Sunday, December 07, 2014

Tax Time- how Americans were sucker-punched


Standing in the long line at the post office this morning, I had that feeling I get every April 15 like I’ve been severely had. This time the feeling was particularly strong. Partly to blame was the added humiliation of needing to pay for certified mail because of the IRS’s diminishing ability to keep track of its mail (and its imperious habit of blaming the mailer). And of course it didn’t help that every time I turn on the news I learn about some new way the piggy bank we call the U.S. government is opening its riches to graft and greed of all kinds, with foxes guarding the henhouse.

But most importantly this year I’m upset by the knowledge I gained about the history of American taxes, particularly the federal income tax, from a concise and powerful essay by Harvard historian Jill Lepore , “Tax Time: Why we pay,” in the Nov. 26, 2012 New Yorker Magazine. Lepore makes clear, in a way you never hear from our prominent anti-tax voices, that the income tax was foisted on America through a con job as deceitful as any on the street.

Lepore is non-partisan, in the real sense (not in the “crossing the aisle” sense). Her skill is in stating facts that do all the debating themselves, leaving aside whether they come from the right or left. She writes: “Since the 70’s all the political talk has been about cuts, surprising because more than 90% of Americans receive social or economic security benefits from the federal government.” Much of the article deals with the practice, originating ironically with New Deal and Great Society liberals, of identifying government support like Social Security, unemployment insurance, Medicare and Medicaid as types of insurance, while Aid to Dependent Families and Food Stamps are “welfare.”

Seen in Lepore’s light the current conservative assault on taxation is based on a false premise, that the people protesting “welfare” are not themselves receiving government assistance. Congressman Paul Ryan, Chairman of the House Budget Committee, does not seem to recognize the distinction, as he exhorts his followers to theoretically cut their own incomes.

Lepore puts our present political stalemate in historical perspective, starting with this rather obvious thought from Oliver Wendell Holmes, Jr.: “Taxes are what we pay for civilized society.” That’s easy to forget these days. From the moment you get up in the morning you are supported by things paid for with your taxes, whether it’s the safety of your neighborhood and your drinking water, or the road you drive on. It’s hard to argue that taxation itself is a bad thing in some absolute sense.

But we were not always taxed so much.

Before the Civil War, Congress raised revenue almost exclusively through tariffs- duties on imports. Lepore relates that this made sense to Jefferson, because, as he explained, “…it (a tariff) falls exclusively on the rich.” This is the beginning of a long history in which taxation has been presented to the American public as a tool aimed primarily at the wealthy.

In 1862, after noting that the British funded the Crimean War with an income tax, Lincoln established the Bureau of Internal Revenue, which, per Lepore, was “charged with administering a graduated tax that taxed incomes of more than $600- at 3%- at the time, the average income was about $300- and incomes of over $10,000 at 5%. The Confederacy’s lack of political will to do the same cost it revenue and is thought to be a contributing factor in its defeat.”

After the war, the federal income tax was allowed to expire, over the protests of John Sherman (of the Sherman Antitrust Act), a Republican from Ohio, who, Lepore says, ”…argued that tariffs were a burden on the poor and that only an income tax could properly tax the rich.”

By the 1860’s most states taxed property, largely to pay for the Civil War, but there was still much sentiment that taxes should be levied on the rich.

In the 1880’s, Lepore recounts, “Populists advocated an income tax…believing that it was essential to the survival of a democracy undermined by economic inequality. In the aftermath of the Panic of 1893, the Populists prevailed. By then, income taxes had become commonplace in Europe.”

Yes, you read that right: Populists advocated the income tax, because it was conceived as asking mostly from the rich, and less or nothing from the middle class and poor.

In 1894, a 2% federal income tax passed that applied only to Americans earning more than $4,000. But, per Lepore, “the next year…the Supreme Court ruled, 5-4, that the tax was a direct tax [on income, not goods and services], and unconstitutional. Dissenting, Justice John Harlan said the ruling had turned provisions ‘originally designed to protect the slave property’ into ‘privileges and immunities never contemplated by the founders,’” references to the Constitutional debate over whether slaves were taxable property or people. The Southern view, per Lepore, is the origin of the American anti-tax movement.

Lepore continues: “In 1896, the Democratic Party [prevalent then in the South], for the first time endorsed an income tax, ‘so that the burdens of taxations may be equally and impartially laid, to the end that wealth may bear its due proportion of the expenses of Government.’”

Lepore gives great significance to the San Francisco earthquake of 1906, which, she explains, “…caused the financial panic of 1907, leading to the 16th amendment, in 1913, which granted Congress the right to levy an income tax, and to establishment of a central banking system, the Federal Reserve.”

