by Randolph T. Holhut
American Reporter Correspondent
April 19, 2006
OUR TAX SYSTEM WASN'T ALWAYS RIGGED AGAINST THE LITTLE GUY
DUMMERSTON, Vt. -- Nobody likes to pay taxes, but people dislike paying taxes even more when they think the game is rigged against them.
A poll commissioned by the Associated Press last week found that six in 10 respondents thought the federal tax system is unfair, a percentage unchanged from two decades ago.
Twenty-five years of tax cutting and jiggling the federal tax code is the reason why. The 70 percent of Americans with taxable income under $50,000 a year have been paying more and more in taxes while the top 0.4 percent, those earning more than $500,000 per year, are paying less and less.
It wasn't always this way.
When the federal income tax law was enacted in 1913, the tax rate was set at 1 percent for income up to $20,000 to 7 percent on income above $500,000. It exempted the first $3,000 of income for single wage earners, $4,000 for a married couple. In today's dollars, that $4,000 exemption would be worth $76,000. Only 1 percent of Americans made enough money in 1913 to pay taxes.
Paying for World War I forced the federal government to raise the tax rates to 2 percent on taxable income over $2,000 to 77 percent on all income over $2 million. There was also an excess profits tax levied on businesses and individuals. Still, 95 percent of Americans paid no income tax.
Industrialist Andrew Mellon led the charge to lower the tax rates on the wealthy in the 1920s. He claimed that doing so would increase overall tax revenues and stimulate the economy. The top rate was eventually cut from 73 percent in 1921 to 25 percent in 1926. Mellon himself saved $800,000 a year in taxes as a result.
But instead of prosperity, the tax cut brought disaster. Too much money went into too few hands. The money fueled a speculation frenzy on Wall Street that ultimately ended in the stock market crash of 1929 and the Great Depression. Taxes went up again in the 1930s; the top bracket would increase to 79 percent by 1936.
They shot up still higher during World War II. The biggest federal tax increase in history occurred from 1939 to 1944 under President Franklin D. Roosevelt. Overall general fund revenue from individual and corporate taxes and other levies rose from $4.8 billion to $40.5 billion, a 744 percent increase. If taxes today were raised at the same rate that they were between 1939-44, the government would have taken in more than $6 trillion, enough money to wipe out most of the national debt in one year.
The top personal tax rate during the war was 94 percent on all income above $70,000, or about $753,000 in today's dollars. Besides helping to pay for the cost of the war, it also succeeded in redistributing income and helped to create the post-war middle class.
In the 1950s, corporations paid an average of 75 cents in taxes for every dollar paid by individuals and families. Today, corporations pay 25 cents for every dollar paid by individuals and families.
In the 1950s, the top individual tax rate remained 91 percent on all income over $400,000. In the 1960s, it was lowered by President John F. Kennedy to 70 percent. Far from being a drag on the economy, the period between 1945 and 1973, when the United States had its highest tax rates on personal and corporate income, the nation saw its most rapid economic growth and the narrowest gap between rich and poor.
But then came President Ronald Reagan and the Republican Party's drive to cut taxes on its wealthiest supporters. By 1986, the top individual rate was cut from 50 percent to 28 percent, lower than any time since the 1920s. It was raised by President Bill Clinton in 1994 to 39.6 percent and was lowered under President George W. Bush to 35 percent.
Thanks to all the "reforms" to the federal tax system over the last 25 years, middle class taxpayers now pay a far greater share in taxes than millionaires and corporations. The top fifth of taxpayers now pay 19 percent of their income in taxes, while the bottom fifth pay 18 percent.
Under the current administration, we get the worst of all worlds - out-of-control deficit spending, aggressive tax cutting that benefits a wealthy elite, the progressive destruction of the middle class and an unfair tax burden on ordinary citizens. And few in Washington have the guts to put a stop to it.
AR Correspondent Randolph T. Holhut has been a journalist in New England for more than 25 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.