Monday, April 17, 2006


Taxation: It Ain't About the Budget.

It would not be unreasonable to regard taxes as a budgetary matter. The state has to pay for certain services, and it must have revenues to do so. Therefore, functionally, taxes would seem to create the revenue to pay for the services. In practice, however, taxes have always been the exercise of political ideology.

The history of American taxation is, like the history of the Bush administration, an example of how taxes reflected the political ideology of the ruling party. During the civil war, Congress (that is "the Union") passed the first income tax to support the war. The marginal rate was 3%, which in 1962 was increased to 5% on higher incomes (progressive income taxation is born!). Along the way, the debate raged between factions who argued unequal taxation was an affront to American democracy and those who felt fairness demanded each pay according to his means. (Sound familiar?)

The top marginal rate fluctuated from the initial 3% all the way to 94% during WWII as the country swung from the excesses of the Gilded Age to the great progressive era of FDR. The tax debate featured a judicial fight and an amendment to the Constitution. It charts the history of the 20th Century not only politically, but economically, as economists grew more sophisticated in their understanding of incentives and macroeconomics. And then came the great reversal, when, thanks to Reagan, the ideologues changed the debate and began to reverse progressivity in the tax code (while simultaneously making it a byzantine patchwork of giveaways to the wealthy.)

As a index of how quickly things have changed, and how successfully the conservatives have been, Reagan's famous 1981 tax cuts lowered the top bracket to 50%--still far higher than it is today. In '86, Reagan pushed through a second cut, dropping the rate almost in half, to 28%, but Bush I was forced to raise it to 31% when the deficits ballooned (the famous "read my lips: no new taxes" retraction that cost him the election). He also cut corporate rates in half, from 50% to 35%. In 1964, the top marginal rate was 91%; in 1986, 28%.

The country's tax debates actually make a fascinating history, and if you have the time, the Treasury department's fact sheet is an entertaining read (or perhaps I reveal too much of my own character by thinking so).

The salient point, and the important frame for any discussion about taxes, though, is that tax rates are political. They reward certain segments of the population and punish others. Who those rewards flow to can be tracked directly back to the support the ruling party has received, be they the broad populist coalition who supported FDR, or the entrenched corporate donors who support Bush. Of course, the US has to pay its bills. Tax law, however, determines who will be doing the paying.


zemeckis said...

what were the tax rates in prewar germany?

Jeff Alworth said...

Oh good lord--even with Google, that'd be a lengthy investigation. Why?