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.