In my last commentary entitled, “The Graduated Income Tax," I pointed out that the reason the very rich pay a large percentage of our taxes is because they have most of the income and most of the wealth, and the gap between the haves and the have-nots gets ever greater. I showed that the graduated income tax only closes the gap a miniscule amount since after tax income shows only a slight closing of that gap.
I quoted Warren Buffett as pointing out that in the final analysis despite our theoretical graduated income tax, his marginal tax rate is 17.7 % on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at a marginal tax rate of 30%.
While many provisions of the tax code play a part in this, I have little doubt that a major reason is the favorable treatment given capital gains. It has often been said that America has a Protestant work ethic that places special value on work, and everyone in American society has an obligation to “work.” This, however, is not reflected in our tax system, for here we penalize work with a substantially higher tax rate than passive income, i.e. income earned without work. At the moment earned income is taxed at a marginal tax rate of 35% on incomes over $357,000, (This is extremely low by historical standards. Between 1941 and 1945 taxpayers with incomes over $1 million faced a top marginal rate of 94 percent.) but unearned income or capital gains (if held for more than a year) and dividends are taxed at 15%. I submit that there is no justifiable reason to tax unearned income at a rate below that for income, which is earned by actually working. While people at the lower end of the income scale often make a small percentage of their income from capital gains, those with high incomes, who often have never made a cent in their lives by the sweat of their brow, or even from intellectual effort, having often inherited their wealth, make the bulk of their income from unearned income. Furthermore, they have every opportunity to cheat even from this minimum burden, for while the wage earner has his income reported to the IRS by his employer, the investor is on his honor when reporting the cost of his asset, (stock or other) and can easily inflate his cost (“basis” in tax lingo) and even misrepresent the date of the acquisition to gain long term status (assets held less than a year don’t get this favorable treatment). Under present Internal Revenue law the broker must report the sale of stock to the IRS, but he is not required to report a purchase. Thus the IRS has no way of knowing whether tax evasion is occurring short of an audit, which is rare. I strongly urge, (and I am sorely disappointed that no major columnist or candidate has addressed this issue) that brokers and other sellers of assets, including real estate agents, be required to report the purchase and sale of all assets subject to tax.
I also believe that the present system which taxes capital gains only when the asset is sold (realized capital gain) distorts the capital markets. It is far better for the capital markets to function when the only consideration is to maximize ones gains or minimize ones losses, without tax consideration being a major factor in decision making. This becomes particularly egregious when one considers that the wealthy can postpone selling their assets indefinitely if they want to avoid paying taxes, while those in lesser financial positions must frequently sell to meet expenses, particularly after retirement. I believe that it would be far better if the value of the asset be assessed at the end of the taxable year (easily done with stocks and bonds) and that to the extent that the value of the asset has increased or decreased be used as the taxable gain or loss minus an allowance for inflation. It becomes an outright scandal when we consider that those who can afford to not sell their assets before they pass away, can avoid paying a capital gains tax altogether on their gains, since their heirs get the assets with a basis, not as of acquisition, but as of the death of the legator thus escaping ALL capital gains taxes.
Those who generally argue for reducing the tax burden on those who can best carry it maintain that dividends and capital gains are different from other income and not only deserve favored treatment but should be exempt from all taxation. Their arguments are so that numerous that it is difficult to set them all forth even without pointing out their fallacies, but let me attempt to cover at least the most prominent ones within the circumscribed length of this article. See here.
1.) “High effective capital gains rates reduce the capital stock and lower growth and productivity.” I discussed this in my previous article on the income tax. More capital will not be deployed unless there is consumer demand, which according to the Wall Street Journal accounts for 70% of GDP.
2.) “Capital gains taxes encourage a "lock-in" effect that discourages investors from selling their assets.” I think there is merit in this, which is why I advocate taxing all gains at the end of each fiscal year instead of at the time of sale.
3.) “Capital gains are not income -- as the Supreme Court held for many years, and even after the passage of the 16th Amendment.” This is more a reflection on the makeup of the Supreme Court than an argument and the Supreme Court has long since reversed this erroneous holding.
