The Benefit and The Burden: Tax Reform Why We Need It and What it Will Take by Bruce Bartlett
"The Benefit and The Burden" is a very solid, no-nonsense book that makes the compelling case for tax reform and what it will take to do so. In an even-handed, non-partisan manner Bruce Bartlett skillfully makes the US Tax System accessible to the masses. Bartlett's background in government economics and having worked on the staffs of Congressmen Ron Paul and Jack Kemp and as deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration, serves him well to write such a topical and important book. A book about tax reform can be dry and tedious to read at times but Bartlett's lucid and concise prose makes this book a worthwhile read. This educational 288-page book is composed of twenty-four chapters and broken out into the following three parts: Part I. The Basics, Part II. Some Problems, and Part III. The Future.
Positives:
1. Well-written, and exhaustively-researched book that is accessible to the masses.
2. No-nonsense, lucid and concise prose. The author writes with conviction and expertise.
3. Does a very good job of keeping the chapters short and intelligible.
4. Educational and enlightening book that provides a basic foundation in understanding the US Tax System.
5. Despite Bruce Bartlett's work in Republican administrations, he is even-handed and treats this topic with utmost respect and care. He does not shy away from criticizing any party.
6. In general, the author provides persuasive arguments for his thesis.
7. Good use of charts to illustrate points.
8. The author tell you his biases right up front.
9. A brief history of taxation.
10. Explains the tax system process.
11. Generally does a good job of defining terms and provides simplified examples.
12. Does a very good job of differentiating between conservatives and liberals regarding tax reform.
13. Reality versus perceptions.
14. Some eye-opening facts, "A 2011calculation by the CBO concluded that the Bush tax cuts reduced federal revenues by $2.8 trillion between 2002 and 2011".
15. The factors that contribute to economic growth. The purpose of investments.
16. The basic ways that that income can be taxed.
17. Distinctions between U.S. and foreign tax systems.
18. Tax ideas from other countries. Interesting.
19. The impact of tax credits.
20. Understanding social welfare and how we compare to other countries.
21. The goals of tax reform.
22. Heath care policies.
23. Real estate and tax policies.
24. The impact of state and local taxes, surprisingly educational.
25. Charitable contributions.
26. The special problems of capital gains.
27. The even bigger problem of corporations as it relates to tax policy.
28. The critical goal of tax reform, how to improve the tax collection system. Interesting cases.
29. A look at flat tax and the implications.
30. A brief summary of tax reform proposals.
31. The problem of debt.
32. Value-added tax (VAT), a look at this interesting consumption tax. Arguments for and against it.
33. The future of tax reform.
34. A good summary of what the author would like to see happen and what he feels is the best scenario for tax reform.
35. Tea Party criticism.
36. The author provides extensive reading material and I mean extensive.
Negatives:
1. Despite the best intentions tax reform can be dry and tedious.
2. Let's face it economics is a complex topic and some concepts will go over the heads of many readers.
3. I would have liked an analysis of entitlement programs.
4. A breakout of the budget by categories and an analysis would have been welcomed.
5. A glossary of terms would have added value.
6. A little humor never hurts.
7. In order to keep the book to a manageable level, some topics were sacrificed.
8. No direct links in Kindle.
In summary, this was an educational and informative book. If you are interested in learning the basics of the US Tax System and tax reform this is a good book to start. Bartlett provides a plethora of resources for those who want to sink their teeth further into this topic and the information that he does provide is solid and well grounded. The book can be dry at times and some topics may be beyond the reach of the layperson but in general the author does a commendable job of making the book accessible and keeping the book concise. I learned a lot from this book and the author successfully addresses the main issues of his subject. If you are interested in this topic by all means get this book, I recommend it.
Further suggestions: "
Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class
" by Jacob S. Hacker, "
Screwed: The Undeclared War Against the Middle Class - And What We Can Do about It)
" by Thom Hartmann, "
The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis
" by Michael W. Hudson, "
Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else
" by David Cay Johnston, and "
The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It
" by Les Leopold.
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The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take Hardcover – January 24, 2012
by
Bruce Bartlett
(Author)
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A spirited and insightful examination of the need for American tax reform—arguably the most overdue political debate facing the nation—from one of the most legendary political thinkers, advisers, and writers of our time.
A thoughtful and surprising argument for American tax reform, arguably the most overdue political debate facing the nation, from one of the most respected political and economic thinkers, advisers, and writers of our time.
The United States Tax Code has undergone no serious reform since 1986. Since then, loopholes, exemptions, credits, and deductions have distorted its clarity, increased its inequity, and frustrated our ability to govern ourselves.
At its core, any tax system is in place to raise the revenue needed to pay the government’s bills. But where that revenue should come from raises crucial questions: Should our tax code be progressive, with the wealthier paying more than the poor, and if so, to what extent? Should we tax income or consumption or both? Of the various ideas proposed by economists and politicians—from tax increases to tax cuts, from a VAT to a Fair Tax—what will work and won’t? By tracing the history of our own tax system and by assessing the way other countries have solved similar problems, Bartlett explores the surprising answers to all of these questions, giving a sense of the tax code’s many benefits—and its inevitable burdens.
Tax reform will be a major issue debated in the years ahead. Growing budget deficits and the expiration of various tax cuts loom. Reform, once a philosophical dilemma, is turning into a practical crisis. By framing the various tax philosophies that dominate the debate, Bartlett explores the distributional, technical, and political advantages and costs of the various proposals and ideas that will come to dominate America’s political conversation in the years to come.
A thoughtful and surprising argument for American tax reform, arguably the most overdue political debate facing the nation, from one of the most respected political and economic thinkers, advisers, and writers of our time.
The United States Tax Code has undergone no serious reform since 1986. Since then, loopholes, exemptions, credits, and deductions have distorted its clarity, increased its inequity, and frustrated our ability to govern ourselves.
At its core, any tax system is in place to raise the revenue needed to pay the government’s bills. But where that revenue should come from raises crucial questions: Should our tax code be progressive, with the wealthier paying more than the poor, and if so, to what extent? Should we tax income or consumption or both? Of the various ideas proposed by economists and politicians—from tax increases to tax cuts, from a VAT to a Fair Tax—what will work and won’t? By tracing the history of our own tax system and by assessing the way other countries have solved similar problems, Bartlett explores the surprising answers to all of these questions, giving a sense of the tax code’s many benefits—and its inevitable burdens.
Tax reform will be a major issue debated in the years ahead. Growing budget deficits and the expiration of various tax cuts loom. Reform, once a philosophical dilemma, is turning into a practical crisis. By framing the various tax philosophies that dominate the debate, Bartlett explores the distributional, technical, and political advantages and costs of the various proposals and ideas that will come to dominate America’s political conversation in the years to come.
