"While campaigning for Harry Truman in 1948, [Ronald] Reagan attacked corporate greed, defended the common man, and lambasted the Republican Congress for tax cuts that he charged were skewed toward the wealthy." 1
In Wealth and Democracy, Kevin Phillips discusses the inequality enjoyed by the uberwealthy. "As aggravating as Phillips finds this 'morphing of politics into a marketplace,' he is more concerned that the corporate elite makes most of its money off finance, tax avoidance and shifty speculation, adding little to the true wealth of the nation. 'Market theology and unelected leadership,' he concludes, 'have been displacing politics and elections. Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime -- plutocracy by some other name." 2
A little history lesson about US Taxation & Tax Rates: 3
1. During Colonial Times, most of the Federal Govt's tax revenue came from tarifs, excise taxes, and custom duties. States taxed using a variety of methods: import/export taxes, property taxes and "head" taxes.
2. In the Post Revolutionary Era, the new govt had few responsibilities & no nationwide tax. States could levy taxes as they pleased. By 1789, the Founding Fathers recognized that no govt could function if it relied solely on other governments for its resources. The Constitution included the power to "…lay and collect taxes, duties, imports, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States." The collection of taxes was the responsibility of the states. Thus, Congress levied excise taxes on liquor, tobacco, sugar, carriages, etc. to pay for the war.
3. From 1817 until the Civil War, Congress imposed no internal revenue, relying instead on high customs duties & the sale of public land.
4. When the Civil War erupted, Congress passed the Revenue Act of 1861. This was a combination excise tax and a tax on personal income (3% of all incomes higher than $800/yr.). A year later, due to high war costs, they added more items to the excise tax & set up a two-tiered tax rate: Incomes up to $10,000 were taxed at 3% and higher incomes at 5%. A $600 standard deduction as well as a few other deductions were also added. For the first time, taxes were deducted at the source--by employers. After the war, most taxes were repealed. From 1868-1913, nearly 90% of all revenue was collected from excise taxes.
5. 1913 & the 16th Amendment. Congress passed an excise tax on business income and 36 states ratified the Amendment to allow the Feds to impose taxes on individuals' income. Rates were progressive, from 1-7%, the highest being for incomes in excess of $500,000. (Note: less than 1% of the population paid income taxes at this time).
6. WWW1 & the 1920's caused a need for more money. The tax rate in 1918 went to 6-77%, the highest for taxpayers earning over $1.5 million (Note: 5% of the population paid income taxes). During the booming 20's, tax rates fell back down, with the highest income earners down to 25%.
7. The Great Depression saw federal revenue drop from $6.6 billion to $2.7 billion, so Congress passed the Tax Act of 1932, dramatically increasing tax rates again. Another tax increase in 1936 saw the lowest tax rate at 4% and the highest at 79%. The Social Security Act in 1935 was financed by a 2% tax (1/2 from a worker's paycheck, the other 1/2 from employers on behalf of their employees).
8. WWW2 saw the need for big defense spending & support of anti-axis programs; the bottom $500 income earners now faced a tax rate of 23% while incomes over $1 million paid 94% tax rates. (Note: 4 million paid taxes in 1939; 43 million did so in 1945).
9. Post WW2: the maximum tax rate in 1954 remained at 87% of taxable income. The economy remained subject to frequent boom and bust cycles, so policy makers continued a pattern of raising & lowering taxes and adjusting aggregate demand thru spending.
10. The Economic Recovery Act of 1981 offered a 25% reduction in individual tax brackets, with the top tax rate at 50%. Businesses also enjoyed a tax depreciation change as well as a 10% investment tax credit. The new theory was that by reducing marginal tax rates, businesses would put more money into new opportunities instead of pocketing the profits. The other change was that of shifting away from income taxation and toward taxing consumption. The Federal Reserve altered monetary policy and the economy fell into a deep recession in 1982 and produced high budget deficits. In 1984, some of the cuts were pared back, esp. on the business side.
11. The Tax Reform Act of 1986 tried to simplify the tax system but resulted in a downturn in the economy and played a significant role in the collapse of the Savings & Loan industry. The top individual tax rate was now 28% and taxes once again shifted back to income taxation. From 1986-1990, high levels of govt spending with their resulting deficits created higher pressures to increase taxes. In 1990, the top tax rate shifted up to 31%; in 1993 it rose to 36% w/a 10% surcharge (thus the real rate was 39.6%).
12. The Taxpayer Relief Act of 1997 provided a modest tax cut by offering a tax cut for certain families with children. It was the first tax change that provided refundable credits. The system also shifted back to consumption taxes. Despite higher tax rates in the 90's, the economy performed strongly.
13. Economic Growth and Tax Relief and Reconciliation Act of 2001 halted the $281 billion budget surplus, with a tax rate drop back to 33%. The tax cut was almost devoid of business tax provisions and continued the move toward a consumption tax. In 2004, 60% of the tax cuts went to the top 20% of income earners and over 25% going to the top 1% of income earners. 4
14. The 2009 Economic Stimulus Bill introduced the biggest tax cut ever: $282 billion over 2 years. These are short term refunds paid to working and middle class families. Remember, in 2007, the average American household paid $22,100 in federal taxes; in 1965, after adjusting for inflation, the average was $10,800.
The current tax code contains over 5.6 million words--seven times as many words as the Bible. 5 Talk has occured for years that the code should be simplified by a flat tax rate, where, for instance, everyone pays 19%--everyone, rich, poor, middle class. A progressive flat tax might be more fair because I believe this simply isn't enough to cover the deficits which the last administration saddled us with. The rich can afford to pay taxes; the poor cannot.
Economist Paul Krugman wrote an article last month about the Reagan years. He points out that the rich got richer, working families saw meager gains, and for the first time during a non-war period, the govt went on a spending spree. The S&L crisis, fueled by deregulation, ended up costing taxpayers over $130 billion--that was when this was a lot of money. New Deal restrictions were eliminated, fueling increased debt by Americans. This explosion of debt made the US economy weak. Who benefits? I guess it must be the financial institutions. If you recall, George & Jeb Bush owned a Colorado S&L back in the 80's which we bailed out; Tim Geitner was president of the NY Federal Reserve, which probably means close ties to Wall Street, which we've bailed out. Go figure.
Sources:
1. http://www.allacademic.com/meta/p_mla_apa_research_citation/0/6/5/8/0/p65800_index.html
2. SF Chronicle book review by Theodore Roszak, http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2002/06/02/RV207386.DTL.
3. http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml
4. http://www.washingtonmonthly.com/archives/individual/2009_02/016863.php
5. http://www.hoover.org/research/focusonissues/focus/17442454.html
6. http://www.sodahead.com/blog/85527/reagan-did-it/
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