4.) “Capital gains are already taxed more than once through the corporate and personal income tax -- and taxing appreciating stocks or real estate can be a third layer of taxation.” This is the favored argument not only for not taxing capital gains and dividends, but for not taxing estates, but it is nonsensical, because ALL taxation is of a multiple nature. When a worker’s pay is taxed is it double taxation because that money was already taxed when the corporation earned it? Is it double taxation when a worker is taxed and then pays a portion to his grocer, who is taxed, who then pays his doctor, who is taxed, who pays his landlord who is taxed? The whole point of taxes, and the only way it can work, is that money, or any asset, is taxed every time it changes hands. What the corporation earns is taxed and when it passes those earnings to its stockholders it is taxed - it has changed hands. An even better illustration is the real estate tax where the same piece of property is taxed year after year. If it were otherwise the government would get a tax once and never again.
5.) “Lowering capital gains taxes substantially raises tax collections and increases tax payments by the rich” (Source) This is true in the short run but untrue in the long term, or as Professor Richard Serlin of the University of Arizona put it, “When there is a cut in the capital gains tax rate, there is an incentive to sell the stock then, and get the lower tax rate before a new administration raises it again. Thus, when the capital gains tax is cut, there is a rush of investors selling stocks to pay their capital gains taxes now, when the rate is law, rather than later when the rate may be raised back up. Capital gains tax revenue to the government thus may go up now, but it will go down later, and it will go down overall.”
But logic is not the strong point of the advocates of reverse taxation, i.e. placing the greatest tax burden on those who make the least, who are to be grateful for the opportunity to serve those who make the most.
Sunday, November 30, 2008
Sunday, November 23, 2008
The Graduated Income Tax System
In my last commentary I discussed at length the history of the graduated income tax in the US and demonstrated that far from being a new socialist, or European idea, it had been with us for almost one and a half centuries and is as American as apple pie.
The radical opponents of this time honored idea (and I call them radicals rather than conservatives because it is hardly conservative to try to abolish a system that has been so time honored) argue that there is something wrong with a large portion of the population not paying any tax or even for a small portion of the populace to pay the bulk of the taxes. They chose to ignore the old axiom; “you can’t get blood from a stone.”
Beyond that they pretend that it is offensive to the principles of Capitalism, apparently being unaware that Adam Smith, the early apostle of capitalism, wrote in 1776 in his seminal treaty on capitalism, The Wealth of Nations, “The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” It is rather interesting to note that Adam Smith espoused a graduated tax.
But none of this deters our modern radicals from proclaiming the unfairness of that which is both practical and just. Ari Fleisher, George W. Bush’s former press secretary for example wrote an article in the Wall Street Journal of April 16, 2007, “The income tax system is so bad, and increasingly reliant on a shrinking number of Americans to pay the nation's bills, that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny.” I do not know whether this is accurate, but even if it is, it is not true that it is “INCREASINGLY reliant on a shrinking number of Americans to pay the nation's bills.” As I demonstrated in my previous article, according to the US Treasury department, our tax system as early as 1860 relied on a small number of the wealthy to pay the taxes and under the law of 1923 less than 1% of the population were expected to pay any tax at all. Fleisher goes on to complain that the richest (I assume he doesn’t mean the richest, but rather those with the largest taxable income since income taxes are based on income and not on wealth) 1% of Americans pay 37% of all our taxes. 10% of taxpayers pay 71% and 40% pay 99%. He goes on to complain that those who make under $43,200 carry only .09% of the income tax burden. Again I don’t know whether these figures are accurate, but assuming that they are, what does Mr. Fleisher propose, that we double the tax on people who often work two jobs and barely have enough to pay their rent, their medical bills, put food on the table and educate their children. But of course these people pay much more taxes than Mr. Fleisher gives them credit for, since they not only pay federal income taxes, but payroll taxes, sales taxes, real estate taxes, excise taxes and possibly local income taxes as well. Our tax system has over the years become not more progressive, but rather much more regressive and Mr. Fleisher and his cohorts, against all precedent, want to tax the have-nots more and more so that the billionaires, who are increasing their wealth as a percentage of the total wealth in the country, and whose after tax income is steadily increasing, can accumulate even more. But even this remains misleading, for the rich make most of their income from capital gains, which are not taxed to the same extent as income made from the sweat of one’s brow.