- Print length288 pages
- LanguageEnglish
- PublisherSimon & Schuster
- Publication dateJanuary 24, 2012
- Dimensions6.25 x 1 x 9.25 inches
- ISBN-101451646194
- ISBN-13978-1451646191
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Editorial Reviews
Review
"A lucid analysis... a provocative book... remarkably successful in interweaving the underlying economics of the US tax system with the political choices that have made it what it is."—Financial Times
"Today we’re living in a country deeply divided between winners and losers. Nowhere is that more evident than in our tax system—so distorted by loopholes, exemptions, credits, and deductions favoring the already rich and powerful that it no longer can raise the money needed to pay the government’s bills. Among the people who saw this crisis coming was the conservative economist Bruce Bartlett... The Benefit and the Burden is a layman’s guide through the jungle of a tax system that, thanks to rented politicians and anti-tax ideologues like Grover Norquist, enable the one percent to make off like bandits while our national debt soars sky-high."—Bill Moyers
“[Bartlett’s] analysis of tax burdens and policies in modern times is essential reading for anyone following the present debate about income inequality and taxation.”—Worth
"For a vivid picture on how evolving tax laws have wrecked America's fiscal standing, consult Bruce Bartlett's new book."—Froma Harrop, The Providence Journal
"A great introduction for anyone who doesn't really know much about the U.S. tax system and wants to learn the basics. It's clear, short, and a quick read."—Kevin Drum, Mother Jones
"If Obama wants to win this election, he needs to embrace radical tax reform. The shape and structure of sane reforms is already out there, as Bruce Bartlett explains."—Andrew Sullivan, The Daily Beast
"[Bartlett] writes beautifully and seems to have no trouble avoiding getting caught up in the many complexities of tax policy."—Len Burman, Forbes and Professor of Economics at Syracuse
"In a political system beset by ignorance and misinformation, delivering basic information to interested citizens is a worthy goal. And Bartlett does it very well."—Joseph J. Thorndike, Tax Notes
“[Bartlett’s] balanced, well-researched primer on America’s tax system... is a refreshing entree to a difficult subject. The book’s no-nonsense approach to tax policy proves surprisingly engaging.”—The Economist
"Bruce Bartlett has waded into the debate on tax policy with a thoughtful argument for the necessity of reform."—Tom Pauken, The American Conservative
"Bartlett’s book is a clear and comprehensive overview of today’s complicated tax system."—Robert J. Samuelson, The Washington Post
"An excellent, wide-ranging guide to what matters about the U.S. federal income tax system, its history and problems, and where it might go next. Bartlett, who has been a favorite commentator of mine for many years, does a really excellent job of providing a lucid review that deserves... broad readership."—Daniel Shaviro, Wayne Perry Professor of Taxation at New York University Law School
"In his wonderful new study... Bruce Bartlett offers a useful thumbnail history on the federal government's seemingly haphazard role in the post-WWII evolution of the private health insurance industry."—Scott Galupo, U.S. News & World Report
“You gotta get this. You’ll read it, and get mad, which is good.”—Jon Stewart
"It is to Bartlett's credit as a writer that he makes this topic accessible, while showing great aplomb in dismantling many of the myths and misconceptions that exist about taxes."—Noah Kristula-Green, The Daily Beast
"Bartlett gives a broad overview of federal income-tax policy. He argues that people want more government than they have been willing to pay for, and chronic deficits are no longer sustainable. He dismisses Grover Norquist’s mission to 'starve the beast' of government as nonsense but favors reducing America’s corporate tax rate because only Japan has a higher one. He sets forth political conditions necessary for reform: courage for Democrats and compromise for Republicans."—David Cay Johnston, The American Prospect
"[A] vital call for radical tax reform."—Andrew Sullivan, The Daily Beast
"[A]n excellent guide to the promise and peril of tax reform... [Bartlett's] writing is clear, concise, and crisp... Highly recommended for anyone wanting a pithy introduction to the challenges of designing a tax system we can be proud of."—Donald Marron, Director of the Urban-Brookings Tax Policy Center
"[Bartlett's] contribution, a full–throated call for reform, has gotten a surprising amount of attention for a tax book... And the notice is well-deserved. He’s written a clear, well-reasoned brief for reform."—Howard Gleckman, Tax Policy Center, Urban Institute and Brookings Institution
"Impeccably fair-minded."—David Brooks, The New York Times
"A wonderfully clear primer on the relevant issues and the history behind them... Read this book."—Timothy Noah, The New Republic
"Today we’re living in a country deeply divided between winners and losers. Nowhere is that more evident than in our tax system—so distorted by loopholes, exemptions, credits, and deductions favoring the already rich and powerful that it no longer can raise the money needed to pay the government’s bills. Among the people who saw this crisis coming was the conservative economist Bruce Bartlett... The Benefit and the Burden is a layman’s guide through the jungle of a tax system that, thanks to rented politicians and anti-tax ideologues like Grover Norquist, enable the one percent to make off like bandits while our national debt soars sky-high."—Bill Moyers
“[Bartlett’s] analysis of tax burdens and policies in modern times is essential reading for anyone following the present debate about income inequality and taxation.”—Worth
"For a vivid picture on how evolving tax laws have wrecked America's fiscal standing, consult Bruce Bartlett's new book."—Froma Harrop, The Providence Journal
"A great introduction for anyone who doesn't really know much about the U.S. tax system and wants to learn the basics. It's clear, short, and a quick read."—Kevin Drum, Mother Jones
"If Obama wants to win this election, he needs to embrace radical tax reform. The shape and structure of sane reforms is already out there, as Bruce Bartlett explains."—Andrew Sullivan, The Daily Beast
"[Bartlett] writes beautifully and seems to have no trouble avoiding getting caught up in the many complexities of tax policy."—Len Burman, Forbes and Professor of Economics at Syracuse
"In a political system beset by ignorance and misinformation, delivering basic information to interested citizens is a worthy goal. And Bartlett does it very well."—Joseph J. Thorndike, Tax Notes
“[Bartlett’s] balanced, well-researched primer on America’s tax system... is a refreshing entree to a difficult subject. The book’s no-nonsense approach to tax policy proves surprisingly engaging.”—The Economist
"Bruce Bartlett has waded into the debate on tax policy with a thoughtful argument for the necessity of reform."—Tom Pauken, The American Conservative
"Bartlett’s book is a clear and comprehensive overview of today’s complicated tax system."—Robert J. Samuelson, The Washington Post
"An excellent, wide-ranging guide to what matters about the U.S. federal income tax system, its history and problems, and where it might go next. Bartlett, who has been a favorite commentator of mine for many years, does a really excellent job of providing a lucid review that deserves... broad readership."—Daniel Shaviro, Wayne Perry Professor of Taxation at New York University Law School
"In his wonderful new study... Bruce Bartlett offers a useful thumbnail history on the federal government's seemingly haphazard role in the post-WWII evolution of the private health insurance industry."—Scott Galupo, U.S. News & World Report
“You gotta get this. You’ll read it, and get mad, which is good.”—Jon Stewart
"It is to Bartlett's credit as a writer that he makes this topic accessible, while showing great aplomb in dismantling many of the myths and misconceptions that exist about taxes."—Noah Kristula-Green, The Daily Beast
"Bartlett gives a broad overview of federal income-tax policy. He argues that people want more government than they have been willing to pay for, and chronic deficits are no longer sustainable. He dismisses Grover Norquist’s mission to 'starve the beast' of government as nonsense but favors reducing America’s corporate tax rate because only Japan has a higher one. He sets forth political conditions necessary for reform: courage for Democrats and compromise for Republicans."—David Cay Johnston, The American Prospect
"[A] vital call for radical tax reform."—Andrew Sullivan, The Daily Beast
"[A]n excellent guide to the promise and peril of tax reform... [Bartlett's] writing is clear, concise, and crisp... Highly recommended for anyone wanting a pithy introduction to the challenges of designing a tax system we can be proud of."—Donald Marron, Director of the Urban-Brookings Tax Policy Center
"[Bartlett's] contribution, a full–throated call for reform, has gotten a surprising amount of attention for a tax book... And the notice is well-deserved. He’s written a clear, well-reasoned brief for reform."—Howard Gleckman, Tax Policy Center, Urban Institute and Brookings Institution
"Impeccably fair-minded."—David Brooks, The New York Times
"A wonderfully clear primer on the relevant issues and the history behind them... Read this book."—Timothy Noah, The New Republic
About the Author
Bruce Bartlettis a columnist for the Economix blog of The New York Times, The Fiscal Times, and Tax Notes. Bartlett worked as staff director of the Joint Economic Committee of Congress, senior policy analyst in the Reagan White House, and as deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration.
