Why We Tax: A Timely Reminder for Tax Day
April 15 is fast approaching, and Americans are naturally thinking about taxes. But most of us won’t be thinking about taxes the same way Americans once did. Over the past half-century, we’ve had a profound transformation in our attitudes toward income taxation.
How profound? Consider the tax perspective of Randolph Paul, the corporate tax attorney who helped shape federal tax policy during and after World War II.
Randolph Paul probably thought about taxes — and their role in our society — as deeply as any American of his time. Paul lived and died taxes, literally. In 1956, he slumped over and passed away while testifying about tax policy before a U.S. Senate committee.
Paul’s tax career had started decades earlier. In 1918, just a few years after the federal income tax went into effect, Paul began specializing in tax law. By the 1930s, he had become one of Wall Street’s top tax experts. His clients ranged from General Motors to Standard Oil of California, and probably no one in America knew the tax code — loopholes and all — any better.
That knowledge made Randolph Paul invaluable to Franklin Roosevelt’s New Deal. In 1940, Paul helped New Dealers write an excess profits bill. In 1941, right after Pearl Harbor, he joined the Treasury Department and worked to make sure that all Americans, the wealthy included, contributed financially to the war effort.
Paul succeeded. By 1944, the federal income tax had become a major presence in American life. Most Americans, for the first time ever, were paying income tax — and rich Americans were paying the most taxes of all. During the war, the tax rate on income over $200,000, about $2.6 million today, jumped to 94 percent.
Two years after the war, back in private practice, Paul published his masterwork, the ultimate distillation of his thinking about tax policy. His new book, Taxation for Prosperity, presented a carefully argued case for continuing high wartime tax rates on peacetime high incomes.
Taxation for Prosperity drew a distinction between “a mature economy” and a “mature approach to economic problems.” The immature in a mature economy, Paul noted, preach “the gospel that taxes are for revenue only.”
In fact, Paul would argue, taxes in a mature economy offer us “powerful instruments for influencing the social and economic life of the nation.” With “well-planned taxes,” we could avert a next depression.
By “well-planned taxes,” Paul meant progressive taxes, steeply graduated levies that kept as much money as possible in the pockets of “people in the lower brackets.” Lower-income people, Paul explained, “have a higher propensity to spend.” Their spending keeps “the wheels of industry turning.”
For people in higher income brackets, by contrast, a “well-planned” tax system meant high tax rates.
“The people with high incomes can best afford to contribute to the support of the government,” as Paul noted, “and the failure to impose substantial taxes in the upper brackets would seriously injure the morale of the rest of the taxpaying public.” High taxes on people of high income, Paul continued, also “perform the valuable service of preventing more saving than our economy can absorb,” soaking up the excess that would otherwise wind up devoted to destabilizing speculation.
Could taxes on the rich ever go too high? That danger, Paul acknowledged, does exist in an economy that “depends upon the profit motive.” So taxes on the rich ought always be kept at a level that “fosters economic activity.”
But the “need for this incentive,” Paul added, fades away “when we reach the highest brackets.” At that point, tax rates ought to rise “very sharply ” to help “counteract undue concentration of wealth.”
In other words, Paul summed up, we need a tax system that keeps “the nation’s wealth” from flowing “into the hands of too few.”
Sign up for Too Much
Over the next two decades, in the 1950s and 1960s, we had a tax system that for the most part played that role. Tax rates on America’s rich hovered at high, near World War II-era levels, and average Americans, over the course of these years, prospered as never before.
Since then, we’ve gone in the opposite direction. Our nation’s tax experts — and the elected officials they advise — no longer think about taxes as a tool for combatting our “undue concentration of wealth.” They see taxes as a matter of raising revenue pure and simple.
Randolph Paul considered that attitude “immature.” We should, too. Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, writes widely about inequality. His latest book, The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970, has just been published.