Not that he needs any further lessons from the master of
confiscatory taxation.
"It's only right that we ask everyone to pay their fair share,"
President Obama has declared, while calling for higher taxes on the
group he refers to as "millionaires and billionaires."
Redistribution is the key concept--President Obama again and again
demands that the U.S. redistribute wealth from one group of
Americans to another.
Where does this emphasis on redistribution come from? Not from
the Founders. The Constitution mandates that "all duties, imposts
and excises shall be uniform throughout the United States." The
Declaration of Independence entrenches the right to life, liberty,
and the pursuit of happiness for all citizens. And once slavery was
abolished, the 14th Amendment required that no state deny "equal
protection of the laws" to "any person."
In fact, the Founders, and the American leaders of the 1800s,
disdained the income tax. In 1872, President Grant rid the nation
of the Civil War income tax; two decades later, the Supreme Court
struck down another attempt at an income tax. If we must have
taxes, the Founders urged, let them be consumption taxes--a luxury
tax on imports, for example, or a vice tax on whiskey. As Alexander
Hamilton said in Federalist 21
of such taxes:
"The amount to be contributed by each citizen will
in a degree be at his own option, and can be regulated by an
attention to his resources. If duties are too high,
they lessen the consumption; the collection is eluded; and the
product in the treasury is not so great.…This forms a complete
barrier against any material oppression of the citizens by taxes of
this class, and is itself a natural limitation of the power of
imposing them."
In other words, if the government taxes whiskey, tobacco, or
imported French wine at too high a rate, people will drink less and
smoke less--and revenue will go down. That is "a natural
limitation" on the greed of politicians. Thus, a system of tariffs
and excise taxes formed the basis of U.S. revenue collection from
Presidents Washington to Teddy Roosevelt.
In the early 1900s, the progressives argued that more power
needed to be centralized in the executive branch, and more money
should be spent by government to attack social problems. But where
could the money be found to pay for such huge government
bureaucracies? Progressives had a solution: tax the rich and
regulate their income.
On August 31, 1910, Teddy Roosevelt, who
became a key progressive spokesman, announced:
"The really big
fortune, the swollen fortune, by the mere fact of its size,
acquires qualities which differentiate it in kind as well as in
degree from what is possessed by men of relatively small means.
Therefore, I believe in a graduated income tax on big fortunes."
In
other words, uniform taxes, equal protection of the laws, and full
property rights do not apply to those people with fortunes that are
swollen.
"A graduated income tax on big fortunes" is needed,
Roosevelt insisted, as part of society's right to "regulate the use
of wealth in the public interest."
But who is to determine how much money constitutes a swollen
fortune? And what will the proper tax on it be? Under an income
tax, politicians are the ones who judge ability to pay, and they
choose the rates they think rich people can afford. And here,
unlike with a consumption tax, there is no real check on the greed
of politicians. If politicians choose rates too high they may lose
the support of the rich, but they may gain support of those larger
groups receiving subsidies from the redistributed swollen
fortunes.
The income tax became law in 1913 through constitutional
amendment, and immediately politicians enacted a progressive tax
and began the arbitrary process of setting rates. Over time,
politicians discovered incentives to increase taxes on the small
group of rich people and redistribute their wealth to the larger
group of voters.
In 1913, for example, the original top tax rate
was 7 percent on all income over $500,000. Three years later the
top rate was 15 percent. During the 1920s, the top rate became 25
percent on all income over $100,000, but in 1932, during the Great
Depression, it was hiked to 63 percent on incomes over $1,000,000.
In 1935, President Franklin D. Roosevelt raised the top rate to 79
percent on multimillionaires. Thus, even before the income tax was
22 years old, politicians had steadily jacked up the top rate from
7 to 79 percent. FDR had no experience running a profitable
business, but his cries for the rich to pay their "fair share"
profited his political career.
FDR USED THE CRISIS of World War II to do three things: first,
to tax the rich even more; second, to begin taxing the majority of
Americans; and third, to introduce "withholding" to get cash
immediately and guarantee a regular flow of revenue into the
federal treasury.
These three changes were dramatic events in U.S.
history, and few historians have studied them. Rows of books have
been written on the bombing of Pearl Harbor and on the dropping of
the atomic bomb, but little is known of how 39 million Americans
suddenly had to pay income taxes and why the cash was withheld from
their monthly pay envelopes. In our new history FDR Goes to War, we tell the story of
these three dramatic changes.