Excerpt. © Reprinted by permission. All rights reserved.
Chapter 1
A Brief History of Federal Income Taxation
As every schoolchild knows, following the American Revolution, the Articles of Confederation governed the United States from 1781 to 1789. But the government established by the Articles proved to have a fatal weakness in the area of taxation. The federal government depended on the states to provide it with revenue, and like all taxpayers, the states didn’t much enjoy paying taxes to Washington. The federal government soon had a financial crisis. It lacked the revenue to function adequately, and so a constitutional convention was assembled to write a new basic law for the nation.
The Constitution, which replaced the Articles, gave the federal government independent taxing power so that it was no longer dependent on the states for revenue. The precise terms of the government’s taxing power are surprisingly vague. It is free to tax what it likes, subject to just two constraints: exports may not be taxed, and the federal government is prohibited from levying a direct tax unless it is proportionate to the population. The main purpose of the latter clause was to limit the federal government’s ability to tax slaves—one of the many compromises made by the Founding Fathers to accommodate the South’s “peculiar institution.”
Initially there was resistance to federal taxation, especially the whiskey tax, which led to a rebellion in 1794. But after Treasury Secretary Alexander Hamilton had the federal government assume state debts from the war, state taxes fell. On balance, the tax burden declined.
THE TARIFF
From the beginning, the federal government’s primary revenue source was the tariff. This led to continuing tensions between the northern states, where manufacturing was the dominant industry—manufacturers favored high, protective tariffs—and the southern states, where agriculture was the dominant industry and tariffs were thus unpopular. Interestingly, one argument for raising revenue through tariffs was that it was a progressive form of taxation, one that takes more, proportionately, from the rich than the poor. As Thomas Jefferson wrote in 1811 in a letter to Thaddeus Kociuszko, “The rich alone use imported articles, and on these alone the whole taxes of the General Government are levied. The poor man, who uses nothing but what is made in his own farm or family, or within his own country, pays not a farthing of tax to the General Government.”
Until the Civil War, tariffs constituted about 90 percent of all federal revenues. The balance came mainly from sales of federal lands. On the eve of the war, total federal revenues were $53.5 million, of which $49.6 million came from customs duties. Federal revenues consumed about 1.2 percent of the gross domestic product (GDP); they have averaged 18.5 percent of GDP since World War II.
The war increased the need for revenue. By 1866 federal revenues were ten times greater than they had been before the war. An important innovation was the creation of the first federal income tax in 1861. As the war progressed, the government’s revenue needs increased, and it raised the income tax. By 1866 income taxes constituted 55 percent of federal revenues. But even at the end of the war, the top rate was just 10 percent on incomes over $10,000 (equivalent to $142,000 today).
The unpopularity of the income tax led to its expiration in 1872. To replace the lost revenue, the federal government expanded the taxation of alcohol and tobacco. By 1900 these taxes constituted 43 percent of federal revenue. Customs duties raised 41 percent.
In 1894, Democrats attempted to revive the income tax in order to finance a reduction in tariffs, which fell heavily on the farmers and workers who constituted their base. A 2 percent flat-rate income tax was enacted on incomes over $4,000 (about $105,000 today). However, the following year the Supreme Court found it to be unconstitutional in the case of Pollock v. Farmers’ Loan and Trust Co. (1895), even though the Civil War income tax had been found to be constitutional in Springer v. United States (1880). The Court found that the income tax was a direct tax and not apportioned uniformly.
Although it was widely believed among legal scholars that the Supreme Court erred in the Pollock decision, this ruling nevertheless effectively foreclosed any further legislative efforts regarding an income tax without a change in the Constitution.
Growth of the Progressive movement and continuing agitation for tariff cuts kept up the pressure for an income tax. In 1909 President William Howard Taft, a Republican, endorsed a constitutional amendment to permit one. In part it was a delaying tactic to fend off increasing support for tariff cuts, which would have angered the GOP’s base among manufacturers.
SIXTEENTH AMENDMENT
The proposed Sixteenth Amendment passed both the House and the Senate surprisingly easily, but ratification by the states was slow. The last state, Delaware, didn’t ratify it until 1913, just days before Woodrow Wilson became only the second Democratic president since before the Civil War.
Wilson brought with him a Democratic Congress, which quickly enacted legislation reducing tariffs and creating a permanent income tax. The 1913 act imposed a 1 percent tax rate on all those with incomes above a personal exemption of $3,000 (about $66,000 today) and a top rate of 7 percent on those with incomes above $500,000 (about $11 million today). Consequently, few people paid substantial income taxes. But that changed with the outbreak of World War I. Anticipating U.S. involvement, the government raised tax rates in 1914 and 1916. The United States’ formal entry into the war in 1917 led to a further rise.
By 1918 the lowest rate of taxation was up to 6 percent on incomes over $1,000 (about $14,000 today), and the top rate was 77 percent on incomes over $1 million (about $14 million today). Although taxes were quickly reduced after the war, they were not lowered to their prewar level. By 1920 the bottom rate was down only to 4 percent, and the top rate fell to 73 percent. The thresholds were unchanged, but there was considerable inflation, which lowered the real income levels at which tax rates became effective.
The desire for significant income tax cuts helped Republican Warren Harding win the White House in 1920. He appointed the financier Andrew Mellon as his Treasury secretary, and Mellon began a decade-long effort to bring down the wartime tax rates. Kept on in his position by Calvin Coolidge, Mellon succeeded in getting the bottom tax rate down to just 0.375 percent in 1929 and the top rate down to 24 percent. However, in the process the threshold for the top rate was reduced to $100,000 (about $1.3 million today).
The Great Depression decimated federal finances. Revenues fell more than half between 1930 and 1932, while relief measures caused spending to rise 40 percent. In 1932 Herbert Hoover asked Congress to raise taxes to reduce the deficit. The bottom rate went back up to 4 percent and the top rate increased to 63 percent. In dollar terms, however, the largest increases were for excise taxes on a wide variety of goods and services, including gasoline, telephones, tires, and many others.