In order to see the extent of the gap in the income of Americans the following figures from the US Census bureau are instructive: The top 20% of Americans make 49.7% of total income. The next quintile made 23.3%. The middle quintile 14.8% or to put it another way the top 60% made 87.8 percent of total income in the US. The bottom 40% made 12.3% of income.
One can easily see that even if we had a flat tax, with everyone regardless of income paying the same percentage, the top 20% of earners would still be paying almost 50% of the federal income taxes. And while the graduated income tax is often described as redistributing income, it does so rather ineffectively, if at all, as can be seen from the figures below showing income distribution after taxes. As can be seen the difference for after tax income is miniscule. The top 20% have 46.2% of income, the next quintile have 22.3%, the middle 15.6%, the bottom 40% end up with 16%.
As for wealth as opposed to income, according to Forbes - September 17, 2008 edition - to become one of the 400 of the richest people in America one has to have a net income of $1.3 billion. Over the past year their combined wealth increased by $1.57 billion. The richest has a net value of $57 billion and would be worth $90 billion if he had not given away much of it to charity. The second richest is Warren Buffet with $50 billion, who had this to say about our tax system, when addressing a group of 400 wealthy individuals, “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”
Mr. Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.
Not only are the rich not being overtaxed, it appears that the richer you are the smaller the percentage of your income goes to pay federal taxes. While we appear to have a graduated income tax, the lower capital gains tax more than makes up for this discrepancy, as do the innumerable tax deferrals and exemptions available only to the rich.
Even with some small restoration of fairness, as proposed by President elect Obama, we will be a long way from restoring our traditional graduated tax system, which has kept us from becoming a class structured society, and has kept us economically successful.
The radical opponents of this time honored idea (and I call them radicals rather than conservatives because it is hardly conservative to try to abolish a system that has been so time honored) argue that there is something wrong with a large portion of the population not paying any tax or even for a small portion of the populace to pay the bulk of the taxes. They chose to ignore the old axiom; “you can’t get blood from a stone.”
Beyond that they pretend that it is offensive to the principles of Capitalism, apparently being unaware that Adam Smith, the early apostle of capitalism, wrote in 1776 in his seminal treaty on capitalism, The Wealth of Nations, “The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” It is rather interesting to note that Adam Smith espoused a graduated tax.
But none of this deters our modern radicals from proclaiming the unfairness of that which is both practical and just. Ari Fleisher, George W. Bush’s former press secretary for example wrote an article in the Wall Street Journal of April 16, 2007, “The income tax system is so bad, and increasingly reliant on a shrinking number of Americans to pay the nation's bills, that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny.” I do not know whether this is accurate, but even if it is, it is not true that it is “INCREASINGLY reliant on a shrinking number of Americans to pay the nation's bills.” As I demonstrated in my previous article, according to the US Treasury department, our tax system as early as 1860 relied on a small number of the wealthy to pay the taxes and under the law of 1923 less than 1% of the population were expected to pay any tax at all. Fleisher goes on to complain that the richest (I assume he doesn’t mean the richest, but rather those with the largest taxable income since income taxes are based on income and not on wealth) 1% of Americans pay 37% of all our taxes. 10% of taxpayers pay 71% and 40% pay 99%. He goes on to complain that those who make under $43,200 carry only .09% of the income tax burden. Again I don’t know whether these figures are accurate, but assuming that they are, what does Mr. Fleisher propose, that we double the tax on people who often work two jobs and barely have enough to pay their rent, their medical bills, put food on the table and educate their children. But of course these people pay much more taxes than Mr. Fleisher gives them credit for, since they not only pay federal income taxes, but payroll taxes, sales taxes, real estate taxes, excise taxes and possibly local income taxes as well. Our tax system has over the years become not more progressive, but rather much more regressive and Mr. Fleisher and his cohorts, against all precedent, want to tax the have-nots more and more so that the billionaires, who are increasing their wealth as a percentage of the total wealth in the country, and whose after tax income is steadily increasing, can accumulate even more. But even this remains misleading, for the rich make most of their income from capital gains, which are not taxed to the same extent as income made from the sweat of one’s brow.
