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Tax Struggle
Loop hole ...
Making the Rich Pay
Their Fair Share


Making the rich pay their fair share was the idea behind the income tax. But who pays depends on who has political power.


Nothing is certain in life except taxes and class struggle. And nothing illustrates the meaning of that old-fashioned term "class struggle" better than taxes.

No one likes to pay taxes. But that’s where the similarity ends. The wealthy can afford to pay taxes but would rather have workers lighten their load by paying a greater share of the tax burden. Living from paycheck to paycheck, working people have a hard time paying more than their fair share.

The rich would have us think that lower taxes for them are actually good for us. "The prosperity of the lower and middle classes depends upon the good fortune and light taxes of the rich," said multi-millionaire Andrew Mellon, treasury secretary under Presidents Harding, Coolidge and Hoover. He probably believed it, too. The same message is repeated today.

Politics is often about who gets handed the tax bill. Rush Limbaugh says, "It’s time to get serious about raising taxes on the poor." UE advocates reduced taxes on working-class Americans and higher taxes on the wealthy and corporations.

To put it another way: "One class struggles to throw the burden off its own shoulders. If they succeed, of course, it must fall upon others. They also, in turn, labor to get rid of it, and finally the load falls upon those who will not or cannot make a successful effort for relief."

That’s how a Supreme Court justice summed up the debate a century ago, when unions and labor parties were demanding that the United States establish an income tax.

It may sometimes seem difficult to believe today, but the income tax was (and still is) the best device for placing the tax burden on those with the money.


Back in the 1830s, rich men taxed working men for the privilege of voting and buying their tools and clothing. The nation’s first labor parties argued in favor of replacing poll and sales taxes with taxes on income, property and bonds.

Fifty years later, union-backed parties advocated a graduated income tax. Then came the People’s Party, a coalition of debt-weary farmers, factory workers and miners also known as the Populists. They likewise called for a graduated income tax to make the wealthy pay their share of the cost of our national government. In the early 1890s, the Populists elected members of Congress, governors and state legislators; the Populist presidential candidate carried three states in 1892.

Political pressure for change forced Congress in 1894 to enact an income tax.

The wealthy were horrified. The Supreme Court declared the act unconstitutional. More years of political pressure led to the adoption in 1913 of the Sixteenth Amendment, which allowed the federal government to levy taxes on personal income.

The income tax was (and, to some extent, still is) graduated and progressive — meaning that in stages, the tax rate is higher on larger incomes. Back in 1913, workers and farmers thought this made good sense. The robber barons who had become fabulously wealthy by looting the nation’s resources and exploiting labor ought to be required to give back some of their ill-gotten gains.


Now here’s a fact worth remembering: when the income tax first went into effect, only the rich paid.

In 1941 the rich (the owners and managers of industry) paid 55 percent of all federal taxes and workers 45 percent.

Exemptions excluded most workers from taxation until the 1940s. Even in 1944, at the height of wartime, only 16 percent of the average factory worker’s income was subjected to the federal income tax. The tax bite was a mere 4 percent of income. There wasn’t even a payroll deduction until 1943, during wartime.

Directed mainly at the big money, the income tax supplied as much as 59 percent of the federal budget. A top rate of 90 percent whacked the income of the super-rich. President Franklin D. Roosevelt, elected with labor support, said no American should have an income of more than $25,000 after taxes — about $250,000 in today’s money.

But the class struggle over taxes continued. In the White House, the goal of fairness and social equality died with Roosevelt. The corporate elite came back in full control. Unions came under attack. (UE, in particular, was targeted for extinction.)


Loopholes allowed the wealthy to weasel out of paying the high rates required. Workers, meanwhile, became stuck paying more taxes as the exemptions failed to keep pace with their rising income. In 1964 the UE NEWS complained that the exemptions covered only 54 percent of workers’ income, instead of the 16 percent 20 years earlier. The federal tax bite took 10 percent of workers’ income, instead of the 4 percent in 1944.

UE welcomed the tax cuts enacted in February 1964 which gave workers a couple of bucks of extra income but condemned the much bigger gains going to millionaires. The union’s position, repeated annually throughout the 1950s, 1960s and 1970s — zero taxes on incomes below a level needed for a moderate standard of living.

Over the years the burden on working people became ever heavier as loopholes became more outrageous and the tax rate on corporate income declined. In 1960 corporations paid 24.2 percent of all federal taxes. By 1976, after demanding additional deductions, credits and other loopholes, corporations paid only 15.5 percent of all taxes.

While in 1960 34.5 percent of all taxes collected by the federal government were withheld from workers’ paychecks, just 16 years later that figure had risen to 41 percent. The Vietnam War made the problem worse — "it isn’t Welfare that is soaking up the taxes, it’s Warfare," UE pointed out in 1971.


Tax bite ...

During World War II, personal income exemptions covered all but 16 percent of the average factory worker’s income. Today, twice as much of the average worker’s income is subject to the income tax. The wealthy and corporations have succeeded in shifting much of the tax burden to working people. To achieve fair taxation, UE calls for higher taxes on the wealthy and corporations and lower taxes on working-class Americans. (The table is based on the average factory wage and a family of four with standard deductions.)

Illustration based on a graphic by Fred Wright
in the UE NEWS, February 10, 1964.