Franklin D. Roosevelt’s first major contribution to tax policy came in 1935, when he asked Congress to raise taxes on the rich. This move was driven less by revenue needs than by fairness. In a message to Congress on June 19, he said, “People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which government itself contributes. Therefore, the duty rests upon the government to restrict such incomes by very high taxes.”
SOAKING THE RICH
Privately Roosevelt worried about the growing political support for socialist and crackpot schemes. To keep them in check, he had to increase the perception of fairness in the capitalist system. “I want to save our system, the capitalistic system,” he told an emissary of the archconservative newspaper publisher William Randolph Hearst. To do so, Roosevelt said, “it may be necessary to throw to the wolves the forty-six men who are reported to have incomes in excess of one million dollars a year.”
The 1935 tax bill raised the top rate to 79 percent, but also raised the income threshold at which the top rate applied, from $1 million to $5 million (about $78 million in today’s dollars). It was reported that only one person in America, John D. Rockefeller Jr., paid taxes at the top income tax rate.
The institution of Social Security that same year also had a major impact on taxation. Roosevelt insisted that it be financed conservatively to impress upon people that it was an earned benefit, not a giveaway welfare program. People had to pay into Social Security to get benefits; it was financed with a flat-rate tax of 2 percent; and revenues went into a trust fund, not unlike a private pension fund.
Social Security taxes began being collected in 1937, but the first benefits weren’t paid out until 1940. The payroll tax constituted a significant tax increase on the working population, most of whom paid no federal income taxes. Many economists believe that this increase was a major contributor to the recession of 1937–38 after several years of double-digit real growth in the economy. For three years the payroll tax took money out of the economy before benefit payments started putting it back in again.
World War II led to a drastic expansion of federal taxation. With the top rate already at virtually a confiscatory level after 1935, there was limited scope for raising significant additional revenues from the rich. The tax base had to expand to include the middle and working classes previously exempt from income taxes. On the eve of war only about 3 percent of Americans paid any income taxes. By the end of the war the rate was up to 30 percent. There were fewer than 4 million taxable returns in 1939. By 1943 this figure was up to more than 40 million.
During the war the bottom tax rate rose from 4 percent to 23 percent on incomes over $500 (about $6,000 today). The top rate increased from 79 percent to 94 percent on incomes above $200,000 (about $2.4 million today). Although tax rates were reduced after the war, the reduction was modest due to growth in the national debt and fears of inflation, which prohibited a large cut in federal revenues that would have increased the budget deficit. By 1949 the bottom income tax rate was down to just 16.6 percent and the top rate fell to 82.1 percent.
Concerns about Soviet expansionism prevented the sort of demobilization and cuts in military spending that accompanied previous major wars. Moreover, by 1950 the United States was again involved in a shooting war, this time in Korea. Consequently there was little scope for tax reduction throughout the 1950s, reinforced by Dwight Eisenhower’s opposition to deficit spending. The bottom tax rate stayed at 20 percent throughout the 1950s, while the top rate remained above 90 percent.
KENNEDY TAX CUT
By 1960 there was general agreement among economists that the economy needed a boost. Keynesian economists, who increasingly dominated economic discussions, wanted the federal government to increase federal spending and the budget deficit to increase aggregate demand and raise growth. While John F. Kennedy was sympathetic to the Keynesian argument, he worried about inflation and the precarious position of the dollar. He therefore resisted the recommendations of his economic advisers.
House Ways and Means Committee Chairman Wilbur Mills convinced Kennedy that a fiscal stimulus could just as well be done on the tax side as the spending side. A big cut in tax rates could serve the dual purpose of stimulating the supply and demand sides of the economy. It was also less likely to upset financial markets and was easier to enact, politically, than an equivalent increase in spending.
In 1963 Kennedy asked Congress to reduce the top income tax rate to 65 from 91 percent, and the bottom rate to 14 from 20 percent. Unfortunately he was assassinated before congressional action could be completed. Lyndon Johnson finished the job in 1964. The final bill was close to Kennedy’s proposal, except that the top rate was reduced only to 70 percent.
By the end of the 1960s inflation was becoming the nation’s number one economic problem. Keynesian economics recommended a tax increase to reduce aggregate demand. Reluctantly Johnson supported a surtax in 1968 that temporarily raised everyone’s income taxes by 10 percent. The impact on inflation was modest and due largely to a recession that began in December 1969.
Although more and more economists concluded that the Federal Reserve’s monetary policy was primarily responsible for inflation, the Keynesians had enough influence to prevent any permanent tax cuts during the 1970s. They believed that budget deficits were primarily responsible for inflation. Tax cuts would make it worse.
However, one of the most important ways that inflation harms the economy is by pushing people into higher tax brackets. This is the main reason federal revenues rose from 17.3 percent of GDP in 1971 to 19 percent in 1980. Marginal tax rates also increased for the same reason. According to the Treasury Department, for a four-person family with the median income, the marginal income tax rate—the tax on each additional dollar earned—rose from 19 to 24 percent over the same period. The marginal rate on a family with twice the median income went from 28 to 43 percent.
REAGAN TAX CUT
In the 1980 presidential campaign Ronald Reagan promised to replicate the Kennedy tax cut and reduce rates across the board. He supported the tax proposal sponsored by Rep. Jack Kemp of New York and Sen. Bill Roth of Delaware. As a member of Kemp’s staff, I had a key role in developing this legislation.
Reagan’s tax cut, enacted in 1981, reduced the top rate from 70 to 50 percent and the bottom rate from 14 to 11 percent. Reagan also supported the Tax Reform Act of 1986, which raised the bottom rate to 15 percent but reduced the top rate to just 28 percent. His successor, George H. W. Bush, agreed to a budget deal in 1990 that raised the top rate to 31 percent. Not only did this action undermine his conservative support in 1992, but it also poisoned the well for future tax reforms. The 1986 act was a deal in which the wealthy gave up their tax preferences in return for a lower top rate, but when the top rate was increased in 1990, the preferences were not restored.
Having broken the deal that underlay the 1986 reform, Bush made it easier for Bill Clinton to go back to the same well and raise the top rate to 39.6 percent in 1993. However, it is seldom noted that Clinton raised the threshold for the top rate from $86,500 to $250,000 ($500,000 for couples), equivalent to $375,000 ($750,000 for couples) today.
Although Republicans predicted an economic apocalypse from the 1993 tax increase, the opposite occurred, and a period of exceptionally rapid growth followed. Also, contrary to Republican predictions that the new revenue would be spent and not reduce the deficit, spending and the deficit both fell. Federal outlays fell from 22.1 percent of GDP in 1992 to 18.2 percent of GDP in Clinton’s last year in office; revenues rose from 17.5 percent of GDP to 20.6 percent of GDP. The deficit went from 4.7 percent of GDP to a surplus of 2.4 percent of GDP over the same period, a remarkable improvement of 7.1 percent of GDP. Thus, ironically, a liberal Democrat turned out to be America’s most fiscally conservative president since Calvin Coolidge.