In order to see the extent of the gap in the income of Americans the following figures from the US Census bureau are instructive: The top 20% of Americans make 49.7% of total income. The next quintile made 23.3%. The middle quintile 14.8% or to put it another way the top 60% made 87.8 percent of total income in the US. The bottom 40% made 12.3% of income.
One can easily see that even if we had a flat tax, with everyone regardless of income paying the same percentage, the top 20% of earners would still be paying almost 50% of the federal income taxes. And while the graduated income tax is often described as redistributing income, it does so rather ineffectively, if at all, as can be seen from the figures below showing income distribution after taxes. As can be seen the difference for after tax income is miniscule. The top 20% have 46.2% of income, the next quintile have 22.3%, the middle 15.6%, the bottom 40% end up with 16%.
As for wealth as opposed to income, according to Forbes - September 17, 2008 edition - to become one of the 400 of the richest people in America one has to have a net income of $1.3 billion. Over the past year their combined wealth increased by $1.57 billion. The richest has a net value of $57 billion and would be worth $90 billion if he had not given away much of it to charity. The second richest is Warren Buffet with $50 billion, who had this to say about our tax system, when addressing a group of 400 wealthy individuals, “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”
Mr. Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.
Not only are the rich not being overtaxed, it appears that the richer you are the smaller the percentage of your income goes to pay federal taxes. While we appear to have a graduated income tax, the lower capital gains tax more than makes up for this discrepancy, as do the innumerable tax deferrals and exemptions available only to the rich.
Even with some small restoration of fairness, as proposed by President elect Obama, we will be a long way from restoring our traditional graduated tax system, which has kept us from becoming a class structured society, and has kept us economically successful.
Monday, November 17, 2008
Joe the Plumber or The Graduated Income Tax
Joe the Plumber! What was that about anyway? They never told us in so many words. Joe complained that he might have to pay more taxes if he ended up making more than $250,000. Why would that be wrong? They quoted Obama as saying, “Spread the wealth.” What is wrong with that? McCain said, “I want to grow the wealth, not spread it.” Are the two contradictory? The campaign is over and one might ask why am I focusing on something that happened in the campaign? The answer is that these issues don’t disappear when a campaign ends. They are the stuff that guides policy.
A campaign is conducted with catch words that are believed to have emotional appeal. They usually have a subtext. The basic subtext in this case was that a graduated income tax is wrong. There was also a suggestion that a graduated tax, or at least making the tax slightly more graduated, was socialistic or European.
Why should we penalize people for success? Why should we “soak the rich?” But that misses the point. The purpose is not to penalize people for success or to “soak the rich” but rather to raise the huge amounts of money that the US Treasury needs to pay its bills, and the money can only be gotten from people who have it. A flat tax, as is advocated by many Republicans, led by Steve Forbes, would mean a tax that would be devastating on people with small, or even moderate incomes. For that reason our income tax has always been a graduated one. As for it being socialistic or European, a graduated income tax is as American as apple pie.
Our first income tax was passed in 1861 to pay for the costs of the Civil War. It was set at a flat 3% but it exempted all incomes under $800. - (Source - The US Treasury for this and all other statements which are not otherwise sourced) - Thus even then there was a recognition that only people making above a certain amount could fairly be taxed. The census data show that the average factory wage in 1860 was about $20/mo. or $240/year compared with a median farm profit of about $150/year in Wayne County. The appropriate inflation factor is 175, as is discussed in the article at an earlier point, the equivalent factory wage today would be $42,000/year. (The 1860 Census Of Manufacuring By Gerald K. Moore)
Thus even then there was a recognition that only people making substantially more than three times the average factory wage should bear this tax burden. The tax was on the rich. In 1862 this was refined. A two-tiered rate structure was enacted, with taxable incomes up to $10,000 (it is presumed that the $800 exemption was retained) taxed at a 3 percent rate and higher incomes taxed at 5 percent. A standard deduction of $600 was enacted and a variety of deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely collection, taxes were "withheld at the source" by employers. It is remarkable that our first attempt at an income tax so closely resembled the graduated taxes of today and this was enacted long before any European or Socialist entity even conceived of the idea. At the end of the war the income tax was repealed because the need for the revenue was no longer needed, but its constitutionality was never challenged.
