This month is the 100th anniversary of the ratification of the Sixteenth Amendment to the Constitution.
The amendment is not very popular these days, since it’s the constitutional provision that allowed Congress to impose the income tax.
Under relentless attack from Republican defenders of the right of the very wealthy not to pay their fair share, the income tax no longer fulfills the vision of those who favored ratification of the Sixteenth Amendment. Progressives in the early years of the last century supported a progressive income tax, meaning that those who earn higher incomes pay a higher percentage of their income than those with lower incomes. A progressive tax seemed not only fair, but also a useful tool to combat the increasing inequality of wealth resulting from the rapid industrialization of the United States after the Civil War.
At first, the income tax failed to fulfill the progressive hope. The initial top rate was only seven percent. But the rate leaped to 77 percent by the end of World War I in 1918, only to fall to 25 percent by the mid-1920s under the influence of conservative Republican control of the federal government. The Great Depression and World War II reversed that trend, with the top rate hitting 94 percent.
Rates stayed high after World War II, remaining at 91 percent during the 1950s. Most Americans believed that higher rates on higher incomes furthered social stability and progress and stymied unfair concentration of wealth.
Credit, or blame, depending on your perspective, usually goes to Ronald Reagan for the current lack of progressive income taxes. But it was John F. Kennedy who began the retreat from an equitable tax system. Kennedy said in January 1963, “The most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”
Congress followed his lead, lowering top rates to 70 percent. Then came Reagan and his conservative revolution, arguing that if the Kennedy tax cuts stimulated the economy, then further tax cuts would further stimulate the economy. The result: A plutocrat’s dream of a top rate of 28 percent.
Because of historically low top marginal rates and because of loopholes in the tax code favoring the rich, America’s wealthy today pay rates comparable to those paid by average wage earners. The oft-repeated comparison may sound trite, but it’s unfortunately true: The CEO of a multibillion dollar corporation may pay a lower marginal tax rate than his or her secretary.
As Sam Pizzigati and Chuck Collins point out, returning to Eisenhower-era rates of 90 percent or more can be accomplished, but only by redefining the method for calculating the top rate. “Steeply graduated rates, as traditionally structured,” they write, “haven't been sustainable anywhere for more than a few decades. The super-rich have always been able to make them crumble. One reason: The 99 percent have never been able to rouse a passion on behalf of high top rates that matches the passion of the 1 percent -- and the 0.1 percent -- against them. The super-rich essentially take steeply graduated tax rates much more personally than the 99 percent.”
The key phrase for Pizzigati and Collins is “as traditionally structured.” Steeply graduated tax rates are still possible if they are based on “an approach that gives the 99 percent a greater incentive to defend them.”
Pizzigati and Collins suggest tying the top income tax rate -- a new 91 percent maximum rate -- to multiples of the minimum wage. They suggest a multiple of 25, the ratio between the earnings of a CEO and a typical worker in the middle of the 20th century, before corporate pay went completely haywire.
Here’s how their proposal would work: The federal minimum wage sits at $7.25 an hour. A married couple working a minimum-wage jobs earns about $30,000 a year. If entry to the top bracket is pegged at 25 times that, then taxpayers making $750,000 or more would pay the 91 percent top rate. But if the minimum wage rose to $10 an hour, then the top bracket kicks in at one million dollars a year.
Pizzigati and Collins again: “In today's plutocratic America, the rich get richer by exploiting the poor. In an America that tied maximum tax rates to minimum wages, the rich would regularly "get richer" -- that is, pay less in taxes -- only if low-wage workers were taking home bigger paychecks.”
Now that would be a truly Happy Birthday for the Sixteenth Amendment.