In the 2000 election Republican George W. Bush campaigned on the idea that the budget surplus was dangerous because Congress might spend it. It was better, he said, to dissipate the surplus through tax cuts. True to his word, Bush supported tax cuts that caused the budget surplus to evaporate into a deficit of 3.2 percent of GDP by his last year in office, a fiscal reversal of 5.6 percent of GDP. And contrary to Republican promises that tax cuts would stimulate the economy, economic growth was sluggish throughout the early 2000s, culminating in the second worst economic slump in American history.
Barack Obama’s principal contribution to tax policy was to insist that the Bush tax cuts be allowed to expire on schedule at the end of 2010—exactly as Republicans had written the legislation in the first place—for those with incomes above $250,000. At the last minute, however, he agreed to extend the Bush tax cuts for another two years without change. They are scheduled to expire at the end of 2012 and will, undoubtedly, be a major issue in the presidential campaign that year.
FURTHER READINGS
Ackerman, Bruce. “Taxation and the Constitution.” Columbia Law Review (Jan. 1999): 1–58.
Baack, Bennett D., and Edward John Ray. “Special Interests and the Adoption of the Income Tax in the United States.” Journal of Economic History (Sept. 1985): 607–25.
Bank, Steven A. “Origins of a Flat Tax.” Denver University Law Review (1996): 329–402.
Bank, Steven A., Kirk J. Stark, and Joseph J. Thorndike. War and Taxes. Urban Institute, 2008.
Bartlett, Bruce. The New American Economy. Palgrave Macmillan, 2009.
Bartlett, Bruce. Reaganomics: Supply-Side Economics in Action. Arlington House, 1981.
Blakey, Roy G., and Gladys C. Blakey. “The Revenue Act of 1932.” American Economic Review (Dec. 1932): 620–40.
Blakey, Roy G., and Gladys C. Blakey. “The Revenue Act of 1935.” American Economic Review (Dec. 1935): 673–90.
Brown, Roger H. Redeeming the Republic: Federalists, Taxation, and the Origins of the Constitution. Johns Hopkins University Press, 1993.
Brownlee, W. Elliot. Federal Taxation in America: A Short History. Cambridge University Press, 1996.
Edling, Max M., and Mark D. Kaplanoff. “Alexander Hamilton’s Fiscal Reform: Transforming the Structure of Taxation in the Early Republic.” William and Mary Quarterly (Oct. 2004): 714–44.
Einhorn, Robin L. American Taxation, American Slavery. University of Chicago Press, 2006.
Ekirch, Arthur A. “The Sixteenth Amendment: The Historical Background.” Cato Journal (Spring 1981): 161–82.
Evans, Michael W. “Foundations of the Tax Legislative Process: The Confederation, Constitutional Convention, and the First Revenue Law.” Tax Notes (Jan. 21, 1991): 283–93.
Flaherty, Jane. The Revenue Imperative. Pickering & Chatto, 2009.
Jones, Carolyn C. “Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax during World War II.” Buffalo Law Review (Fall 1988–89): 685–737.
Joseph, Richard J. The Origin of the American Income Tax: The Revenue Act of 1894 and Its Aftermath. Syracuse University Press, 2004.
Leff, Mark H. “Taxing the ‘Forgotten Man’: The Politics of Social Security Finance in the New Deal.” Journal of American History (Sept. 1983): 359–81.
McMahon, Stephanie. “A Law with a Life of Its Own: The Development of the Federal Income Tax Statutes through World War I.” Pittsburgh Tax Review (Fall 2009): 1–41.
Mehrotra, Ajay K. “Lawyers, Guns, and Public Moneys: The U.S. Treasury, World War I, and the Administration of the Modern Fiscal State.” Law and History Review (2010): 173–225.
Mehrotra, Ajay K. “‘More Mighty Than the Waves of the Sea’: Toilers, Tariffs, and the Income Tax Movement, 1880–1913.” Labor History (May 2004): 165–98.
Slaughter, Thomas P. “The Tax Man Cometh: Ideological Opposition to Internal Taxes, 1760–1790.” William and Mary Quarterly (Oct. 1984): 566–91.
Slaughter, Thomas P. The Whiskey Rebellion. Oxford University Press, 1986.
Stanley, Robert. Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861–1913. Oxford University Press, 1993.
Thorndike, Joseph J. “An Army of Officials: The Civil War Bureau of Internal Revenue.” Tax Notes (Dec. 24, 2001): 1739–60.
Thorndike, Joseph J. “Four Things That Everyone Should Know about New Deal Taxation.” Tax Notes (Nov. 24, 2008): 973–75.
Thorndike, Joseph J. “The Limited Lessons of 1937.” Tax Notes (Jan. 25, 2010): 429–32.
Weisman, Steven. The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power That Transformed the Nation. Simon & Schuster, 2002.
Witte, John F. The Politics and Development of the Federal Income Tax. University of Wisconsin Press, 1985.
Zelizer, Julian E. Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975. Cambridge University Press, 1998.
Copyright © 2012 by Bruce Bartlett
A Brief History of Federal Income Taxation
As every schoolchild knows, following the American Revolution, the Articles of Confederation governed the United States from 1781 to 1789. But the government established by the Articles proved to have a fatal weakness in the area of taxation. The federal government depended on the states to provide it with revenue, and like all taxpayers, the states didn’t much enjoy paying taxes to Washington. The federal government soon had a financial crisis. It lacked the revenue to function adequately, and so a constitutional convention was assembled to write a new basic law for the nation.
The Constitution, which replaced the Articles, gave the federal government independent taxing power so that it was no longer dependent on the states for revenue. The precise terms of the government’s taxing power are surprisingly vague. It is free to tax what it likes, subject to just two constraints: exports may not be taxed, and the federal government is prohibited from levying a direct tax unless it is proportionate to the population. The main purpose of the latter clause was to limit the federal government’s ability to tax slaves—one of the many compromises made by the Founding Fathers to accommodate the South’s “peculiar institution.”
Initially there was resistance to federal taxation, especially the whiskey tax, which led to a rebellion in 1794. But after Treasury Secretary Alexander Hamilton had the federal government assume state debts from the war, state taxes fell. On balance, the tax burden declined.
THE TARIFF
From the beginning, the federal government’s primary revenue source was the tariff. This led to continuing tensions between the northern states, where manufacturing was the dominant industry—manufacturers favored high, protective tariffs—and the southern states, where agriculture was the dominant industry and tariffs were thus unpopular. Interestingly, one argument for raising revenue through tariffs was that it was a progressive form of taxation, one that takes more, proportionately, from the rich than the poor. As Thomas Jefferson wrote in 1811 in a letter to Thaddeus Kociuszko, “The rich alone use imported articles, and on these alone the whole taxes of the General Government are levied. The poor man, who uses nothing but what is made in his own farm or family, or within his own country, pays not a farthing of tax to the General Government.”
Until the Civil War, tariffs constituted about 90 percent of all federal revenues. The balance came mainly from sales of federal lands. On the eve of the war, total federal revenues were $53.5 million, of which $49.6 million came from customs duties. Federal revenues consumed about 1.2 percent of the gross domestic product (GDP); they have averaged 18.5 percent of GDP since World War II.