On the first point, FDR hiked tax rates even further on the rich
because he wanted more of their money to fight the world war. In
the 1940s, he gradually boosted marginal rates on top incomes to 94
percent on all income over $200,000. But even at those high rates,
he ran out of rich people before he ran out of places to spend the
money. As Senator Tom Connally complained,
"We cannot get much more
from the very high brackets, because as to them we have already
reached the point of unproductiveness."
FDR's solution was to convert the income tax from a class tax to
a mass tax. Before World War II, fewer than 5 percent of Americans
paid income taxes.
"Too many people are
earning money and not contributing to the government."
- Franklin Delano Roosevelt
When a
Treasury official suggested lowering personal exemptions, Roosevelt
was delighted. "Of course I want that. I have been trying to get it
for years but nobody will help me do it."
From 1939 to 1944, with
Roosevelt's blessing, the amount of money families could earn
before they had to pay income taxes declined from $2,500 to $1,000
for married couples.
That meant that from 1940 to 1942, the number
of Americans paying income taxes jumped almost tenfold, from 4
million to 39 million. Furthermore, the starting tax rate
skyrocketed from 4 percent to almost 24 percent. The government
used the wartime emergency as a tool to encourage tax payments.
"Taxes to Beat the Axis" became the slogan of the day. Songs on the
radio, speeches by movie stars, and even Walt Disney cartoons in
movie theaters urged all Americans to pay their income taxes.
Just as 1942 was the year of the first mass tax in U.S. history,
1943 would be the year of withholding taxes at the source. The case
for withholding was simple: the war was expensive, and FDR wanted
to get more revenue more quickly from the tens of millions of new
taxpayers. To sell the idea of withholding to Americans, the
government called the practice "pay as you go," which made higher
taxes sound more like payments on layaway merchandise in a store.
"Pay as you go" also subtly implied that everyone was paying a debt
that they owed, when in reality, most Americans had never paid an
income tax before. But if employers could be forced to extract pay
from their workers' wages each week or month, and then send that
cash to Washington, the government could secure a steady flow of
revenue--not only for the rest of the war, but for generations to
come.
The campaign for withholding, however, hit a snag: Tax payments
in the United States were not on a current basis. The 1942 tax
bill, for example, was not due until 1943, and there was no system
of withholding. That system of earning revenue in one year and
paying nothing until the next year started with the first income
tax law passed in 1913. Congress did not pass that tax until
October and, to extract instant cash from wealthy people, made the
tax retroactive. To ease the pain, Congress allowed taxpayers to
pay their 1913 tax in 1914, and that practice had continued for the
next 30 years. Thus, the more than 30 million new taxpayers in 1942
could delay their payments to Uncle Sam until 1943. But since FDR
wanted withholding immediately in 1943, that meant most taxpayers
would be subject to "double taxation," in 1943--they would be
paying withholding tax immediately, and they would still owe their 1942 taxes
on top of that.
Some observers favored the government forgiving people of their
1942 taxes in return for withholding, but FDR insisted on "double
taxation" even if it meant that rich people owed more than 100
percent of their 1943 income to pay both years' taxes all at once.
The Current Tax Payment Act of 1943, passed on June 9, forced
millionaires to pay some double taxation--one-fourth of their 1942
tax bill was due in 1943, and they also had to pay withholding on
1943 income immediately. Married people with no dependents who
annually earned $500,000, for example, would have to pay a 98.7
percent tax rate in both 1944 and 1945. Those who earned $1 million
each year of the war would owe a whopping $1,006,750 in both 1944
and 1945. When asked how some people, admittedly a small minority,
could pay more than they earned in taxes, Senator Allen Ellender
(D-LA) responded, "I submit that the [rich] taxpayer is likely to
have accumulated sufficient assets with which to make the necessary
income payments."
THE PROGRESSIVE IDEA that income should be limited by law raised
profound questions for American society. Do rights, such as the
right to property, come in a natural way from God--as stated in the
Declaration of Independence--or do they come from government? If
Americans have a natural right to life, liberty, and property, then
high progressive taxes violate that right. If, instead, rights come
from government, then the leaders of government have the legitimate
authority to confiscate wealth, or redistribute it from one group
to another. In time of war, Roosevelt argued, and perhaps
afterward, government had the right to most, if not all, income of
wealthy citizens in the national interest.
