Tax the Rich

In this economy, what’s a fair share?

Livia Gershon | Longreads | October 2018 | 9 minutes (2,206 words)

In May, Nancy Pelosi, the House minority leader, declared that, if Democrats win power in Congress this fall, they will work to repeal the $1.5 trillion tax cut package passed last year by Republicans. Sen. Cory Gardner, the chair of the National Republican Senatorial Committee, responded with apparent glee. “I wish Nancy Pelosi the biggest platform ever to talk about her desire to increase tax revenue,” he told NBC News. “I hope she shouts it from the mountain top.”

For nearly 40 years, the GOP has relied on cutting taxes as an easy way to win votes, even when their plans—like the most recent package—benefit only the rich. Now, as Democrats are looking to compete in 2018 and 2020, many are embracing ambitious, expensive ideas like Medicare for all, free college, and universal pre-kindergarten—while proclaiming the necessity of higher taxes on the wealthy. In a July interview, Sen. Elizabeth Warren pushed back against an idea, articulated by John Harwood of CNBC, that it’s “wrong for more than half of somebody’s marginal income to be taken.” Using equally moralistic language, Warren insisted that taxes are “an expression of our values” and said that the essential question about tax policy is: “What constitutes a fair share in this economy?”

Bill De Blasio, the mayor of New York City, has gone as far as to argue that “tax the wealthy” should be the centerpiece of a progressive Democratic agenda. “I think if you say, ‘We’ll tax the wealthy’ you are both being honest about how you’ll pay for it and about real power dynamics,” he told NBC. “It shows a willingness to stand up for people’s interests against those who hold all the power right now.”

Between 1979 and 2014, income (before taxes and government benefits) rose 28 percent for the middle 60 percent of earners in the United States—and 221 percent for the top 1 percent. In 2017, that top 1-in-100 elite brought in 22 percent of total pretax income in the country, more than the collective incomes of the bottom 60 percent. When it comes to overall wealth—the stocks, real estate and everything else we own—the picture is even starker. The top 1 percent controls 40 percent of the nation’s riches, compared with 10 percent owned by the bottom 80 percent.

What it means for the wealthy to pay their “fair share” gets at the heart of how we understand the economy. When you add up taxes at the federal, state, and local levels, the top 1 percent pays 24 percent of the total tax bill in the country. That’s a bit more than its 22 percent share of income. (That’s also only considering reported income, but let’s set that aside for the moment.) Is it fair to ask the rich to pay more—perhaps much more—than a proportional amount?

Taxing the rich more is a popular idea, but it’s commonly offset in policy discussions by a notion that it’s ultimately not fair—that, as Harwood put it, it’s simply “wrong” to tax the rich at really high rates relative to the rest of the population. That logic is based on what Lawrence Zelenak, a professor of tax law at Duke University, has called the “myth of pretax income.” In a 2002 essay, Zelenak wrote that “in the absence of taxes there would be no government, in the absence of government there would be anarchy, and in a state of anarchy no one would have any income.” Americans tend to hold a view, “everyday libertarianism”—coined by Liam Murphy and Thomas Nagel, professors of law and philosophy at New York University—that government is an outside force imposing itself on an existing web of social and economic relationships. But in reality, Zelenak explains, the government helps weave that web.

***

The federal income tax as we know it came into being with the ratification of the Sixteenth Amendment, in 1913. It emerged during a time when the government’s role in economic institutions was far more obvious, in part because the economy was changing fast. Railroads were spreading across the country as the federal government gave land away to corporate barons. Money was in short supply—the gold standard was giving more power to wealthy lenders and less to small farmers and other borrowers. New vagrancy laws were forcing people, particularly black workers in the post-Reconstruction South, into low-paid labor. Government troops—as well as private forces using violence with the implicit blessing of the state—beat and killed those who went on strike.

In 1892, the Populist Party called for an income tax on the rich along with a variety of other reforms, such as the direct election of senators and an end to government subsidization of corporations. The aim, in addition to raising money for federal programs, was curbing illegitimate uses of power by the ultra rich. If this power were not “met and overthrown at once,” the party platform warned, “it forebodes terrible social convulsions, the destruction of civilization, or the establishment of an absolute despotism.”

Eighteen years later, Theodore Roosevelt, out of the White House and in Osawatomie, Kansas, dedicating the John Brown Memorial Park, demanded a “square deal” for American taxpayers. In what came to be called his “New Nationalism” speech, Roosevelt introduced himself as a populist firebrand, arguing not only for “fair play under the present rules of the game,” but also for “having those rules changed.” He called for a graduated income tax and an inheritance tax for the richest Americans, so that they would pay for a fair share of government and keep their influence in check. “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,” he said.

What it means for the wealthy to pay their ‘fair share’ gets at the heart of how we understand the economy.

Around this time, newspapers, particularly in communities far from the northeastern centers of capital power, were filled with cartoons that illustrated the concern Roosevelt described. “The Bosses of the Senate,” published in 1889 by Joseph Keppler, depicts top-hatted giants from big money interests—Standard Oil Trust, Sugar Trust—towering over lawmakers. “The Road to Dividends,” drawn around 1895 by Thomas Dorgan, shows stern-faced industrialists in fur-lined coats walking behind a girl weighed down by an enormous bundle.

Monica Prasad, a historical sociologist at Northwestern University who studies the development of tax systems, told me that these illustrations reflected an assumption, growing in popularity among Americans, that the wealth of the very rich was essentially stolen from workers, consumers, and small farmers. “They did not think it was legitimate at all,” she said.

