Happy Birthday, Dear Income Tax
In February 1913, exactly a century ago, the Sixteenth Amendment gave Congress a constitutional green light to levy a federal tax on income. Later that same year, lawmakers made good on that opportunity. An income tax has been part of the federal tax code ever since.
So what can we learn, as progressives, from this first century of income taxation?
Lesson One
Steeply graduated income tax rates can help societies do big things.
A half-century ago, America’s federal income tax rates rose steadily—and quite steeply—by income level, with 24 tax brackets in all. On income roughly between $32,000 and $64,000, in today’s dollars, couples in the 1950s faced a 22 percent tax rate. On income that today would equal between $500,000 and $600,000, affluent Americans faced a tax rate of 65 percent. The highest 1950s tax rate, 91 percent, fell on annual income that would today exceed $3.2 million.
Today, our federal tax rates rise much less steeply. The current top rate? The “fiscal-cliff battle” earlier this winter raised the top federal rate on individual income over $400,000 from 35 to 39.6 percent, less than half the 91 percent top rate in effect through the Eisenhower years.
Those high tax rates in the middle of the 20th century made a huge difference. The revenue these tax rates generated funded new government programs like the justly celebrated G.I. Bill. Within a single generation, the United States went from a nation two-thirds poor to a nation two-thirds middle class. Americans saw the difference that government can make—and felt that difference personally.
Most Americans today, by contrast, don’t expect much from their government. And for good reason. Most of us around today haven’t seen our government undertake any major new initiative improving the quality of the lives we lead. In this low-expectations political environment, conservative lawmakers demand endlessly lower income taxes for everybody, at every opportunity, and mainstream liberals dare not even hint at raising taxes on “middle class” incomes under $250,000.
But back in our steeply graduated tax-rate past, politicians did dare talk about higher taxes, and middle class Americans didn’t much mind paying those taxes—for two reasons. They saw big results from the tax dollars they paid. They also knew that America’s wealthiest were sacrificing at tax time, too.
We don’t do big things in America anymore. But we could, if we made paying taxes politically palatable again. Steeply graduated income tax rates helped work that magic a half-century ago. They could work that magic again.
Lesson Two
Progressive tax rates can do much more than raise significant amounts of revenue.
Our progressive forebears a century ago didn’t see the income tax as just a prolific source of revenue. They saw progressive taxes as a battering ram against plutocracy, or rule by the rich. An income tax that levied a much greater burden on high incomes than low, progressives believed, would both raise revenue fairly and shrink plutocratic fortune down to democratic size.
The nation needed, as ex-President Theodore Roosevelt had famously declared in 1910, to “destroy privilege.” Ruin for our democracy, Teddy continued, would be “inevitable if our national life brings us nothing better than swollen fortunes for the few.”
The first federal income tax that emerged after the Sixteenth Amendment’s ratification, late in 1913, didn’t do much to shrink those swollen fortunes. Progressives in Congress had argued for graduated tax rates that topped off at 68 percent. But the compromise Congress adopted placed the top rate—on income over $500,000, over $11 million today—at a mere 7 percent.
This top rate would soon skyrocket, during World War I, to 77 percent, then drop to 25 percent in the 1920s before starting to rise again in the 1930s. The top federal income tax rate would top 90 percent for the first time in 1944 and hover around that level for the next 20 years.
These mid-20th century tax rates had exactly the impact that early 1900s progressives had hoped. By the 1950s, high taxes on high incomes had made a significant dent on America’s grand concentrations of income and wealth. Top 0.01 percent income-earners were grabbing at mid-century just a fifth of the national income share they grabbed in the late 1920s.
Over recent decades, those tax rates have disappeared, and deep income inequality has taken its place. In 2011, economist Emmanuel Saez details, our top 0.01 percent pocketed just about the same share of national income America’s top 0.01 percent took in the ferociously unequal years that ushered in the Great Depression.