The war increased the need for revenue. By 1866 federal revenues were ten times greater than they had been before the war. An important innovation was the creation of the first federal income tax in 1861. As the war progressed, the government’s revenue needs increased, and it raised the income tax. By 1866 income taxes constituted 55 percent of federal revenues. But even at the end of the war, the top rate was just 10 percent on incomes over $10,000 (equivalent to $142,000 today).
The unpopularity of the income tax led to its expiration in 1872. To replace the lost revenue, the federal government expanded the taxation of alcohol and tobacco. By 1900 these taxes constituted 43 percent of federal revenue. Customs duties raised 41 percent.
In 1894, Democrats attempted to revive the income tax in order to finance a reduction in tariffs, which fell heavily on the farmers and workers who constituted their base. A 2 percent flat-rate income tax was enacted on incomes over $4,000 (about $105,000 today). However, the following year the Supreme Court found it to be unconstitutional in the case of Pollock v. Farmers’ Loan and Trust Co. (1895), even though the Civil War income tax had been found to be constitutional in Springer v. United States (1880). The Court found that the income tax was a direct tax and not apportioned uniformly.
Although it was widely believed among legal scholars that the Supreme Court erred in the Pollock decision, this ruling nevertheless effectively foreclosed any further legislative efforts regarding an income tax without a change in the Constitution.
Growth of the Progressive movement and continuing agitation for tariff cuts kept up the pressure for an income tax. In 1909 President William Howard Taft, a Republican, endorsed a constitutional amendment to permit one. In part it was a delaying tactic to fend off increasing support for tariff cuts, which would have angered the GOP’s base among manufacturers.
SIXTEENTH AMENDMENT
The proposed Sixteenth Amendment passed both the House and the Senate surprisingly easily, but ratification by the states was slow. The last state, Delaware, didn’t ratify it until 1913, just days before Woodrow Wilson became only the second Democratic president since before the Civil War.
Wilson brought with him a Democratic Congress, which quickly enacted legislation reducing tariffs and creating a permanent income tax. The 1913 act imposed a 1 percent tax rate on all those with incomes above a personal exemption of $3,000 (about $66,000 today) and a top rate of 7 percent on those with incomes above $500,000 (about $11 million today). Consequently, few people paid substantial income taxes. But that changed with the outbreak of World War I. Anticipating U.S. involvement, the government raised tax rates in 1914 and 1916. The United States’ formal entry into the war in 1917 led to a further rise.
By 1918 the lowest rate of taxation was up to 6 percent on incomes over $1,000 (about $14,000 today), and the top rate was 77 percent on incomes over $1 million (about $14 million today). Although taxes were quickly reduced after the war, they were not lowered to their prewar level. By 1920 the bottom rate was down only to 4 percent, and the top rate fell to 73 percent. The thresholds were unchanged, but there was considerable inflation, which lowered the real income levels at which tax rates became effective.
The desire for significant income tax cuts helped Republican Warren Harding win the White House in 1920. He appointed the financier Andrew Mellon as his Treasury secretary, and Mellon began a decade-long effort to bring down the wartime tax rates. Kept on in his position by Calvin Coolidge, Mellon succeeded in getting the bottom tax rate down to just 0.375 percent in 1929 and the top rate down to 24 percent. However, in the process the threshold for the top rate was reduced to $100,000 (about $1.3 million today).
The Great Depression decimated federal finances. Revenues fell more than half between 1930 and 1932, while relief measures caused spending to rise 40 percent. In 1932 Herbert Hoover asked Congress to raise taxes to reduce the deficit. The bottom rate went back up to 4 percent and the top rate increased to 63 percent. In dollar terms, however, the largest increases were for excise taxes on a wide variety of goods and services, including gasoline, telephones, tires, and many others.
Franklin D. Roosevelt’s first major contribution to tax policy came in 1935, when he asked Congress to raise taxes on the rich. This move was driven less by revenue needs than by fairness. In a message to Congress on June 19, he said, “People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which government itself contributes. Therefore, the duty rests upon the government to restrict such incomes by very high taxes.”
SOAKING THE RICH
Privately Roosevelt worried about the growing political support for socialist and crackpot schemes. To keep them in check, he had to increase the perception of fairness in the capitalist system. “I want to save our system, the capitalistic system,” he told an emissary of the archconservative newspaper publisher William Randolph Hearst. To do so, Roosevelt said, “it may be necessary to throw to the wolves the forty-six men who are reported to have incomes in excess of one million dollars a year.”
The 1935 tax bill raised the top rate to 79 percent, but also raised the income threshold at which the top rate applied, from $1 million to $5 million (about $78 million in today’s dollars). It was reported that only one person in America, John D. Rockefeller Jr., paid taxes at the top income tax rate.
The institution of Social Security that same year also had a major impact on taxation. Roosevelt insisted that it be financed conservatively to impress upon people that it was an earned benefit, not a giveaway welfare program. People had to pay into Social Security to get benefits; it was financed with a flat-rate tax of 2 percent; and revenues went into a trust fund, not unlike a private pension fund.
Social Security taxes began being collected in 1937, but the first benefits weren’t paid out until 1940. The payroll tax constituted a significant tax increase on the working population, most of whom paid no federal income taxes. Many economists believe that this increase was a major contributor to the recession of 1937–38 after several years of double-digit real growth in the economy. For three years the payroll tax took money out of the economy before benefit payments started putting it back in again.
World War II led to a drastic expansion of federal taxation. With the top rate already at virtually a confiscatory level after 1935, there was limited scope for raising significant additional revenues from the rich. The tax base had to expand to include the middle and working classes previously exempt from income taxes. On the eve of war only about 3 percent of Americans paid any income taxes. By the end of the war the rate was up to 30 percent. There were fewer than 4 million taxable returns in 1939. By 1943 this figure was up to more than 40 million.
During the war the bottom tax rate rose from 4 percent to 23 percent on incomes over $500 (about $6,000 today). The top rate increased from 79 percent to 94 percent on incomes above $200,000 (about $2.4 million today). Although tax rates were reduced after the war, the reduction was modest due to growth in the national debt and fears of inflation, which prohibited a large cut in federal revenues that would have increased the budget deficit. By 1949 the bottom income tax rate was down to just 16.6 percent and the top rate fell to 82.1 percent.
Concerns about Soviet expansionism prevented the sort of demobilization and cuts in military spending that accompanied previous major wars. Moreover, by 1950 the United States was again involved in a shooting war, this time in Korea. Consequently there was little scope for tax reduction throughout the 1950s, reinforced by Dwight Eisenhower’s opposition to deficit spending. The bottom tax rate stayed at 20 percent throughout the 1950s, while the top rate remained above 90 percent.
KENNEDY TAX CUT
By 1960 there was general agreement among economists that the economy needed a boost. Keynesian economists, who increasingly dominated economic discussions, wanted the federal government to increase federal spending and the budget deficit to increase aggregate demand and raise growth. While John F. Kennedy was sympathetic to the Keynesian argument, he worried about inflation and the precarious position of the dollar. He therefore resisted the recommendations of his economic advisers.
