Of the many subjects upon which well-meaning Americans often disagree, federal income taxes are among the most contentious. At a moment when general government gross debt (federal, state, and local) exceeds $19 trillion and income inequality is at its highest point in nearly a century, what does it mean to pay your fair share?
Ronald Reagan’s election in 1980 ushered in a new, tax-cutting philosophy that gave rise—for better or worse—to a new era in which every president competes to keep taxes as low as possible. In 1981, Reagan’s first year in office, the top tax rate was 70 percent. By 1988, it had dropped to 28 percent.
Today the top tax rate is 39.6 percent, still low by historical standards (more on that later), yet the New York Times recently reported that the super-rich are shielding their fortunes by paying “a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers.” In other words, the very rich pay millions to avoid paying tens of millions in taxes.
But the issue isn’t just tax loopholes, sophisticated avoidance schemes, and legally buying political influence through super PACs, it’s about how we have historically thought about taxes from a societal perspective, and how it relates to our concept of fairness.
The 16th Amendment
For much of American history, a far smaller federal government was almost exclusively funded by customs duties (tariffs). In fact, the first federal income tax wasn’t imposed until 1862, when the Union government needed funds to pay for its part in the Civil War. The highest tax rate, 10 percent, was applied to income in excess of $10,000. When the immediate need for federal revenue decreased after the war, Congress allowed the law to expire.
A new federal income tax was enacted in 1894, but the Supreme Court ruled it unconstitutional the following year, finding that it violated the Constitution’s requirement that federal taxes must be apportioned according to the population of each state.
It wasn’t until 1913, when the ratification of the 16th Amendment cleared away the constitutional impediment, that the federal government began to be funded by taxing the income of individuals and families. At the time, many argued that tariffs disproportionately affected the poor and were an intrinsically limited source of revenue. The newly passed income tax required both individual and joint filers to pay a paltry 1 percent of their income up to $20,000 a year.
Fast forward a little more than a century: today almost half (46 percent) of all federal revenue comes from individual income taxes.
Is the U.S. tax system still “progressive”?
The U.S. tax system is tiered so that different brackets of income are taxed at progressively higher rates. As noted earlier, the current top marginal tax rate—the rate applied to the highest income bracket—is 39.6 percent. This top rate applies to taxable income above $413,200 for a single person or $464,850 for married couples filing jointly. Again, this is a marginal rate, meaning it only applies to that income over and above those thresholds. About 1.3 million taxpayers, or less than 1 percent of all Americans, reach that top bracket.
But at past points in our history, the top marginal rate has been substantially higher. It soared to 94 percent during World War II. And during the eight years (January 1953- January 1961) of Dwight Eisenhower’s presidency, the top rate was a whopping 91 percent. Eisenhower was no socialist—he was, in fact, a Republican—and he presided over faster rates of economic growth than we’re seeing today.
Eisenhower’s approach—and the concept of fairness that drove it—has been decidedly abandoned. Fifty years of tax cuts began when President Kennedy lowered the top marginal rate to 70 percent, accelerated with the huge drops (from 70 to 50 to less than 30 percent) of the Reagan presidency, and have continued to the present day.
Tax the rich?
Recently, a report from Oxfam International concluded that the world’s 62 richest individuals now possess as much wealth as half the world’s population. That’s 3 billion people.
This massively lopsided ratio isn’t just a product of American tax structure; it’s a global phenomenon to be sure. Still, a half-century of tax cuts in by far the world’s richest and most powerful country has undeniably contributed to this extreme wealth inequality.
Americans of the last five decades have been raised in a philosophical climate that equates low taxes with prosperity, self-reliance, and the ability to “keep what you earn.” But when considering the history of taxation in this country and the hugely skewed wealth ratios we are now seeing, is it not time to at least consider landing somewhere in the middle?
According to one study, raising the top tax rate to 67 percent for the top 1 percent of earners would raise about $4 trillion over a decade. That is a lot of money that could go towards programs like tuition-free college, livable pensions, and upgrading America’s increasingly out-of-date infrastructure, to name a few.
Again, it comes down to what you think is fair.
The views and opinions expressed here are those of the author and do not necessarily represent those of Avvo.
3 comments
Annie
Even though the income tax as we know it did not exist until the early 20th Century, I think the Founding Fathers, who were well aware of the problems created by a hereditary aristocracy and the wealth it controlled in European countries, would support its existence if they were alive today. This article is quite helpful in pointing out the history of the federal income tax but it misses several important points. The first is that until the late 70s, there were actually 25 or 26 brackets (it varied slightly from year to year); for those filing as heads of household, the number of brackets was even in the mid-30s. The nadir was reached under Reagan when for three years there were only two brackets. The number gradually rose again, reaching seven brackets beginning in 2013. This reduction in brackets has severely reduced the progressivity of our income tax structure. I would seriously disagree that the top bracket should begin at the income that marks the beginning of the top 1%. While an income of $413,200/$464,850 is far above what most of us (a good portion of the 99%!), it pales in comparison to the super wealthy .1% or even more astoundingly, the .01%. People at the bottom of the top 1% income level are generally those who have worked to get education to become hard-working professionals, executives who carry a great deal of responsibility, or small business owners who have taken risks and, again, worked hard to achieve that income level. While I believe their marginal rate should be higher than that of someone making, say, $60,000, I nevertheless also believe it should be less than that of the person whose taxable income is $1 million or $10 million or the astronomical $1 billion that a couple of Americans now have as an annual income. Tax cut stupidity is destroying this country.
Scarlett
Great article, very informative information on the tax system in this country.
Arnold Cohen
That is an excellent historical presentation. To answer the 'fairness' question first requires a statement of the purpose of the income tax. I suggest that the primary purpose is to raise sufficient money for the Federal government which, in conjunction with other revenues, will adequately fund the expenditures which Congress determines to have the government incur.
Then 'fairness', a word much like 'beauty' being in the vision of the beholder, must be determined for income taxes in principle as a basic standard. The standard which generally is adopted at least by lip service is: a progressive tax whereby those of the greatest incomes bear proportionately more of the tax burden than those of modest and meager incomes. Some corollary principles might be [in no particular order of priority] that: (1) the income tax together with other financial burdens imposed by government should not impoverish any class of people nor preclude them from managing their daily needs; (2) the overall tax structure and financial burdens imposed by government should not significantly diminish the incentives of citizens and taxpayers to contribute to society and the economy by their labor, creativity and investment of their financial resources; (3) income taxes and other financial impositions by government should not violate the Constitution; (4) using the income tax structure for purposes of social, political or economic engineering should be avoided if it will cause deviation from adherence to other basic principles.
It is not easy to reconcile and balance these principles and others that might be adopted. To make it work ways should be determined to avoid or minimize corruption of the process by wealthy and/or politically powerful interests who try to gain a disproportionate advantage at the expense of the taxpaying public generally.