“Economically, the United States today has, by far, the most unequal distribution of wealth and income of any major country on earth,” as Senator Bernie Sanders has put it, “and that inequality is worse today in America than at any time since the late 1920s.”
Lesson Three
Progressive income tax rates don’t just happen. People have to battle for them.
Tax rates of politics past today look like something out of a science-fiction book, a bizarre artifact from a political universe light years away. In our contemporary political climate, even the 70 percent top rate in place as late as 1980 seems unthinkable.
Analysts once dismissed those high rates as an inevitable historical anomaly, the consequence of a cataclysmic series of traumatic political events—the Great Depression, World War II, the Cold War—unlikely to ever be repeated.
But, tough times don’t automatically cause taxes on the rich to rise. After 9/11, for instance, tax rates on America’s rich actually fell significantly, despite the onset of a worldwide “war against terror” that cost over $1 trillion. In 2001, the nation’s 400 highest-income taxpayers paid an average 22.3 percent of their total incomes in federal income tax. In 2007, the tax on top 400 incomes averaged only 16.6 percent.
The higher tax rates on high incomes enacted during World War II had nothing inevitable about them. Powerful political forces—top right-wing lawmakers in Congress and their Chamber of Commerce business allies—did everything they could to keep the tax touch on America’s rich as light as possible. Conservatives wanted to pay the war freight with a national sales tax, a levy that would have come down much harder on average Americans than the affluent.
In response, progressives didn’t just call for higher tax rates on high incomes. They called for the highest rate possible, demanding a 100 percent top federal income tax rate, essentially an income cap.
The idea for a 100 percent top rate had first surfaced nationally during World War I. This earlier campaign for an income cap began just a few weeks after the war’s declaration in 1917 and brought together many of America’s most famous progressive reformers, from social worker Jane Addams and newspaper publisher E. W. Scripps to labor leader Sidney Hillman.
A year earlier, in 1916, Congress had raised the top tax rate on high incomes from 7 to 15 percent to pay for war preparations. At 15 percent, announced Representative Henry Rainey from Illinois, a future House speaker, income tax rates had reached their “very highest notch.”
The bold progressive drive for a 100 percent top rate would promptly and totally redefine the nation’s sense of “very highest.” By 1918, the top rate would sit at 77 percent.
In World War II, this same political dynamic returned, but this time the advocates for a 100 percent top rate would even include the president. In April 1942, FDR declared that “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year,” about $350,000 today.
Over the next two years, Roosevelt would continue pushing for a 100 percent top rate. The United Auto Workers, other CIO unions, and progressive national groups like the NAACP would push with him. They wouldn’t win all that they wanted. But they changed the entire tenor of the World War II revenue debate. By war’s end the top federal tax rate would stand at 94 percent on income over $200,000.
Over recent decades, feisty, in-your-face advocacy around taxes has come mostly from the right. Reagan-era conservatives have reframed taxes as assaults on freedom, tax collectors as modern-day stormtroopers. In this political environment, a trillion-dollar war “to defend freedom” could—and did—go hand-in-hand with tax cuts for the most privileged among us.
Progressives need to build on the recent small victory in the “fiscal-cliff” fight by making a bold and energetic case for substantially higher tax rates on high incomes. No “shock” to our political system, by itself, will ever restore a progressive tax code.
Lesson Four
Tax loopholes cost our society more than just tax revenue.
In the middle of the last century, the richest Americans traced their fortunes to one of two sources. They had either inherited their fortunes from a time before taxes became steeply progressive or they did business in an industry—like oil—that enjoyed massive federal tax loopholes.
Tax breaks for oil first became a permanent and enormously lucrative tax code fixture in 1926. Tax lawyer Jerome Hellerstein would note that one oilman he knew had collected $14 million in income over a five-year period and paid only $80,000 of that in federal tax.
Windfalls like this helped oil become what the New Yorker called mid-century America’s “most important source” of modern grand fortune. Those who held these Big Oil grand fortunes would do their best to remake America into a land where riches like theirs would be forever safe.