House Ways and Means Committee Chairman Wilbur Mills convinced Kennedy that a fiscal stimulus could just as well be done on the tax side as the spending side. A big cut in tax rates could serve the dual purpose of stimulating the supply and demand sides of the economy. It was also less likely to upset financial markets and was easier to enact, politically, than an equivalent increase in spending.
In 1963 Kennedy asked Congress to reduce the top income tax rate to 65 from 91 percent, and the bottom rate to 14 from 20 percent. Unfortunately he was assassinated before congressional action could be completed. Lyndon Johnson finished the job in 1964. The final bill was close to Kennedy’s proposal, except that the top rate was reduced only to 70 percent.
By the end of the 1960s inflation was becoming the nation’s number one economic problem. Keynesian economics recommended a tax increase to reduce aggregate demand. Reluctantly Johnson supported a surtax in 1968 that temporarily raised everyone’s income taxes by 10 percent. The impact on inflation was modest and due largely to a recession that began in December 1969.
Although more and more economists concluded that the Federal Reserve’s monetary policy was primarily responsible for inflation, the Keynesians had enough influence to prevent any permanent tax cuts during the 1970s. They believed that budget deficits were primarily responsible for inflation. Tax cuts would make it worse.
However, one of the most important ways that inflation harms the economy is by pushing people into higher tax brackets. This is the main reason federal revenues rose from 17.3 percent of GDP in 1971 to 19 percent in 1980. Marginal tax rates also increased for the same reason. According to the Treasury Department, for a four-person family with the median income, the marginal income tax rate—the tax on each additional dollar earned—rose from 19 to 24 percent over the same period. The marginal rate on a family with twice the median income went from 28 to 43 percent.
REAGAN TAX CUT
In the 1980 presidential campaign Ronald Reagan promised to replicate the Kennedy tax cut and reduce rates across the board. He supported the tax proposal sponsored by Rep. Jack Kemp of New York and Sen. Bill Roth of Delaware. As a member of Kemp’s staff, I had a key role in developing this legislation.
Reagan’s tax cut, enacted in 1981, reduced the top rate from 70 to 50 percent and the bottom rate from 14 to 11 percent. Reagan also supported the Tax Reform Act of 1986, which raised the bottom rate to 15 percent but reduced the top rate to just 28 percent. His successor, George H. W. Bush, agreed to a budget deal in 1990 that raised the top rate to 31 percent. Not only did this action undermine his conservative support in 1992, but it also poisoned the well for future tax reforms. The 1986 act was a deal in which the wealthy gave up their tax preferences in return for a lower top rate, but when the top rate was increased in 1990, the preferences were not restored.
Having broken the deal that underlay the 1986 reform, Bush made it easier for Bill Clinton to go back to the same well and raise the top rate to 39.6 percent in 1993. However, it is seldom noted that Clinton raised the threshold for the top rate from $86,500 to $250,000 ($500,000 for couples), equivalent to $375,000 ($750,000 for couples) today.
Although Republicans predicted an economic apocalypse from the 1993 tax increase, the opposite occurred, and a period of exceptionally rapid growth followed. Also, contrary to Republican predictions that the new revenue would be spent and not reduce the deficit, spending and the deficit both fell. Federal outlays fell from 22.1 percent of GDP in 1992 to 18.2 percent of GDP in Clinton’s last year in office; revenues rose from 17.5 percent of GDP to 20.6 percent of GDP. The deficit went from 4.7 percent of GDP to a surplus of 2.4 percent of GDP over the same period, a remarkable improvement of 7.1 percent of GDP. Thus, ironically, a liberal Democrat turned out to be America’s most fiscally conservative president since Calvin Coolidge.
In the 2000 election Republican George W. Bush campaigned on the idea that the budget surplus was dangerous because Congress might spend it. It was better, he said, to dissipate the surplus through tax cuts. True to his word, Bush supported tax cuts that caused the budget surplus to evaporate into a deficit of 3.2 percent of GDP by his last year in office, a fiscal reversal of 5.6 percent of GDP. And contrary to Republican promises that tax cuts would stimulate the economy, economic growth was sluggish throughout the early 2000s, culminating in the second worst economic slump in American history.
Barack Obama’s principal contribution to tax policy was to insist that the Bush tax cuts be allowed to expire on schedule at the end of 2010—exactly as Republicans had written the legislation in the first place—for those with incomes above $250,000. At the last minute, however, he agreed to extend the Bush tax cuts for another two years without change. They are scheduled to expire at the end of 2012 and will, undoubtedly, be a major issue in the presidential campaign that year.
FURTHER READINGS
Ackerman, Bruce. “Taxation and the Constitution.” Columbia Law Review (Jan. 1999): 1–58.
Baack, Bennett D., and Edward John Ray. “Special Interests and the Adoption of the Income Tax in the United States.” Journal of Economic History (Sept. 1985): 607–25.
Bank, Steven A. “Origins of a Flat Tax.” Denver University Law Review (1996): 329–402.
Bank, Steven A., Kirk J. Stark, and Joseph J. Thorndike. War and Taxes. Urban Institute, 2008.
Bartlett, Bruce. The New American Economy. Palgrave Macmillan, 2009.
Bartlett, Bruce. Reaganomics: Supply-Side Economics in Action. Arlington House, 1981.
Blakey, Roy G., and Gladys C. Blakey. “The Revenue Act of 1932.” American Economic Review (Dec. 1932): 620–40.
Blakey, Roy G., and Gladys C. Blakey. “The Revenue Act of 1935.” American Economic Review (Dec. 1935): 673–90.
Brown, Roger H. Redeeming the Republic: Federalists, Taxation, and the Origins of the Constitution. Johns Hopkins University Press, 1993.
Brownlee, W. Elliot. Federal Taxation in America: A Short History. Cambridge University Press, 1996.
Edling, Max M., and Mark D. Kaplanoff. “Alexander Hamilton’s Fiscal Reform: Transforming the Structure of Taxation in the Early Republic.” William and Mary Quarterly (Oct. 2004): 714–44.
Einhorn, Robin L. American Taxation, American Slavery. University of Chicago Press, 2006.
Ekirch, Arthur A. “The Sixteenth Amendment: The Historical Background.” Cato Journal (Spring 1981): 161–82.
Evans, Michael W. “Foundations of the Tax Legislative Process: The Confederation, Constitutional Convention, and the First Revenue Law.” Tax Notes (Jan. 21, 1991): 283–93.
Flaherty, Jane. The Revenue Imperative. Pickering & Chatto, 2009.
Jones, Carolyn C. “Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax during World War II.” Buffalo Law Review (Fall 1988–89): 685–737.
Joseph, Richard J. The Origin of the American Income Tax: The Revenue Act of 1894 and Its Aftermath. Syracuse University Press, 2004.
Leff, Mark H. “Taxing the ‘Forgotten Man’: The Politics of Social Security Finance in the New Deal.” Journal of American History (Sept. 1983): 359–81.
McMahon, Stephanie. “A Law with a Life of Its Own: The Development of the Federal Income Tax Statutes through World War I.” Pittsburgh Tax Review (Fall 2009): 1–41.
Mehrotra, Ajay K. “Lawyers, Guns, and Public Moneys: The U.S. Treasury, World War I, and the Administration of the Modern Fiscal State.” Law and History Review (2010): 173–225.