Still, it took some maneuvering for an income tax to go into effect. In 1894, Congress imposed a 2 percent income tax on the wealthiest Americans, but the Supreme Court—at the time, a staunch defender of corporate property rights, even in the face of populist anger—quickly struck it down. The verdict meant that such a tax would require a Constitutional amendment. With the support of populists and progressives in both parties—and in the new Progressive Party, formed by Roosevelt in 1912—advocates managed to do it.

When the first income tax was imposed, it was supported widely, Prasad said. “The wealthy certainly didn’t want to be taxed, but everybody else was very happy with it,” she explained. “I think we have a general sense that in the U.S. we support the rich, we don’t believe in taxing the rich. And, in fact, the history is exactly backward. We are the country that started taxing the rich before any other country did.”

Just a few years after it went into effect, the tax, combined with a new tax on “excess profits,” raised enough money, according to one estimate, to cover 22 percent of the cost of America’s efforts in World War I. Later, when World War II demanded even more cash, the income tax morphed from a tax on the rich to something most people pay. But that didn’t stir controversy or spark campaign feuding—thanks largely to the success of populist reforms, most people’s incomes were rising and, compared to today, the government was still taking most of its revenue from corporations and the wealthiest citizens.

***

The turn to everyday libertarianism as we now know it came in 1978. That’s when Howard Jarvis and Paul Gann, two retired businessmen, successfully organized a campaign to pass “Proposition 13,” which would drastically cut property taxes in California, their home state. Jarvis, a bombastic conservative, embraced the scorn of the political establishment and spouted hard-right rhetoric that elevated property rights above all other values. “The most important thing in this country is not the school system, nor the police department, nor the fire department,” he once said. “The right to preserve, the right to have property in this country, the right to have a home in this country—that’s important.”

Dean Baker, a senior economist at the Center for Economic and Policy Research, a progressive think tank, explained that Jarvis constructed a worldview in which middle-class workers were on the same side as millionaire business owners. “He’d go around and say ‘in the battle of us against them, I’m for us,’” Baker told me. The campaign appealed to middle-income homeowners suffering from the era’s stagflation, which kept home values rising while incomes languished. Jarvis and Gann’s target audience consisted mostly of white voters who associated paying taxes with funding government benefits that they believed, wrongly, went mainly to black and Latinx people.

At the time, the GOP was post-Watergate and desperately seeking a platform that would win back disillusioned constituents. In 1980, Ronald Reagan made tax cuts the centerpiece of his presidential run. Five months before the election, the journalist Robert G. Kaiser wrote in the Washington Post that the promise of “huge cuts in federal taxes” was one of the few novel ideas to emerge in the campaign—an “unconventional and politically potent” plan that just might help win Reagan the election.

It did. And between 1980 and 1988, Reagan helped bring the top marginal income tax rate down from 70 percent to 28 percent. (The rate that the rich really paid didn’t fall that much, since lower rates were accompanied by the closing of some loopholes, but it did drop.)

Even with the all the methods of evasion, tax policy remains a potent shaper of the economy—that’s why rich people and corporations fight so hard for cuts.

 

Since then, tax policy has been riding a seesaw with whichever party has been in power. Under Bill Clinton, the top tax rate went up—and raised lots of money—then, under George W. Bush, it fell again. Through the Affordable Care Act, Barack Obama effectively raised rates by creating new taxes on high incomes.

But as long as tax codes have existed, rich people and corporations have been finding ways to dodge them—and the rest of America knows it. That remains a problem: Many people distrust the government and resent their tax bills not only because they hate to turn over a slice of their paychecks, but also because they’re well aware that wealthy people can manipulate loopholes or simply break tax laws with impunity.

***

Chuck Marr, the director of federal tax policy at the Center on Budget and Policy Priorities, a progressive think tank, told me that there’s no need to despair at the seeming impossibility of imposing higher tax rates on the rich. Tax evasion isn’t just a matter of wealthy people being clever crooks, he said—it’s largely about the government being an unenthusiastic cop when it comes to this crime. If politicians took fighting fight tax evasion seriously, they could strengthen the Internal Revenue Service’s enforcement division, which has been hobbled in recent decades by funding cuts. They could also push for strong international agreements to fight the use of tax havens. Besides, even with the all the methods of evasion, tax policy remains a potent shaper of the economy—that’s why rich people and corporations fought so hard for last year’s tax package.

Going forward, beyond repealing the 2017 tax cuts, both Marr and Baker believe that Democrats should push for more comprehensive and better enforced estate taxes and higher taxes on the rich. “The idea that we suffer any harm—we meaning non-rich people—from higher taxes on the wealthy, I think, just doesn’t hold any water,” Baker said. Depending on how they’re structured, tax hikes can sometimes cause problems, like encouraging rich people to find new dodges or discouraging them from making worthwhile investments, he noted, but many types of taxes have benefits for everyone. For example, a tiny tax on financial transactions could limit short-term speculation that enriches the financial sector at the expense of other parts of the economy.

Like the populists of the late nineteenth and early twentieth century, Baker sees higher taxes as a crucial part of a broad agenda designed to curb the wealth and power of private interests. Just as land grants to railroads supported barons of the Gilded Age, the enforcement of intellectual property laws puts enormous government resources at the service of pharmaceutical companies. There’s nothing “free market” about how this system delivers gains to large companies and their owners, Baker said.

If we want to defend taxes on the rich, or other government policies that shift power away from the wealthy, we need to face down everyday libertarianism—and its bogus theories. That means recognizing that markets don’t precede government policy—they’re created by it.

***

Livia Gershon is a freelance journalist based in New Hampshire. She has written for the Guardian, the Boston GlobeHuffPostAeon and other places.

Editor: Betsy Morais

Fact-checker: Ethan Chiel