For the first time in U.S. history, the redistributionists
dominated political life. For example, on the Senate floor on May
14, 1943, Senator Happy Chandler (D-KY) said:
"All of us owe the
government; we owe it for everything we have--and that is the basis
of obligation--and the government can take everything we have if
the government needs it. The government can assert its right to have
all the taxes it needs for any purpose, either now or at any time
in the future."
Chandler, however, did not redistribute much of his
own income. Already investigated in 1942 for accepting large gifts
from war contractors--including a 60-foot in-ground swimming
pool--Chandler had a history of securing government contracts for
friends and donors, and then reaping rewards for himself.
Not all congressmen agreed with Chandler. Many opposed
Roosevelt's "capital levy," as Senator Robert Taft (R-OH) called
it. Senator Arthur Vandenberg (R-MI) called it "prejudicial class
baiting." During the congressional debate, Rep. Charles Gifford
(R-MA) said:
"The administration [has] set loose the forces of
prejudice and disunity."
Rep. John Jennings (R-TN) said of the
American taxpayer:
"Heretofore, we have sheared him annually--now
it is proposed to skin him. I do not hold any
brief for Henry Ford, but I am glad that he started life with a
pair of blue overalls and a monkey wrench and the genius that God
Almighty put into his brain, and became a millionaire, because he
made other men rich and paid the highest wages that up to that time
had ever been paid to the American workingman and covered this
whole country with a network of highways ... The time will come if we continue on down
the slippery, steep road we are now on to the precipice that leads
to the bottomless pit, the abyss of financial bankruptcy and ruin,
the time will come when we can put a taxpayer on exhibition and
make money charging admission for people to see him."
FDR, however, clearly wanted Congress to pass a tax bill that
gave him withholding and double taxation on the rich. When the
Senate refused to pass such a bill, FDR threatened a veto.
"The
Senate bill would result in a highly
inequitable distribution of the cost of the war and in an unjust
and discriminatory enrichment of thousands of taxpayers in the
upper income groups."
- Franklin Delano Roosevelt
Yet this "unjust" Senate bill already taxed
large incomes almost 90 percent. The Senate-House conference
committee, however, under threat of an FDR veto, turned out a bill
that taxed million-dollar incomes at 100.6 percent per year for
1944 and 1945. Six months later, however, when Congress refused to
raise those rates further in the Revenue Act of 1943, FDR vetoed it
and called it "not a tax bill but a tax relief bill providing
relief not for the needy but for the greedy."
FDR's ACTIONS SEEM PUZZLING:
He knew that rich people would shelter their income in foreign investments, tax-exempt bonds, or collectibles if tax rates were confiscatory. In fact, he saw it happen during his early New Deal years. When he raised the top rate to 79 percent in 1935, the revenue into the federal government from income taxes that year was less than half of what it was six years earlier when the top rate was 24 percent.
After that, FDR admitted privately:
But he refused "to pay usury in order to get recovery," and he kept rates high. Why?
Why "soak the rich" for 100 percent
of their income (more or less) when they already face rates of 90
percent in both income and corporate taxes?
He knew that rich people would shelter their income in foreign investments, tax-exempt bonds, or collectibles if tax rates were confiscatory. In fact, he saw it happen during his early New Deal years. When he raised the top rate to 79 percent in 1935, the revenue into the federal government from income taxes that year was less than half of what it was six years earlier when the top rate was 24 percent.
After that, FDR admitted privately:
"Barney Baruch has been saying
right along that you have got to reduce the top taxes and that if
you do that people will take chances."
But he refused "to pay usury in order to get recovery," and he kept rates high. Why?
Three points are important here.
First, FDR, as a progressive,
believed with his cousin Teddy that "swollen fortunes" needed to be
taxed at punitive rates to redistribute wealth. In fact, as we can
see, redistributing wealth was more important to FDR than
increasing it. FDR was the first U. S. president to take
redistribution that far.
Second, high taxes on the rich provided excellent cover for his
having made the income tax a mass tax. How could a steelworker in
Pittsburgh, for example, refuse to pay a new 24 percent tax when
his rich factory owner had to pay more than 90 percent?
Third, and possibly most important, class warfare was the major
campaign strategy for FDR during his whole presidency. He believed
he won votes when he attacked the rich, or they attacked him, and
he discussed that with Ray Moley, his speechwriter, and later with
Henry Morgenthau, his secretary of the treasury. During the 1936
campaign, when FDR still had double-digit unemployment, he used the
rich again and again as scapegoats. Two weeks before the election,
FDR announced that wealthy people had long been refusing "to pay a
fair share" of the cost of government.
