Class Warriors

Posted: May 21, 2001 12:00 AM
In recent days, the class warriors have been out in force. They are making a last ditch effort to water-down any benefits for the well-to-do in the tax bill and expand those for people who actually pay no taxes now. They may be seriously misjudging the American people's support for income redistribution and soaking the rich. The debate over progressivity is as old as the income tax. The first income tax in 1913 conceded the principle by establishing a 7-rate tax system with 7 percent as the top rate, on incomes over $500,000. That would be equivalent to an annual income of about $130 million today. The purpose of progressive rates was not so much to redistribute income as to make the overall tax system roughly proportional. At that time, the federal government's principal revenue source was the tariff, which was a kind of consumption tax largely paid by the poor. The tax-rate schedule did not really become steeply progressive until World War I, when the top rate shot up to 73 percent. It was during the fight over reducing these high wartime rates after the war that the first real debate on progressivity occurred. All efforts to cut the top rate were strenuously opposed by Democrats who, then as now, argued that it was nothing but a give-away to the undeserving rich. For example, Democrats on the House Ways and Means Committee opposed cutting the top rate in 1921 in these words: "Not one dollar of taxes should be reduced on these profiteering corporations and on the millionaires and multimillionaires that reaped harvests of wealth during the war, as long as a single dollar of war indebtedness remains." Sounds very similar to Democrats today who argue that taxes cannot be cut until the debt is paid off. And when they are told that the debt will be paid off even with the tax cut, they lamely argue that it should be paid off faster. Some even argue that there should be no tax cut even after the debt is paid off and that the federal government should save the money to pay for future health and pension benefits. To such people, there is simply never a time to cut taxes, period. Despite strenuous Democratic resistance, the Harding and Coolidge administrations managed to get the top rate down to 24 percent in 1929. The top rate has never been that low since. Subsequently, Republican Herbert Hoover jacked it up to 63 percent in a horribly misguided effort to balance the budget in the middle of the Great Depression. Franklin Roosevelt raised the top rate to 79 percent in 1936 as a purely political ploy to say he was soaking the rich. It was said that John D. Rockefeller was the only person in the entire United States who paid so much as a penny of tax at the top rate. With tax rates already extremely high on the eve of World War II, there was little that could be done to raise additional revenue through still higher rates. Although the top rate did rise to 94 percent in 1944, the main impact of the war was to bring almost all Americans into the tax net and impose high rates even on those with very small incomes. For example, someone with a taxable income of just $3,400 in 1944 paid 41 cents to the government on his $3,401st dollar of income. That is more than the top rate in existence today. As was the case after World War I, Democrats fought any effort to bring down the top rate after World War II. Sadly, they were abetted by Republican President Dwight Eisenhower, who torpedoed efforts by congressional Republicans to do so. He believed that deficit reduction was more important. Thus we see that the history of tax rates is for them to be greatly increased during wartime and for high rates to be extended to those with moderate incomes. Confiscatory top rates exist less to raise revenue than to justify higher rates on everyone. As the great economist F.A. Hayek once put it, "The illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise." It was really only in the 1950s that the redistributionists began to make serious intellectual arguments in favor of high progressive tax rates. These arguments were subjected to thorough review by Walter J. Blum and Harry Kalven in their classic book, "The Uneasy Case for Progressive Taxation," first published in 1953 and still the best single work on the subject. Although Blum and Kalven eventually came down in favor of progressivity in principle, I have always thought that the arguments they presented against it were compelling. For example, they noted that much of the complexity of the tax code derives from progressivity. Such problems as the marriage penalty would simply disappear under a flat-rate tax system. They summed up the case against progressivity as follows: "The price the tax system pays for progression is thus high. It produces a tax law of almost impenetrable complexity. It invites a distorting attention to the tax aspects of any economic transaction. It affords an excessive stimulus to tax avoidance with perhaps incalculable consequences for taxpayer morale and the general respect for law." Yet it is clear that the American people have never entirely been sold on the idea of progressivity. This is shown by the broad support for a flat tax in major polls. Nor do they reflexively oppose cutting tax rates for the rich, as many Democrats seem to believe. This fact is shown by a new poll from Rasmussen Research for the Club for Growth, a pro-tax cut group. Registered voters were asked what is the top federal income tax rate that ought to be paid by someone with an income of $1 million on each additional dollar he earns -- that is, what should the top marginal income tax rate be? Twenty percent said the top rate should only be 10 percent, 22 percent said it should be 20 percent, and 19 percent said 25 percent. Thus three out of five Americans actually favor a lower top rate than that proposed by President Bush. Better than four out of five favor a top rate no higher than 33 percent. This suggests that opposing a cut in the top rate may not be the political winner many Democrats believe it to be. *** Chart data: What Should Be the Maximum Marginal Tax Rate on Someone Making $1 Million? (percent) ---- Tax Rate Survey Response 10 ---- 19.9 20 ---- 22.1 25 ---- 18.9 33 ---- 20.8 40 ---- 8.9 50 ---- 9.1 Source: Rasmussen Research