In 1894 increasing revenue was again needed, and a new income tax law was passed, but this time it was challenged in the courts, and the Supreme Court ruled it to be unconstitutional because Article I, Section 2 Clause 3 of the Constitution provided that taxes have to be apportioned, “among the several States … according to their respective Numbers… It took until 1913 before the 16th amendment to the Constitution was passed, which removed this obstacle. In October of 1923, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid an income tax at the time. As can be seen, throughout our history it was assumed that the tax burden must be born by those who could afford it, limiting the tax to the richest 1% and using a graduated tax to make sure that the richest paid the largest percent.
With World War I again requiring greater revenue Congress passed the 1916 Revenue Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates (now referred to by its opponents as the death tax) and excess business profits. In 1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 a taxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a tax rate of 67 percent. Another revenue act was passed in 1918, which hiked tax rates once again, this time raising the bottom rate to 6 percent and the top rate to 77 percent. (It should be noted that those with incomes over 1.5 million had a marginal tax of 77%) Only 55% of the population paid any income tax. The burden was entirely born by those deemed able to afford it. During World War II taxpayers with incomes over $1 million faced a top rate of 94 percent.
Throughout the 1950s tax policy was increasingly seen as a tool stabilizing macroeconomic activity. The economy remained subject to frequent boom and bust cycles and many policymakers readily accepted the new economic policy of raising or lowering taxes and spending to adjust aggregate demand and thereby smooth the business cycle. This is what is generally known as Keynesian economics and during the Presidency of Richard Nixon he famously said, “We are all Keynesians now.” (The Cato Institute)
In any case as can be seen Republican claims that a graduated income tax is either new, or too high for the rich, or that taxes should be cut all the time and never raised, have no historical basis, and their claim that the are somehow un-American, European or Socialist have no basis in fact.
One of the reasons among many that we are now in the serious financial and economic crisis is that we increasingly abandoned Keynesian economics and adopted Supply Side policies. But without, at this point, arguing the merits or demerits of these respective policies, the claims that a graduated income tax is un-American or Socialistic clearly has no basis in American history and the idea that they have a foreign origin is laughable. During the Bush years with an economy not needing stimulus Bush kept tax rates low creating a huge deficit, ignoring the sound policies of the past, and overheating the economy.
As for the claim that Reagan established the principle that taxes should always be lowered and in the words of Vice-President, Cheney"…proved deficits don't matter," (The Washington Post - June 9, 2004) is another distortion of history. In fact Reagan proved just the opposite. Shortly after coming into office, in 1981 he cut taxes with a 25 percent reduction in individual tax brackets, phased in over 3 years, and indexed for inflation thereafter. This brought the top tax bracket down to 50 percent. The result was a huge and growing deficit. But rather than feeling that this didn’t matter, Reagan became concerned and by 1982 agreed to a sharp rollback of corporate tax cuts, and a smaller rollback of individual income tax cuts. Over all, the 1982 tax increase undid about a third of the 1981 cut as a share of G.D.P., and the increase was substantially larger than Bill Clinton's 1993 tax increase. (Paul Krugman - The NY Times – June 8, 2004)
It is appropriate to debate tax and economic policy. It is not appropriate to distort, to dissemble, or to use names like Socialist to obscure the true facts and the true history, but when a Party essentially represents the economic interests of 2% to 5% of their constituents, that is apparently the only way they can hope to win elections. What is amazing is that so many continue to vote for them.
A campaign is conducted with catch words that are believed to have emotional appeal. They usually have a subtext. The basic subtext in this case was that a graduated income tax is wrong. There was also a suggestion that a graduated tax, or at least making the tax slightly more graduated, was socialistic or European.
Why should we penalize people for success? Why should we “soak the rich?” But that misses the point. The purpose is not to penalize people for success or to “soak the rich” but rather to raise the huge amounts of money that the US Treasury needs to pay its bills, and the money can only be gotten from people who have it. A flat tax, as is advocated by many Republicans, led by Steve Forbes, would mean a tax that would be devastating on people with small, or even moderate incomes. For that reason our income tax has always been a graduated one. As for it being socialistic or European, a graduated income tax is as American as apple pie.
