Commentary

Soak-the-Rich Taxes Soak Everyone

Soak-the-rich taxes have a way of becoming people’s taxes, soaking those who never expected to pay.

This has been true from the very beginning. The first U.S. income tax was passed in 1861 to help pay the Union’s Civil War costs. Western farmers had little cash, so they favored an income tax that wouldn’t affect them. Initially the Civil War income tax was 3 percent of income over $800. Since there weren’t enough people making over $800 to finance war spending, the income tax was revised to include everyone making as little as $600, and the rate was nearly doubled.

This income tax ended in 1872, but farmers hoped to revive it so they could push the cost of government on somebody else. Another income tax was passed in 1894, and 99-9/10ths percent of the 65 million people in the United States paid nothing. A lyrical Missouri congressman exulted: “passage of the bill will mark the dawn of a brighter day, with more sunshine, more of the songs of birds, more of the sweetest music, the laughter of children well fed, well clothed, well housed.” Jubilation was short-lived, when the income tax was struck down by the U.S. Supreme Court.

The Spanish-American War (1898) spurred federal officials to scramble for more revenue. Progressives began dreaming about how to revive the income tax. Eventually, they decided their best option was the long process of amending the Constitution. In December 1906, President Theodore Roosevelt cheered them on, declaring that “there is every reason why, when next our system of taxation is revised, the National Government should impose a graduated inheritance tax, and, if possible, a graduated income tax.” It wasn’t clear what would be done with revenue generated by an income tax, since no country posed a military threat to the United States, and big-time social spending was many years away.

Following ratification by three-quarters of the states, Congress passed an income tax bill, and in 1913, President Woodrow Wilson signed it. Initially, the rates were low, and a reported 99 percent of the U.S. population paid nothing, presumably a key reason why people clamored for it.

But as Wilson maneuvered the United States into World War I, there were higher taxes for everyone. By 1918, the top rate hit 77 percent. “Never before, in the annals of civilization,” noted Columbia historian Edwin Seligman, “has any attempt been made to take that much of a man’s income by taxation.” A lot of ordinary folks found they were subject to the income tax, too.

Ordinary folks were soaked again during the New Deal years (1933-1940) when federal spending doubled. True, President Franklin Delano Roosevelt seemed to be soaking-the-rich when he raised income tax rates on job creators whom he denounced as “economic royalists.”

Yet only about 5 percent of the population paid federal income taxes. The biggest source of federal revenue throughout the New Deal was the excise tax on beer, cigarettes, soft drinks, chewing gum, radios and other cheap pleasures enjoyed disproportionately by middle class and poor people. Until 1936, the federal excise tax generated more revenue than the federal personal income tax and the federal corporate income tax combined. Moreover, New Deal subsidies for big farmers were financed by forcing the three quarters of Americans who weren’t farmers to pay higher food prices. The New Deal was mainly paid for by the middle class and the poor.

The Revenue Act of 1942, amidst World War II, doubled the tax base and clearly made the personal income tax a people’s tax — the biggest source of federal revenue. Although the income tax had been sold to soak-the-rich and give everyone else something for nothing, ordinary folks faced a 23 percent rate on income up to $2,000, plus the headache of maintaining detailed records, filling out forms, dealing with inquisitorial audits and possible seizures.

Soak-the-rich taxes are for suckers. President Obama, like so many politicians who came before, is singing the happy song that only millionaires and billionaires will have to pay. But runaway spending — whether because of war or entitlement programs — drives government to extract revenue from people with much lower incomes, like the nearly half the population that pays no federal income tax now. The violence in Europe suggests they will be shocked and outraged when that happens.

Jim Powell, a senior fellow at the Cato Institute, is the author of FDR’s Folly, Wilson’s War, Bully Boy, The Triumph of Liberty and other books.