(AP Photo/Mike Groll)
Whatever happened to the “progressive” income tax, the notion that taxpayers who make more money should pay taxes at a higher rate? Tax progressivity today has virtually disappeared. We have, in effect, a flat tax for our most financially favored. A taxpayer who pockets $45 million a year—or $450 million—pays federal income taxes at the same top rate as someone making $450,000. That’s not quite what our progressive forebears had in mind 100 years ago this month when they cheered ratification of the Sixteenth Amendment, finally giving Congress the power to impose a federal income tax. Progressives back then hoped the income tax would deal a body blow to plutocracy. But the first tax schedule, enacted soon after the amendment’s ratification in 1913, set the top rate at a mere 7 percent, not the 68 percent progressives in Congress had sought.
World war would soon shift the tax terrain. In 1916, a Congress hungry for war “preparedness” revenue pushed the top rate to 15 percent. With that hike, one prominent House Democrat pronounced, tax rates had reached their “very highest notch.” Not for progressives: in 1917, social reformers ranging from newspaper publisher E.W. Scripps to labor leader Sidney Hillman redefined the tax debate with a national campaign that advocated “a conscription of wealth”—a 100 percent tax on income over $100,000. By war’s end, income tax rates would stretch all the way up to 77 percent.
The post–World War I right-wing resurgence then turned the tax tables. Top rates would fall throughout the Roaring Twenties, down to 25 percent. Treasury Secretary Andrew Mellon, the Pittsburgh iron and steel tycoon, even engineered a $1.27 billion tax rebate for himself and his fellow deep pockets.
The Great Depression and World War II would, in turn, reverse the Mellon tax cuts. First in 1932, and then repeatedly over the next decade, progressives defeated conservative attempts to raise needed revenues via a regressive national sales tax—and kept up the pressure for “soak the rich” rates. By 1942, President Franklin Roosevelt himself was calling for a 100 percent tax rate on income over $25,000 (about $350,000 today). Tax rates would top off at 94 percent during World War II and hover around 90 percent for the next two decades.
High tax rates on high incomes, back in that early postwar era, struck even eminently respectable Americans as absolutely necessary to social stability and progress. Stiff tax rates served “to counteract undue concentration of wealth,” as Wall Street tax lawyer Randolph Paul, FDR’s point man on taxes during World War II, explained in 1947. “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.” Republican President Dwight Eisenhower saw high taxes on high incomes as an antidote to the “opulence” that inexorably leads a nation to “depravity and ultimate destruction.” In the 1950s, under Ike, income over $400,000 faced a 91 percent federal rate. The Eisenhower-era rich, even after loopholes, felt a real tax bite. In 1955, the IRS took 51.2 percent of America’s top 400 incomes.
And today, after thirty years of rising income inequality and shrinking tax progressivity? In 2007, America’s top 400 had an average tax bill, after loopholes, of just 16.6 percent. These 400 reported incomes averaged an astounding $345 million, more than twenty-five times (after adjusting for inflation) the $13 million that the top 400 took home in 1955.
What went so terribly wrong? How could our tax progressivity have deteriorated so astonishingly? The conventional story line blames Ronald Reagan. But the dismantling of tax progressivity began about two decades earlier, under John Kennedy. “As they say on my own Cape Cod,” JFK famously assured America, “a rising tide lifts all the boats.” And nothing would cause the tide to rise faster, he contended in 1963, than tax cuts for everybody, the rich included. Steep tax rates, his economists told him, had become a “heavy drag” on growth, so his administration proposed reducing the top rate from 91 to 65 percent.