Our first income tax was passed in 1861 to pay for the costs of the Civil War. It was set at a flat 3% but it exempted all incomes under $800. - (Source - The US Treasury for this and all other statements which are not otherwise sourced) - Thus even then there was a recognition that only people making above a certain amount could fairly be taxed. The census data show that the average factory wage in 1860 was about $20/mo. or $240/year compared with a median farm profit of about $150/year in Wayne County. The appropriate inflation factor is 175, as is discussed in the article at an earlier point, the equivalent factory wage today would be $42,000/year. (The 1860 Census Of Manufacuring By Gerald K. Moore)
Thus even then there was a recognition that only people making substantially more than three times the average factory wage should bear this tax burden. The tax was on the rich. In 1862 this was refined. A two-tiered rate structure was enacted, with taxable incomes up to $10,000 (it is presumed that the $800 exemption was retained) taxed at a 3 percent rate and higher incomes taxed at 5 percent. A standard deduction of $600 was enacted and a variety of deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely collection, taxes were "withheld at the source" by employers. It is remarkable that our first attempt at an income tax so closely resembled the graduated taxes of today and this was enacted long before any European or Socialist entity even conceived of the idea. At the end of the war the income tax was repealed because the need for the revenue was no longer needed, but its constitutionality was never challenged.
In 1894 increasing revenue was again needed, and a new income tax law was passed, but this time it was challenged in the courts, and the Supreme Court ruled it to be unconstitutional because Article I, Section 2 Clause 3 of the Constitution provided that taxes have to be apportioned, “among the several States … according to their respective Numbers… It took until 1913 before the 16th amendment to the Constitution was passed, which removed this obstacle. In October of 1923, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid an income tax at the time. As can be seen, throughout our history it was assumed that the tax burden must be born by those who could afford it, limiting the tax to the richest 1% and using a graduated tax to make sure that the richest paid the largest percent.
With World War I again requiring greater revenue Congress passed the 1916 Revenue Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates (now referred to by its opponents as the death tax) and excess business profits. In 1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 a taxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a tax rate of 67 percent. Another revenue act was passed in 1918, which hiked tax rates once again, this time raising the bottom rate to 6 percent and the top rate to 77 percent. (It should be noted that those with incomes over 1.5 million had a marginal tax of 77%) Only 55% of the population paid any income tax. The burden was entirely born by those deemed able to afford it. During World War II taxpayers with incomes over $1 million faced a top rate of 94 percent.
Throughout the 1950s tax policy was increasingly seen as a tool stabilizing macroeconomic activity. The economy remained subject to frequent boom and bust cycles and many policymakers readily accepted the new economic policy of raising or lowering taxes and spending to adjust aggregate demand and thereby smooth the business cycle. This is what is generally known as Keynesian economics and during the Presidency of Richard Nixon he famously said, “We are all Keynesians now.” (The Cato Institute)
In any case as can be seen Republican claims that a graduated income tax is either new, or too high for the rich, or that taxes should be cut all the time and never raised, have no historical basis, and their claim that the are somehow un-American, European or Socialist have no basis in fact.
One of the reasons among many that we are now in the serious financial and economic crisis is that we increasingly abandoned Keynesian economics and adopted Supply Side policies. But without, at this point, arguing the merits or demerits of these respective policies, the claims that a graduated income tax is un-American or Socialistic clearly has no basis in American history and the idea that they have a foreign origin is laughable. During the Bush years with an economy not needing stimulus Bush kept tax rates low creating a huge deficit, ignoring the sound policies of the past, and overheating the economy.
