcrum of a tax regime change from a nineteenth-century system based on national tariffs and state general property taxes to a twentieth-century system based on moderate national income taxes. Tax regime change exemplified the broader change in American law and legal practice between 1880 and 1940 and emerged from economists' changed understanding of industrial capitalism represented by the difference between the classical political economy of David Ricardo and John Stuart Mill and the marginalist economics of John Bates Clark and Alfred Marshal. The Mellon tax reform plan provoked a vigorous public debate that popularized the new (marginalist) economic explanations of an industrial economy and facilitated popular acceptance of modern corporate capitalism.;This dissertation revises the standard interpretation of the Mellon tax plan as conservative backlash against progressive reform. The individuals responsible for the Mellon tax plan came to Washington during World War I to finance the war and remained involved in tax reform throughout the 1920s. Committed to progressive income taxation, they overhauled the income tax after the war to make it a permanent peacetime revenue system for an industrial democracy. The Mellon tax plan contributed to progressive era state building.;This dissertation examines the development, execution, and ideological consequences of the Mellon tax plan as a case study in institutional change. Wilson administration officials developed the Mellon plan in response to the problems of the newly enacted high-rate World War I income and profits taxes. The failure of the war excess profits tax compelled re-examination of classical capital theory. Reducing high marginal tax rates on high incomes validated the sources and beneficial uses of profit in a corporate capitalist economy. The insurgent opposition to the Mellon plan introduced alternative economic explanations that illustrated the inter-dependence of life experience, economic thought, and political philosophy. Tax reform ended after Mellon unsuccessfully attempted to repeal the federal estate tax without the support of earlier allies.;The public debate over the Mellon tax plan explored the purposes of taxation and the benefits of capital in an industrial democracy and changed popular attitudes.