Populists, plutocrats and the GOP sales tax
February 1913 marked a turning point in U.S. history. One hundred years ago this month, the states ratified the 16th Amendment, clearing the way for adoption of a federal income tax. Two decades before, in 1892, the Populist Party had first put a progressive income tax on the national agenda.
The income tax faced steep conservative opposition. Since it was enacted, in fact, the political wars over income tax have never stopped. Conservatives battled against it when it was first proposed and have continued the struggle ever since. Now, Tea Party conservativism has given that fight new force.
The economist Joseph Schumpeter called tax systems the âthunder of world history.â Because if you dig beneath the rhetoric, tax systems reveal the underlying direction in which societies move. The saga of the income tax says a great deal about changes in America.
In the decades before the income tax, the rich grew extremely rich while most Americans struggled on the edge of poverty. Mark Twain dubbed it the Gilded Age: Plutocrats built ever-bigger mansions; hard times pressed on everyone else. Yet by the 1950s, the income tax had played a crucial role in the mix of policies that narrowed the income gap and built a broad middle class.
Over the past 35 years, however, those policies have been under siege.
Corporations have bent the regulatory regime to their will. Legal barriers have helped efforts to dismantle the trade unions. And conservative assaults have pounded the progressive structure of the income tax. As a result, the United States is experiencing a crisis of inequality not seen since the last Gilded Age.
Todayâs Republicans want to take this a step further. They are doubling down on the century-old conservative goal of doing away with the income tax. They see it as discriminating against the richest Americans. And they want to replace it with sales and excise taxes â levies that place the heaviest burden on working and poor Americans.
Abolishing the income tax enjoys strong support in the Republican House of Representatives. But in Washington, Republicans need to negotiate with a White House that is holding out for some measure of tax equity.
This is why the real tax action is at the state level. Governor Bobby Jindal of Louisiana, with GOP governors in Kansas, Nebraska and other states, is pushing to end state income taxes and replace them with sales taxes. The common denominator of all these GOP schemes is that they will punish working and poor people â and make the rich richer.
Over the past three years, states with GOP governors and legislatures have become the testing grounds for the conservative vision of government. They have moved aggressively to break what is left of the trade union movement, to restrict womenâs reproductive rights and to limit the voting rights of minorities, the young and the poor. The latest moves are state experiments in conservative tax policy. Jindal and the GOP have now turned their guns on state income taxes.
This puts into context Jindalâs recent speech before the Republican National Committee in Charlotte, North Carolina. There, he warned his fellow Republicans that the GOP needed to convince voters it is not just the party of the wealthy. âWe must not be the party that simply protects the well off,â Jindal said, âso they can keep their toys.â He asserted, âWe are a populist party and need to make that clear.â
Conservative pundits welcomed Jindalâs speech as a hopeful sign of the GOPâs future. But the thunder of Jindalâs tax plan speaks louder than his rhetoric. His conservative vision is firmly stuck in the past. To be precise, it is stuck in the America before the income tax â when the tax system plundered the poor and funneled wealth to the rich.
Jindalâs talk about the GOP as âa populist partyâ is clearly misleading. In the 1890s, the original farmer-labor Populists stood for economic justice.
That is why the Populist Party (also known as the Peopleâs Party) fought hard against the consumption taxes that benefited plutocrats at the expense of the rest. That is why they fought for the progressive income tax to address a growing crisis of inequality. And that is why any Populist worthy of the name would recognize that the Jindal-GOP tax schemes are all about making sure todayâs plutocrats âcan keep their toys.â
Before 1913, a slanted taxing system deepened the economic divide. Most federal revenue came from consumption taxes. People paid import taxes (the tariff) on everything from coffee to cook pans, and excise taxes on alcoholic beverages and other products.
To use the language of todayâs conservatives, taxes were âflat and fairâ â everyone paid the same amount. A poor cotton farmer paid the same tax on a pound of coffee that Jay Gould and other Wall Street tycoons paid for their pound of coffee. The tax was small. So it meant nothing to Gould. But even small taxes burdened the poorâs meager incomes.
Worse, when it came to the division of government outlays there was nothing âflat and fairâ about it. The super-rich gobbled the lionâs share. Gould reaped millions in federal subsidies for his railway schemes, and millions more when the schemes went bust and the government bailed him out.
In short, the tax system redistributed wealth upward â to Wall Street financiers and the super-rich. To remedy this injustice, the Populists proposed a progressive tax on incomes. It would accomplish three Populist goals:
First, it would mean that the wealthy, who could most afford to pay taxes and benefited most from government subsidies, would pay their share of the tax burden.
Second, it would provide funding for infrastructure projects, the postal service, education and scientific research, and other needs of the people not met by the private sector.
Third, it would help close the income gap. As the Populists put it, the country was turning into âa land of tramps and millionaires.â Instead of redistributing wealth upward, the income tax would support a broad-based prosperity.