Therefore, he boasted:
"...we
increased still further the taxes paid by individuals in the
highest brackets--those with incomes over one million dollars a
year. Wasn't that the American thing to do?"
Later, when those
millionaires sheltered their income to escape the high new rates,
Roosevelt publicly denounced them for "tax avoidance" and for not
paying their "fair share."
In 1937, perhaps thinking of his next
reelection campaign, he told two prominent Democrats, Senator Pat
Harrison and Rep. Robert Doughton, that if they would form a
"subcommittee to investigate tax avoidance," that the Democrats
would gain "at least 10,000,000 [votes]" by publicly exposing those
who sheltered income.
FDR won his long-term battle to retain the withholding tax and
keep a large percentage of Americans paying incomes taxes. But in
the next generations, Presidents Kennedy and Reagan were each able
to slash the top rates; Presidents Clinton and Bush were able to
cut the capital gains tax as well. Because these rate cuts created
more revenue, and sparked economic growth in the U.S., the old
campaign for redistribution slowed down until the arrival of Barack
Obama on the political scene.
NO POLITICIAN SINCE FDR has locked into the campaign for
redistribution as faithfully or as enthusiastically as Barack
Obama. He clearly admires FDR and compares himself to FDR. Perhaps
tongue-in-cheek, Obama said FDR was "pretty fiscally conservative,"
but in practice Obama has copied Roosevelt's tax strategy, using
his main tactics and even some of his words.
During the 2008 campaign, we saw Obama parallel FDR's commitment
to the principle of redistribution -- even if it reduced wealth in
society. In an ABC News segment, for example, on April 16, 2008,
Obama said he wanted to raise the capital gains tax. Interviewer
Charlie Gibson asked:
"George Bush has taken it down to 15 percent. And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"
Obama replied:
"Well, Charlie, what I've said is that I would
look at raising the capital gains tax for purposes of fairness...."
When Gibson retorted:
"But history shows that when you drop the
capital gains tax, the revenues go up."
Obama said:
"Well, that
might happen, or it might not."
Thus, whatever the impact on revenue, Obama has fought during
his presidency to raise the capital gains tax. Not only is it a
matter of principle, it is for Obama, as it was for FDR, a useful
campaign strategy.
Both FDR and Obama had huge spending programs
that resulted in high unemployment, increased national debt, and a
stagnant economy. The class warfare theme that worked so well for
FDR is a major part of Obama's campaign for reelection. Regardless
of whether massive federal spending and high taxes hurt the
economy, the political point is that few Americans earn $1 million
a year and those who don't can be riled up at those who do. That's
how, as FDR showed, an incumbent campaigning for reelection can win
and win again during hard times.
Republicans put "party over country," Obama said during an
October 6, 2011 press conference. "Millionaires and
billionaires…have lower tax rates in some cases than plumbers and
teachers." True, capital gains taxes at 15 percent are lower than
income taxes for some middle-class Americans, but that is because
the capital gains tax is, in a real sense, a second tax on top of
the income tax. All cash invested toward capital gains has already
been shrunk by the income tax (and possibly the corporate tax as
well). But census data reveal that the top 1 percent of income
earners pay 38 percent of the federal income tax; and the bottom 50
percent shoulder less than 2 percent of that total tax
burden--which is not a statistic shared by the president. Instead,
Obama promotes his new surtax on millionaires, thus "making our tax
system fair and just and promoting growth."
Those who thrive on class warfare, like FDR and Obama, seem to
have insurmountable advantages. They can divide America, demonize
the rich, and fish for votes among the middle-class and poor. But,
as FDR and Obama have discovered, when you penalize the rich, they
shelter their wealth, or take it elsewhere. That makes an already
depressed economy even more stagnant. Ronald Reagan, by contrast,
slashed tax rates on incomes and corporations, and then watched as
unemployment and inflation plummeted. The U.S. dramatically
expanded its industrial hegemony in the world. Along the way,
Reagan carried 49 of 50 states when he ran for reelection. What's
more, when the economy opened up, the poor really did get something
from the rich--computers, iPhones, Garmins, the Internet, and
flat-screen TVs, for starters. That beats the WPA, the OPA, cash
for clunkers, and Obamacare.
And it gives those who believe in
freedom hope that the votes for President Obama will be
redistributed in 2012.
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