Meanwhile, the expansion of state and local taxes made the burden on working people nearly unbearable. State taxes are even friendlier to the wealthy than federal taxes. For the most part, these are regressive sales and property taxes — meaning, the more money a person has, the lower the tax burden. A 7 percent sales tax on a car takes a bigger bite out of a working person’s income than that of a rich person. When the Reagan and Bush Administrations in the 1980s dismantled federal programs and placed greater responsibilities on the states, working people got socked again, with a heavier tax burden.

At Reagan’s request, Congress in 1983 slashed the top income tax rate from 70 percent to 50 percent. The 1986 tax reform act closed loopholes but dropped the top marginal rate to 28 percent. Under Bush and Clinton, the top rate edged back up to 31 percent in 1991 and to 36 percent in 1993. Not only was the top rate now far below the 91 percent when Kennedy took office 30 years earlier, it was still below the top rates levied on the rich in many other industrialized countries.

Written by lawyers and millionaires for the benefit of those who could afford the best lawyers and accountants, tax law became terribly complicated.

Working people became so frustrated with the tax system that some responded favorably to calls by multi-millionaires to eliminate the income tax. Proposed as a replacement to the income tax were a national sales tax and a flat tax, which would bear down even harder on working people and leave untouched great piles of money owned by the corporate elite.


The super-rich were just being greedy, of course. "From 1977 to 1994, the average after-tax income of the wealthiest one percent of Americans rose 72 percent, after adjustment for inflation, and the average income of the nation’s top 20 percent of families rose 25 percent," reported the Center on Budget and Policy Priorities. "But the average after-tax income of the poorest fifth of the population dropped 16 percent during this period."

In 1994 the wealthiest one percent of Americans received as much after-tax income as the bottom 35 percent combined, and the top 20 percent had nearly as much income as the bottom 80 percent. The unfairness of the tax system, like the decline of union strength, contributed to the growing gap between rich and poor.

The 1997 Clinton-Republican tax package did little to alter that state of affairs. "Do not be fooled by the provision of health insurance to poor children, or the handful of beneficial or palatable changes in the tax bill," editorialized Multinational Monitor. "The Clinton Administration’s support of this tax bill is the most recent shameful act of an administration that has compiled a long record of favoring the rich at the expense of the poor."

The richest one percent gained almost one third of the total value of tax cuts in the 1997 bill; the top five percent took almost half the tax cuts, while the richest 20 percent got more than 75 percent.

"Basically, just about anything that has been discussed that’s positive for investors, and thereby positive for Wall Street, has happened," a Smith Barney executive told the press in commenting on the 1997 tax package.


And what was in it for the rest of us?

Most taxpayers filing their returns last April had little reason to cheer the Clinton-Gingrich tax package, wrote Robert McIntyre of Citizens for Tax Justice. "Only one in 17 taxpayers making less than $59,000 will see a tax reduction... For the 80 percent of taxpayers who fall into that income group, the average tax cut will be $6. Even for the 15 percent of tax filers making $59,000 to $112,000, the average tax cut is only $81." Two-thirds of the "taxpayer relief" promised by the bill went to best-off 1 percent of taxpayers with incomes of more than $666,000, he said.

Despite its many flaws, the tax system is still somewhat progressive. In 1994, the richest 1 percent paid 33.2 percent of their income in all kinds of federal taxes, a higher cumulative rate than the next four percent, and so on. Well-off Americans paid $18 billion more income tax in 1995 than they did in 1993, mostly because they were richer. Their total incomes rose by a mind-boggling $57 billion over those two years.


The problem is that a number of loopholes and dodges allow the very wealthy to shield their incomes from taxes. Working people have little protection; instead, Congress has closed practically all deductions allowed to workers.

As a result of the deductions and credits available to the wealthy, 998 top earners with adjusted gross income totaling $600 million paid no income taxes at all in 1995. Ninety-seven percent of the super-rich paid less than the top rate of 35 percent rate, 81 percent paid less than 30 percent, 43 percent paid less than a 25 percent rate.

Much of the tax "reforms" bandied about in Washington — like the flat tax and value added tax proposals — would replace an unfair tax system with a worse plan that would benefit the wealthy at the expense of working people.

What can be done?


Corporate Share of Federal Income Taxes

Corporations have succeeded in shifting their share of the tax burden to working people. In 1940, corporate income taxes alone accounted for more than 41 percent of all federal tax collections. Over the last 50 years the corporate contribution has declined steadily. Cuts in the corporate tax rate, combined with wasteful military spending in the 1980s, caused the federal deficit to balloon. And corporations make an even smaller contribution to state coffers: in 1997, taxes on corporations represented just 6.9 percent of state tax collections.

Source: UE Research Department, Historical Statistics of the United States (1975), Statistical Abstract of the United States

Delegates to UE’s National convention last year demanded that "Congress and state legislators reform the tax system by increasing taxes on the wealthy and corporations and reducing taxes on working-class Americans." The convention also demanded that "Congress and state legislators end corporate welfare and other corporate tax breaks, especially tax breaks that help companies close plants or move jobs."

(The Labor Party calls for higher income tax rates for the rich and the elimination of all tax loopholes used by the rich and a 100 percent tax on that portion of executive salaries exceeding 20 times the average worker’s pay in that corporation.)

How should taxes on working people be lowered? For many years UE took the position that no income taxes should be levied on income needed to sustain a modest but adequate standard of living, based on U.S. Labor Dept. estimates. The Labor Dept. no longer makes such estimates.

Here’s an idea: No federal income tax on incomes lower than $100,000, period, with automatic increases of that floor.

Taxes will be fair and simple for the majority of Americans when working people succeed in placing the tax burden squarely on those with the money.

UE News - 03/99


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