As for the claim that Reagan established the principle that taxes should always be lowered and in the words of Vice-President, Cheney"…proved deficits don't matter," (The Washington Post - June 9, 2004) is another distortion of history. In fact Reagan proved just the opposite. Shortly after coming into office, in 1981 he cut taxes with a 25 percent reduction in individual tax brackets, phased in over 3 years, and indexed for inflation thereafter. This brought the top tax bracket down to 50 percent. The result was a huge and growing deficit. But rather than feeling that this didn’t matter, Reagan became concerned and by 1982 agreed to a sharp rollback of corporate tax cuts, and a smaller rollback of individual income tax cuts. Over all, the 1982 tax increase undid about a third of the 1981 cut as a share of G.D.P., and the increase was substantially larger than Bill Clinton's 1993 tax increase. (Paul Krugman - The NY Times – June 8, 2004)
It is appropriate to debate tax and economic policy. It is not appropriate to distort, to dissemble, or to use names like Socialist to obscure the true facts and the true history, but when a Party essentially represents the economic interests of 2% to 5% of their constituents, that is apparently the only way they can hope to win elections. What is amazing is that so many continue to vote for them.
Saturday, November 08, 2008
The Election
The election of the first African-American is being celebrated out of all proportion to its significance. That is fine for our media, which is focused on everything as setting a record because that makes good headlines and gets readers or viewers, but we, as objective observers, need to see things in proportion to their true significance. If there is one thing I would like to accomplish in writing these political tracts, it is to slay myths and introduce a certain heterodoxy. The common wisdom promoted by a homogeneous press should not be good enough for us.
Barack Obama ran as a Democrat and a liberal who happened to be Black, not as a Black candidate, and we should cheer his election in that light. Democrats have not gotten a majority of the White vote since they became the party of Civil Rights and that has not changed. I thought it would be ironic if the first African-American candidate was the first to get a White majority, but it didn't happen. 46 percent of White women voted for Obama, an improvement over Kerry's 44% but well below 50%. As for White men - only 41% voted for Obama. Racism did not haunt Obama, but it continues to haunt the Democratic Party, and it will not be forgiven for standing up for the rights of people of color. The difference in the outcome is voters of color, who will change the nature of our politics as they increasingly represent an ever greater percentage of the total electorate and are projected to soon become the majority of our population. But even among the white population the future looks bright. 54 percent of young white voters supported Obama, compared with 44 percent who voted for McCain. In the past three decades, no Democratic presidential nominee has won more than 45 percent of the votes of young white voters.
The Right is seizing upon the election of our first President of color as proof that all discrimination has ceased, and that we no longer need to worry about the discrepancies of income, education and opportunity between our White population and those of color. But they have been making that argument since the beginning of the Civil Rights movement, and never saw a problem when people of color were denied the right to vote and even the right to life. They asserted that State rights were more important than the right to life, as people of color were being lynched.
Yes we have come a long way since then, but no thanks to the denizens of that hardy breed, sometimes called crackers, sometimes rednecks, who the Republican party welcomed into their ranks as part of their Nixon Southern strategy.
In a way the election of an African-American is negative for the movement for real equality, because the President for the very reason that he is an African-American will not want to seem to favor other African-Americans or even Affirmative action. But the movement for equality will, nevertheless, get a tremendous boost from this election, for it is to be expected that the children in the African-American ghettos, who now aspire to be basket ball players, or hip-hop artists, or worse, gang members, and who too often see education as being a "White thing", will now see education as their prerogative and realize that education is the way to empowerment.
What an example our African-America President elect is already setting, not only for people of color but for all fathers, when days after his election, in the midst of a national crisis, he takes the time to attend a parent-teacher’s conference for his young daughters.
Our new President also sets us on the right course when he says there are no Red states or Blue states, there is only the US states, and rejects this oversimplification of our media. When the voting population of a state goes Republican by 51% it does not make that a Republican state. Nor does it become a Democratic state when in the next election it goes Democratic by 51%. These are small electoral changes. They may change the outcome of an election and with it the policies that guide our government, but they do not significantly change the make-up of the population. We must remember that even in states where racists are abundant, there are many decent folks, who happen to be in a minority, but who deserve not to be forgotten simply because our electoral system chooses not to count them.
