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March 31, 2013


I have blogged at length before on the current inequities of the internal revenue code and (to a lesser extent) their historical antecedents. Since the internal revenue code has just celebrated its 100th anniversary, I propose to some extent to correct that historical shortcoming in this essay.

When the Constitution (per the Supreme Court) prohibits a tax on income and it is felt that such a tax is necessary and desirable, the only way to have such a tax is to amend the Constitution to make it clear that income is taxable, and so we did. The 19th Amendment to the Constitution reads as follows: “The Congress shall have power to lay and collect taxes on incomes, FROM WHATEVER SOURCE DERIVED (my emphasis), without apportionment among the several states, and without regard to any census or enumeration.”

We have defined and redefined “incomes” ever since via congress and the courts to suit the whim and caprice of taxpayers, both corporate and individual. The Amendment does not define “income,” so now we have “carried interest,” “dividend income,” “capital gains income,” “ordinary income” and any other redesignated and redefined form of remuneration to taxpayers that tax lawyers and international accounting firms can concoct for amendment to the internal revenue code on behalf of their taxpayer clients, always with a view toward a lower rate of tax for their clients on whatever kind of income they have decided to call it, whether such taxpaying clients are corporate or individual.

The whole idea of progressive taxation has turned out to be a joke. The theory was that the more you made, the more you paid. It hasn’t worked out. See Mitt Romney’s rate of taxation at less than half of what his janitor pays, or worse, see GE in 2010 which made hundreds of millions in profit and not only paid zero taxes – they received a tax refund of THREE BILLION DOLLARS! So much for the bedrock principle that the more you make the more you pay! Rates are pliable, depending on how income is classified, and rich people and corporations have the wherewithal (both pecuniary and political) to keep reduced rates available to themselves, but not to you and me, who pay full freight.

Our country had a WW II postwar president barely 40 years after the 1913 constitutional amendment who presided over a tax rate of 91% for taxpayers whose income was $400,000 or more in a taxable year. He saw high taxes on high income as an antidote to the “opulence” that inexorably leads a nation to “depravity and ultimate destruction.” In 1955, the third year of his first term, the IRS took 51.2% of America’s top 400 incomes. The president was Dwight Eisenhower, a Republican!

So where do America’s top 400 taxpayers stand today in this era of rising income inequality and shrinking tax progressivity? In 2007, America’s top 400 had a tax bill, after loopholes, of just 16.6% (compared to 51.2% in 1955 as above cited). Those 400, whose reported incomes averaged an astounding $345 million, more than 25 times (even after adjusting for inflation) the $13 million on average that the top 400 took home in 1955, are making out like bandits, and complaining via their tea party and other political hacks that their taxes are too high!

How could such a giveaway to the rich and corporate class happen? How could the bedrock principle of progressivity (the more you make the more you pay) in income tax become a laughing stock in tax lore? Most of us have blamed Ronald Reagan with his cut to 50% and then 28% on top-tier taxpayers, and such cuts were indeed unconscionable since they ignited a long term debt problem that has persisted (and exacerbated by the “deficits don’t matter” tactics of the Bush administrations) to this day.

However, John Kennedy must also bear part of the blame for having reduced the top rate from 91% to 65% in 1963, when he famously assured America that “a rising tide lifts all boats.” Our experience, unfortunately, has been that a rising tide lifts SOME boats, and they are not the boats of the working poor and middle class. They are the boats of the rich and corporate class (with the aid of K Street lobbyists who work day and night to reduce the taxes of that class and who do a good job; the internal revenue code averages one amendment a day!).

So what has been the historical result of the Kennedy/Reagan/Bush tax cuts? Particular results have varied, but it is safe to say that one of the major outcomes of these cuts is the restoration of the plutocratic class largely composed these days of zillionaires in Wall Street banks, equity and debt markets, hedge and equity funds et al.

Wall Street has not always looked upon the tax code as a subject to be manipulated and plundered, perhaps surprisingly. In 1947, Wall Street tax attorney Randolph Paul stated that “If the nation’s wealth flows into the hands of too few rather than into the hands of the many, the resulting amount of saving will be greater than can be absorbed. Our economy can take only so much of this sort of thing before it has a violent convulsion.”  What he was saying was that money has to be in the hands of the people because there were too few consumers in the plutocratic class. It’s the same old story – adequate aggregate demand is what makes an economy hum, and such demand is absent where wealth is concentrated in the hands of the few (as is increasingly the case these days). S & P and the Dow do not mirror the strength of our domestic economy now; they rather measure the economy for the rich and corporate class while the rest of us remain in the vise of near-recession.

It is probably politically impossible now to get a raise in the tax rate on incomes of the rich and corporate class per se, even as our deficits and long term debt persist. What can we do to increase revenue to our treasury and mitigate the inequalities of tax treatment as it is now provided in the tax code? We could start with closing loopholes, ending tax preferences for capital gains, dividends and carried interest fictions (all of which should be taxed as ordinary income). We could insist on a Tobin Tax, a tax on the exchange of stock and other financial instruments in the market. We could enact a wealth tax, as many other countries have. We could enact a carbon tax (which would enhance treasury income and help out on environmental concerns a well, an added bonus).

The Constitutional Amendment authorized a tax on income from whatever source derived but left the statutory implementation of such a newly-based taxing power up to the congress to set thresholds, rates etc. Perhaps we should go to the congress with a bill which would set a 90% maximum rate on income over a (for instance, 20 to 1) multiple of our country’s minimum wage (currently $7.25 an hour). A married couple at minimum wage earns about $30,000 a year. CEO and other corporate executives would under such a plan pay taxes at a rate of 90% on all over 20 times $30,000, or $600,000. Their companies can pay them as much as they please, but anything over $600,000 would be taxed at the maximum rate of 90%. Income would be redefined as salary, commissions, stock options, delayed compensation, annuities and other contractural remuneration of any kind so as to avoid a narrow definition of “income” and thus allow these wealthy taxpayers to avoid or even evade the impact of paying taxes in timely fashion on all remuneration.

Such an idea for legislation, in addition to bringing more equal treatment to taxpayers under the code, would encourage the rich and corporate class to favor increasing minimum wages, since their threshold for application of the maximum tax would increase as minimum wages increased. Thus, for instance, if minimum wages were to go to $10 an hour in the above example, their exemption of income from the maximum rate would go up accordingly. They, finally, as the modern expression goes, would have some skin in the game. They have none now, and it shows in their mistreatment of the poor and middle classes via their sponsorship of resistance to increases in the minimum wage, right to work legislation and other such ALEC right wing initiatives designed to keep the poor and labor subservient to the rich and corporate class.

Such a link between the financial fates of the rich and corporate class and minimum wage workers as set forth above would finally and legally put some truth to the old saw about how a rising tide lifts all boats when the only way wealthy people can get more untaxed or lesser taxed income wealth is to share the economy’s bounty with those at the bottom end of the spectrum. Such a good outcome also serves the necessity for stimulation of aggregate demand in the economy. With more money broadly distributed into the pockets of people who will spend it, demand is enhanced and unemployment is reduced, and with the yet additional bonus that the newly-employed become consumers as well, a Keynesian solution that works.

Whether 1913, 1955 or the tax-cutting years of Kennedy, Reagan and Bush the younger, the history of the internal revenue code is an interesting one, and one now over a century of years in age. It is by far the most amended statute in the United States Code, which reflects the work of lobbyists who contribute and friendly politicians eternally on the lookout for “campaign contributions.” (Whatever inferences you may wish to draw from this latter connection – you are free to make.)

Happy 100th birthday, Federal Income Tax!  GERALD  E

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