Many of these Big Oil super rich saw attacks on their tax breaks as part of a broader attack on their way of life—the “American way of life”—from an un-American horde intent on fouling a proud nation with trade unions and integration. In the years right after World War II, these rabid right-wingers could hardly have felt politically more isolated.
The anti-communist hysteria of the late 1940s and early 1950s certainly did reflect basic old-time plutocratic values. But this red scare sported limits that had “true” conservatives constantly grumbling and growling. How could America secure victory over communism if the stalking horses of a red America—unions and progressive taxation—could still roam free? The Democrats accepted this roaming. So did Republicans like Dwight Eisenhower. They all had to be stopped.
Big Oil would stop them. Or, to put the matter more precisely, dollars from Big Oil would allow ultraconservatives to regroup and hold the fort until the reinforcements arrived in the 1970s, the years when America’s corporate movers and shakers finally “came to their senses” and rejoined the battle against unions, progressive taxes, and all those who swore by them.
One mega-millionaire from the oil industry, Fred Koch, would help bankroll the ultra-right John Birch Society and pass his fervor to his two sons, David and Charles. These two Koch brothers would go on to bankroll a whole new generation of much more sophisticated institutions dedicated to proselytizing a plutocrat-friendly, “free-market” vision.
Lesson Five
Just copying our progressive tax-rate past won’t ensure a progressive tax future.
We should honor our progressive forebears for their long and successful struggle to write steeply graduated tax rates into our federal tax code. But we also need to keep in mind that these tax rates, in the end, did not prove sustainable. In fact, progressive tax rates—as traditionally structured—haven’t proved sustainable for more than a few decades anywhere in the world.
The basic structural flaw of these tax rates, in hindsight, now seems fairly obvious. The super rich essentially take steeply graduated tax rates much more personally than the rest of us.
The rest of us, historically, haven’t been able to maintain a passion on behalf of steeply progressive tax rates that matches the passion of the ultra rich against them. No surprise there. The rich feel the sting of high tax rates, up close and personally, every year at tax time. The benefits to society overall from those high tax rates, on the other hand, remain much more indirect and abstract.
Our task as progressives: Restructuring progressive tax rates to make their benefits much more broadly appreciated. We could, for instance, tie our tax system’s maximum top rate to our federal minimum wage. Instead of setting the threshold for a new 91 percent top rate at a fixed dollar figure, we could set that threshold as a multiple of a minimum-wage income.
With this structure, advocates for a higher minimum wage would suddenly have a new ally: the nation’s richest. The tax bill on these rich would go down if the minimum wage went up. We would, in effect, be making the income tax a promoter of a more equal distribution of the nation’s market income, not just a means to attack the inequality markets generate.
For the moment, there’s no denying the stifling impact of the Tea Party and Grover Norquist’s anti-tax enforcers. But progressive forces are organizing in new ways to deepen Americans’ understanding of the need for tax fairness and to build power for change.
The coalition Americans for Tax Fairness helped leverage the strength of labor, consumer, and other groups to put up a real fight over the Bush tax cuts. The Financial Accountability and Corporate Transparency Campaign is shining a brighter spotlight on the scandal of tax haven abuse and forging alliances with small business leaders to push sensible solutions. Emerging grassroots networks like 99 Percent Power and the United Workers Congress are bringing new energy to a range of economic justice issues, drawing from the dynamism of immigrant and youth activists.
By learning the lessons from our income tax past, these and other progressive forces will have a better chance of pushing through the tax changes we need to allow our society to do big things in the century ahead.
Sam Pizzigati edits the Institute for Policy Studies weekly on excess and inequality, Too Much. His most recent book, The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, has just been published.
Sarah Anderson is the director of the the Institute for Policy Studies' Global Economy Project, and also is the lead author on the Institute’s annual executive compensation report.