But it is a mistake to suggest that in seeking unity and bipartisanship the winners in the election must shrink from the task of governing in the way that the electorate has entrusted them to do. Seeking bipartisanship does not mean giving the defeated factions veto power over the policies with which the electorate has entrusted the winning party. It does mean listening, and if the opposing party has any good ideas they must not be rejected because they come from the other side. But the voices from the losers warning that if the winning party actually does the things, which they pledged to do during the election, they will lose, must be rejected resoundingly. Their concern that Democrats might lose rings hollow. Isn’t that the very thing Republicans seek. If they join in support of the task at hand they are welcome, but if they choose to obstruct they must be overcome by all means available. The task at hand both in foreign and domestic policy is huge and our government must bend all its talent and all its forces to the national good. But the policies of the past eight years, and even the policies that had their genesis in the Reagan era have been discredited. Supply side economics has been discredited. We must build from the bottom up and not from the top down. A new day is dawning. We must not shrink from the task ahead.
Barack Obama ran as a Democrat and a liberal who happened to be Black, not as a Black candidate, and we should cheer his election in that light. Democrats have not gotten a majority of the White vote since they became the party of Civil Rights and that has not changed. I thought it would be ironic if the first African-American candidate was the first to get a White majority, but it didn't happen. 46 percent of White women voted for Obama, an improvement over Kerry's 44% but well below 50%. As for White men - only 41% voted for Obama. Racism did not haunt Obama, but it continues to haunt the Democratic Party, and it will not be forgiven for standing up for the rights of people of color. The difference in the outcome is voters of color, who will change the nature of our politics as they increasingly represent an ever greater percentage of the total electorate and are projected to soon become the majority of our population. But even among the white population the future looks bright. 54 percent of young white voters supported Obama, compared with 44 percent who voted for McCain. In the past three decades, no Democratic presidential nominee has won more than 45 percent of the votes of young white voters.
The Right is seizing upon the election of our first President of color as proof that all discrimination has ceased, and that we no longer need to worry about the discrepancies of income, education and opportunity between our White population and those of color. But they have been making that argument since the beginning of the Civil Rights movement, and never saw a problem when people of color were denied the right to vote and even the right to life. They asserted that State rights were more important than the right to life, as people of color were being lynched.
Yes we have come a long way since then, but no thanks to the denizens of that hardy breed, sometimes called crackers, sometimes rednecks, who the Republican party welcomed into their ranks as part of their Nixon Southern strategy.
In a way the election of an African-American is negative for the movement for real equality, because the President for the very reason that he is an African-American will not want to seem to favor other African-Americans or even Affirmative action. But the movement for equality will, nevertheless, get a tremendous boost from this election, for it is to be expected that the children in the African-American ghettos, who now aspire to be basket ball players, or hip-hop artists, or worse, gang members, and who too often see education as being a "White thing", will now see education as their prerogative and realize that education is the way to empowerment.
What an example our African-America President elect is already setting, not only for people of color but for all fathers, when days after his election, in the midst of a national crisis, he takes the time to attend a parent-teacher’s conference for his young daughters.
Our new President also sets us on the right course when he says there are no Red states or Blue states, there is only the US states, and rejects this oversimplification of our media. When the voting population of a state goes Republican by 51% it does not make that a Republican state. Nor does it become a Democratic state when in the next election it goes Democratic by 51%. These are small electoral changes. They may change the outcome of an election and with it the policies that guide our government, but they do not significantly change the make-up of the population. We must remember that even in states where racists are abundant, there are many decent folks, who happen to be in a minority, but who deserve not to be forgotten simply because our electoral system chooses not to count them.
But it is a mistake to suggest that in seeking unity and bipartisanship the winners in the election must shrink from the task of governing in the way that the electorate has entrusted them to do. Seeking bipartisanship does not mean giving the defeated factions veto power over the policies with which the electorate has entrusted the winning party. It does mean listening, and if the opposing party has any good ideas they must not be rejected because they come from the other side. But the voices from the losers warning that if the winning party actually does the things, which they pledged to do during the election, they will lose, must be rejected resoundingly. Their concern that Democrats might lose rings hollow. Isn’t that the very thing Republicans seek. If they join in support of the task at hand they are welcome, but if they choose to obstruct they must be overcome by all means available. The task at hand both in foreign and domestic policy is huge and our government must bend all its talent and all its forces to the national good. But the policies of the past eight years, and even the policies that had their genesis in the Reagan era have been discredited. Supply side economics has been discredited. We must build from the bottom up and not from the top down. A new day is dawning. We must not shrink from the task ahead.
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