Albion Monitor /Commentary
[Editor's note: See also a special item on tax rates in the current 404 section.]

What Real Tax Reform Would Look Like

by Randolph T. Holhut

(AR) After the orgy of IRS-bashing last fall, the conservatives in Congress seem to think our country is ready for serious tax reform -- starting with the abolition of the current tax code.

But look at the alternatives they're offering in its place. One solution that's being hawked is a flat tax of 15-18 percent on income, which would cut the taxes on the wealthy while raising them for the poor and the middle class. Another is a national sales tax, which is also regressive and takes a bigger bite out of the incomes of the lower classes.

To me, the best tax reform would be a return to a strongly progressive federal tax system to make the wealthy and the corporations pay their fair share.

By the 1990s, corporations paid 25 cents for every dollar paid by individuals and families
When the federal income tax law was enacted in 1913, the tax rate was set at one percent for income up to $20,000 to seven 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 1990s dollars, that $4,000 exemption would be worth $58,000 today. Only one 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 two percent on taxable income over $2,000 to 67 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 alone saved $800,000 a year in taxes as a result.

Unfortunately, Mellon's tax cut was a disastrous idea for most Americans. Income was distributed upward, into too few hands. The money was used for speculation in the stock market rather than the creation of jobs. The ultimate result was the Great Depression.

The conservatives would have you believe that President Clinton's 1993 legislation that raised the top federal tax rate from 31 percent to 39.6 percent was the biggest tax increase in history. It wasn't even close. From 1939 through 1944, overall federal general fund revenue from corporate and individual income taxes, excise taxes and other levies rose from $4.8 billion to $40.5 billion, a 744 percent increase. If federal taxes were raised at the same rate they were between 1939-44, the government would have taken in over $5.5 trillion last year, enough money to virtually wipe out the national debt in one year.

Tax rates were raised to help pay for World War II and they stayed high in the postwar years. From the end of the war until 1962, the top rate was 91 percent. Those tax rates, unthinkably high today, coincided with the longest period of prosperity in U.S. history, the creation of a middle class and substantial public investment in education and infrastructure.

In the 1950s, corporations paid an average of 75 cents in taxes for every dollar paid by individuals and families. By the 1990s, they paid 25 cents for every dollar paid by individuals and families. In the 1950's, the top individual tax rate was 91 percent on all income over $400,000. In the 1960s, it was lowered to 70 percent. By 1986, it was 28 percent, the lowest rate since the 1920s.

What would real tax reform look like?
We know what happened when tax rates decreased in the 1980s. As in the 1920s, the number of millionaires tripled. As in the 1920s, financial speculation replaced job creation. As in the 1920s, the rich got virtually all the new wealth that was created. Unlike the 1920s, instead of a total financial collapse, we now have a slow growth economy where the average person has been steadily falling behind.

The share of our nation's wealth held by the richest one-percent has risen from 20 percent in the early 1970s to 40 percent in the early 1990s. It's no coincidence that the increased concentration in wealth coincided with a sharp decrease in the federal tax rate.

Thanks to all the "reforms" that Congress has made to the federal tax system over the last 30 years, middle class taxpayers now pay a far greater share in taxes than millionaires and corporations. With the aid of an army of lobbyists and tax lawyers, the wealthy and corporations have rigged the tax laws so they win huge tax breaks and subsidies at the expense of the rest of us.

Don't believe the hype. The conservatives have not suddenly taken an interest in the federal tax code to save the average person money. They're only interested in "reform" that benefits their wealthy patrons.

What would real tax reform look like? Here's what I'd suggest. Capital gains should be taxed at the same rate as earned income, because the tax rate should be the same, no matter how a dollar is earned. The mortgage deduction should be limited to primary residences and limited to the first $200,000 of value. Deductions should be strictly limited -- outside of homes, children, charitable deductions and retirement savings, there shouldn't be anything more. And the top individual tax rate should return to the 70 percent rate of the 1960s.

Those who have the ability to pay the most in taxes should pay the most. Real tax reform must include provisions to make the rich carry their fair share of the tax burden. It worked in the past, and it can work again.

Randolph T. Holhut is a freelance journalist and editor of "The George Seldes Reader" (Barricade Books)

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Albion Monitor April 15, 1998 (

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