Dr Joseph Preston Baratta is Emeritus Professor of History and Political Science at Worcester State University and the author of The policy of the World Federation (Praeger, 2004).
Income tax filers, 1920
The invasion of the Capitol on January 6 is a sign of deep anger against the course of American life among the so-called “white working class”. Next to it is Black America’s protest against persistent racism and poverty. People who have nothing else in common include perceived economic injustice among their complaints. What can we do as citizens of a democracy about this? Significant reforms, such as those generally attributed to the left in the Biden administration, will cost money. A return to progressive tax rates through meaningful tax reform will be part of the solution.
Economists with a sense of history point out that inequality began to widen around 1980, starting with the Reagan tax cuts. Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley have done the republic a service by methodically tracing what has happened to equality over the past 40 years. Their book, The triumph of injustice (2020), is controversial, but it exposes uncomfortable facts that bear on a solution. An additional analysis tool is also provided.
They trace and measure the divisions from the working, middle, and upper classes in American society down to the super-rich and the top 400 families. At least 50% – half – of Americans are classified as working class, with an average annual income of $18,500. They earned 10% of the national income in 1980; 40 years later, only 12%. Most of the gains in the economy due to technological progress and globalization have gone to the top 10%. The next 40% of the population are middle class and earn an average of $75,000. The bottom 10% of the population are considered upper class or wealthy, earning $220,000 a year. But they also have divisions. The top 1% earn $1.5 million a year. They earned as much (10% of the national income) as the working class as a whole in 1980; 40 years later, their share had risen to 20% (pp. 3-7). At the top are 400 super-rich families, including Warren Buffett, who earned $3.2 billion in 2015 and paid $1.8 million in taxes (a rate of 0.055%) (p. 129). Buffet is honorable in that he openly admits he should pay a higher rate, which he said was lower than his secretary.
Reversing this pattern is absolutely vital for a sense of fairness in America. We’ve had an insurrection before. But won’t the rich, especially the very rich, resist any proposal to increase their taxes? The money is their property. A tax is an appropriation of a private good for the benefit of the public interest. People in democracies resist taxes until they are convinced of their necessity and justice. This country started with a tax revolt. How do we convince Jeff Bezos ($179 billion net worth) and Alice Walton ($62 billion) among the 400 to share?
The principle of progressive taxation has been established historically. The Constitution originally did not provide for an income tax, but it distinguished indirect taxes (such as customs duties) from direct taxes (such as property taxes). Customs duties or tariffs were understood as taxes on consumption, which are regressive, but the citizens of the first republic were so nearly equal – most owned and grew farms – that the slightly increased price of foreign imports was bearable. For 100 years, the main revenue of the US federal government came from tariffs.
Great national crises were the setting for the introduction of a progressive income tax. During the Civil War, the first income tax was introduced – as a direct tax – to deal with the threat to the Union. Its rates were gradually reduced until the 1890s, at the height of the Industrial Golden Age, when the Supreme Court ruled that the government had no right to impose a direct tax. This defect was removed by the 16th Amendment (1913), one of the great achievements of the Progressive Era (1905-15). A regulated and orderly capitalist economy was gradually established by the Interstate Commerce Commission, the Sherman and Clayton Anti-Trust Acts, the Federal Reserve System, the Federal Trade Commission, later the Securities and Exchange Commission, and the income tax. revenue.
Initial rates of the tax were quite modest (7% for the top bracket), but the entry of the United States into the Great War raised the top marginal rate to 67% to counter war profiteering. An inheritance tax was also established at 10% for larger legacies, which rose to 20% by the end of the 1920s.
The great expansion of income tax came with the supreme crises of the Depression and World War II. In the 1930s, with businesses in shambles for many homeowners and many workers reduced to poverty, President Franklin D. Roosevelt sought to confiscate the remaining surplus income. The top marginal rate rose to 79% in 1936. Roosevelt argued that in an American democracy no one should, after taxes, have an income above $25,000 (the equivalent today of about $1,000 000 dollars). The goal was clearly to redistribute income to create a more equitable society. Roosevelt explained in his 1937 inaugural address: “The test of our progress is not whether we add more to the abundance of those who have plenty. It is about whether we provide enough to those who have too little. During the war, the top marginal rate peaked at 94%. This progressive rate fell slowly through the 1950s and 1960s (even in Nixon’s day it was 70%), producing the fairest, and therefore fairest, American society to date in the industrial age. .
This achievement from around 1936 to 1980 was largely undone by tax cuts (the highest rate is now 23%) and the rise of a huge tax avoidance industry. Neoliberal economics argues that the optimal tax rate on capital should fall to zeroand that capital gains income should be replaced by upper taxes on labor income or consumption (p. 99). Reversing this 40-year pattern is vital to bringing the working class to America’s promise and the very wealthy to recognition of their obligations to a democracy.
If you want peace, work for justice.