Under Populist pressure, Congress passed an income tax in 1894, only to have a conservative Supreme Court decide that the tax posed a âcommunist threatâ and rule it unconstitutional. The Populist Party was mortally wounded by the 1896 elections. But in that election, William Jennings Bryan, the Democratic candidate, stumped for the income tax.
By the 1912 presidential race, the income tax had wide public support. All four presidential candidates endorsed it: William Howard Taft (Republican), Woodrow Wilson (Democrat), Theodore Roosevelt (Progressive) and Eugene Debs (Socialist). On Feb. 3, 1913, Delaware, the last of the required three-quarters of the states, ratified the 16th Amendment and opened the door for the federal income tax
The original tax applied only to upper incomes, and rates ranged from 1 percent on the merely well-to-do to 7 percent on the richest Americans. But the principle was in place.
In the years after World War II, the income tax had a broader base and top rates ranged from more than 90 percent in the 1940s and â50s to 70 percent in the 1970s.
The effects were just as the Populists had hoped. The income tax funded infrastructure (interstate highways), education and research. It also helped narrow the gap between the super-rich and everyone else. It was part of the mix of policies that lifted millions of poor Americans into the middle class and sustained a widely shared prosperity.
But conservatives never reconciled to the income tax. In the 1920s and â30s, a conservative bloc in Congress pushed to replace income taxes with a national sales tax. In the early 1960s the John Birch Society, the Young Republicans and other right-wing groups demanded repeal of the 16th Amendment. So did âMr. Conservative,â Senator Barry M. Goldwater, the 1964 GOP presidential candidate.
At the same time, conservatives fought to make income taxes âflatterâ â or less progressive. The breakthrough came in the Reagan years. But even before President Ronald Reagan, both Democrats and Republicans supported flattening rates. By the end of Reaganâs presidency, top rates had tumbled to as low as 28 percent.
Twenty-five years later, the erosion of progressive taxes means that a billionaire like Warren Buffet pays a lower tax rate than his secretary. Yet Republicans in Congress still demand more cuts to taxes on capital gains, estates and other gifts to the super-rich.
In addition, Tea Party conservatives repeat the old right-wing demand for repeal of the 16th Amendment. Conservative Websites spin conspiracy theories about the amendment being unlawfully ratified. Tea Party hero and former Representative Ron Paul attacks income taxes as âtotalitarianâ and âMarxist.â His idea of âtax reformâ is restoration of 19th century tariffs and excise taxes.
Meanwhile, the Cato Institute and other well-funded conservative think tanks push for replacing income taxes with consumption taxes and other means to plunder the poor and enrich the wealthy.
Taking their cues from the Tea Party and the corporate think tanks, Jindal and the other GOP governors seem to be searching for ways to make state taxes even more inequitable. Most states already have a regressive tax system. The rich pay lower tax rates than everyone else because states rely more heavily on sales taxes than income taxes. Yet unlike most people who spend what they earn, the rich spend less of their money on taxable purchases. This makes a sales tax, by its very nature, a class tax in favor of the wealthy.
Some sales taxes are even worse. Alabama, for example, taxes groceries â which punishes the poorest people in one of the poorest states. Or what about excise taxes on beer? They are based on the given quantity of the beverage taxed. In other words, a retiree living on Social Security pays the same tax on a 75-cent can of Pabst as a hedge fund executive pays on his $3 bottle of exotic ale.
It may be only a small tax. The retiree living on a budget, however, might feel it; an executive charging it to an expense account would not. And dollar for dollar, the retiree will pay four times the tax that the executive pays.
As for Louisiana, it already has a light income tax but the third-heaviest sales tax in the country. Jindalâs plan to abolish the income tax will mean higher taxes for 80 percent of Louisianans. It will hit the poorest 20 percent the hardest. And the big winners will be those with annual earnings of $1 million or more, who would receive tax cuts averaging more than $25,000.
Jindal wants to change the public perception of the GOP as the party of the rich and the super-rich. He wants to provide his conservative party with a glossy coat of âpopulistâ paint. But tax systems are the best measures of such claims. They reveal the underlying essentials of how societies work. The original Populists of the 1890s fully understood that consumption taxes fueled inequality by allowing the super-rich to amass fortunes at everyone elseâs expense.
The sales tax schemes of the modern GOP move in the same direction.
ILLUSTRATION (Top): MATT MAHURIN
PHOTO (Insert A): Louisiana Governor Bobby Jindal speaking at the Republican Leadership Conference in New Orleans, Louisiana, June 17, 2011. REUTERS/Sean Gardner
PHOTO (Insert B): Robber Baron Jay Gould, between 1865 and 1892. LIBRARY OF CONGRESS
PHOTO (Insert C): William Jennings Bryan @1907. LIBRARY OF CONGRESS
PHOTO (Insert D): Senator Jack Kemp (R) was a leading advocate of the flat tax when he was chosen by Senator Bob Dole to be his running mate on the Republican presidential ticket in 1996. REUTERS