The panic of 1907 and the recession and widespread unemployment that followed produced a giant boost for populism, and thus for the prospects of an income tax. Lepore writes: “A purpose of a federal income tax was to undergird the Treasury with a stable source of revenue. But it had another purpose, too. The richest 1% of households, which had held about a quarter of the nation’s wealth in 1890, now held more than a third. The tax was intended to answer populist rage at the growing divide between the rich and the poor. In the election of 1908, both parties favored an income tax (Democrats hoping to close that gap, Republicans hoping to quiet that rage).”

Republicans won and William Howard Taft supported the 16th Amendment. It passed easily in 42 of 48 states, 6 more than required, and took effect on Feb. 25, 1913. The House voted on an income-tax bill in May, and Woodrow Wilson signed it in October. Its highest rate was 7%. The next year the Bureau of Internal Revenue printed its first form 1040.

Lepore writes: “The Revenue Act of 1916, anticipating the US entry into the war in Europe, raised taxes….Rates on the wealthiest Americans began to skyrocket, from 7% to 77%, but most people paid no tax at all.”
She quotes W. Elliot Brownlee’s “Federal Taxation in America: A Short History”: “By 1918 only about 15% of American families had to pay personal income taxes, and the tax payments of the wealthiest 1% of American families accounted for about 80% of the revenues.”

What happened to the once common view that the income tax was to be levied specifically on the wealthy? Lepore recounts how the shift happened: “Business interests fought back. Wilson’s tax policies were one reason that his party lost Congress in 1918, and the Presidency in 1920. In 1921,Wilson’s successor appointed Andrew W. Mellon, industrialist and philanthropist, as Secretary of Treasury- he served under three Republican presidents. The American Bankers League became the American Taxpayers League, and paid the expenses of state ‘tax clubs’ whose members testified before Congress, urging tax cuts. Under Mellon, [whose family supported tax clubs] and at his recommendation, the excess-profits tax was abolished, the estate tax was cut, capital gains were exempted from income, and the top tax rate was capped at 25%. “

Mellon wrote that high taxes kill “the spirit of business adventure,” and claimed that lowering taxes would raise the standard of living. He set the ideology of the current anti-tax movement, using the exact opposite of the populist reasoning employed to talk the middle class and poor into the income tax.

Lepore explains the origin of our current distinction between Social Security, Medicare et al as insurance, and “Welfare” as a hand-out: “The crafters of the New Deal were squeamish about taxes, so they decided to fund Social Security with an indirect tax, on payroll, so they could caste the taxes as insurance premiums.” Great Society liberals continued the usage with Medicare and Medicaid. Thus today, the 59 million Americans who benefit from Social Security do not consider themselves on welfare- a conservative view supported with liberal terminology.

Lepore details a number of attempts from wealthy interests to annul the 16th Amendment, and she writes “in this period, the 30’s, the business lobby succeeded in redefining American citizens as ‘taxpayers,’ a practice that politicians have followed ever since.” Interesting how susceptible our vocabulary is to manipulation. It is common now for politicians to refer to citizens as “taxpayers.” Who knew this was purposely introduced to convince people that paying income tax is a duty of the citizen?

Lepore continues her history into the World War II years: “The Revenue Act of 1942, which included a steeply progressive income tax, broadened the tax base: before long, 85% of American families were filing a return. Tax hikes were sold to the public as emergency measures, ‘taxes to beat the Axis.’”

But, Lepore observes dryly, “The wartime tax regime survived into peacetime.”

I’d like to take a moment to reiterate that Lepore is non-partisan in the real sense. Here again she teaches something that argues across all the current left-right divides: The American people were lied to when they accepted the income tax. They were sold a bill of goods- believing that the income tax was an equalizer aimed at the rich. It is a powerful and overwhelming fact, stated without any call to the emotional currents of partisanship.

Moving into the post-war years, Lepore writes, “Eisenhower’s Cabinet included the former president of General Motors. With Eisenhower’s pro-business Administration, Adlai Stevenson said, New Dealers made way for car dealers.”

The Cold War kept the gravy train rolling. And the rest is history.

A fascinating history, for sure, but I’m feeling scant consolation today, April 15, 2014. Knowledge is supposedly power, but only if anyone recognizes the knowledge. Our mouthpieces in the current anti-tax crusade, whose voices dominate everyone else’s, seem intent on an amalgam of fact and expedient fiction, garbled now to the point where I doubt anyone knows exactly where in our two party system sentiment for tax reform belongs. So much for power.

Meanwhile I keep reading the news and learning how the money my wife and I and our kids earn and then give up to the IRS is flying out of wide open doors to any scam artist with the proper grease and sophistication in what appears a truly bipartisan effort. I’ll keep paying my taxes, sure- as they say, you can’t fight city hall. But if we can’t have a rational public discourse on taxes, can we at least close a few of those wide open doors?