Mehrotra, Ajay K. “‘More Mighty Than the Waves of the Sea’: Toilers, Tariffs, and the Income Tax Movement, 1880–1913.” Labor History (May 2004): 165–98.
Slaughter, Thomas P. “The Tax Man Cometh: Ideological Opposition to Internal Taxes, 1760–1790.” William and Mary Quarterly (Oct. 1984): 566–91.
Slaughter, Thomas P. The Whiskey Rebellion. Oxford University Press, 1986.
Stanley, Robert. Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861–1913. Oxford University Press, 1993.
Thorndike, Joseph J. “An Army of Officials: The Civil War Bureau of Internal Revenue.” Tax Notes (Dec. 24, 2001): 1739–60.
Thorndike, Joseph J. “Four Things That Everyone Should Know about New Deal Taxation.” Tax Notes (Nov. 24, 2008): 973–75.
Thorndike, Joseph J. “The Limited Lessons of 1937.” Tax Notes (Jan. 25, 2010): 429–32.
Weisman, Steven. The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power That Transformed the Nation. Simon & Schuster, 2002.
Witte, John F. The Politics and Development of the Federal Income Tax. University of Wisconsin Press, 1985.
Zelizer, Julian E. Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975. Cambridge University Press, 1998.
Copyright © 2012 by Bruce Bartlett
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- Publisher : Simon & Schuster; 49258th edition (January 24, 2012)
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- ISBN-13 : 978-1451646191
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Bruce Bartlett is a longtime observer and commenter on economic and political affairs in Washington, DC. He has written for virtually every major national publication in this area, including the New York Times, Washington Post, Wall Street Journal, Fortune Magazine, The New Republic and many others. His Twitter feed @BruceBartlett is widely followed and reaches up to 10 million people per month.
Bartlett’s work is informed by many years in government, including service on the staffs of Congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen, as executive director of the Joint Economic Committee of Congress, senior policy analyst in the Reagan White House, and deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration.
Bruce is the author of eight books including the New York Times best-seller, "The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take" (Simon & Schuster 2012). His earlier book, "Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy" (Doubleday 2006), was also a New York Times best-seller.
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I found Bruce Bartlett's historical and structural analysis of the U.S. income tax to be informative, balanced and fair-minded. Given his impeccable conservative credentials (having worked with Reagan, Jack Kemp and Ron Paul), I was surprised to see him appear on Bill Moyers' PBS program several months ago (where I learned of this book and subsequently purchased it), but that interview suggested his book would be a clear and sober assessment of the prospects for U.S tax reform, and not a reflection of Grover Norquist-like intransigence and rigid ideology, and it is indeed a fair and balanced evaluation. Essentially, Bartlett seems to be pessimistic about the prospects for reducing spending on the government entitlement programs, and appears equally pessimistic about the prospects for meaningful income tax reform (in light of the power, Bartlett maintains, that Norquist's no-tax-increase pledge has on Republican members of Congress). He therefore proposes a consumption tax to replace / supplement the income tax to increase revenue and slow the growth of public debt and thereby maintain the stability of the U.S. economy.
In the author's analysis of various economic issues pertaining to the U.S. income tax, he will appear to side with liberals on some issues, with conservatives on others, and with neither on some other issues, all contributing to the book's "objective" presentation. For liberals, he appears to favor a comprehensive definition of income and a "fair" tax structure that is based on a progressive rate structure; for conservatives, he favors (or appears to favor) increasing the level of capital losses applicable to ordinary income as a spur to entrepreneurship, and indexing capital gains, at least in principle, for inflation, to remove merely inflationary gains from taxable capital gains. There's even some discussion of either eliminating the corporate income tax (which increasingly accounts for a smaller percentage of federal tax revenue) or more closely integrating it into the individual income tax. Bartlett maintains, however, that some tax rate should apply to capital gains as capital gains meet the definition of comprehensive income, and he even discusses the prospects for taxing unrealized capital gains. He reminds us that increasing the capital gains tax rate in 1986 was the required compromise to enlist Democratic support for the substantial reduction in marginal tax rates on ordinary income in the enormously significant TRA of that year. Implied in the TRA of 1986 was an emerging consensus among liberals and conservatives (or at least among many liberal and conservative economists) that a more "optimal" income tax would exhibit lower marginal rates and a broader tax base. Lower marginal rates, and less tax preferences (a broader base) would be a more "efficient" and less-distortionary tax in that there would be less distortion and waste in the private economy from manipulating the tax system. Liberals would still favor a more progressive structure albeit with lower rates, and some conservatives would still favor a "flat" tax, but TRA 1986 showed that compromise was possible. Bartlett's pessimism (he would call it realism) indicates he sees no sign today of any emerging consensus among our two parties on tax reform, and a major (implicit) explanation is the ideological rigidity of today's tea-party and Grover Norquist-dominated Republican party, particularly at primary time.
Of course another impediment to tax reform is the political clout of those groups wishing to preserve tax preferences and who thereby hinder the attempts to broaden the tax base. For example, the author indicates the difficulty it would take to eliminate the mortgage interest deduction in the face of the real estate industry and its Congressional friends. The elimination of the state income tax deduction would be opposed by forces in high-tax states like New York and California. A good many of these tax preferences are targeted toward specific economic sectors and industries. Economists call these tax subsidies "tax expenditures", and it's suggested that the government spending, which is what it amounts to, should be part of the appropriations process, where the annual level can be budgeted and monitored, rather than part of the tax system where it's permanently maintained in the absence of tax law changes. Thus, we're left with Bartlett's advocacy of a value-added (consumption) tax, that would tax, in the words of its proponets, what taxpayers "take from the economy" and not what they "contribute to the economy" (income). Nonetheless, even Bartlett acknowledges that the value-added tax has been politically unpopular in the U.S. (although widely used in advanced economies), is difficult to administer and particularly to implement, and is difficult to incorporate a progressive structure. For students of public finance, this was a rewarding book.
In the author's analysis of various economic issues pertaining to the U.S. income tax, he will appear to side with liberals on some issues, with conservatives on others, and with neither on some other issues, all contributing to the book's "objective" presentation. For liberals, he appears to favor a comprehensive definition of income and a "fair" tax structure that is based on a progressive rate structure; for conservatives, he favors (or appears to favor) increasing the level of capital losses applicable to ordinary income as a spur to entrepreneurship, and indexing capital gains, at least in principle, for inflation, to remove merely inflationary gains from taxable capital gains. There's even some discussion of either eliminating the corporate income tax (which increasingly accounts for a smaller percentage of federal tax revenue) or more closely integrating it into the individual income tax. Bartlett maintains, however, that some tax rate should apply to capital gains as capital gains meet the definition of comprehensive income, and he even discusses the prospects for taxing unrealized capital gains. He reminds us that increasing the capital gains tax rate in 1986 was the required compromise to enlist Democratic support for the substantial reduction in marginal tax rates on ordinary income in the enormously significant TRA of that year. Implied in the TRA of 1986 was an emerging consensus among liberals and conservatives (or at least among many liberal and conservative economists) that a more "optimal" income tax would exhibit lower marginal rates and a broader tax base. Lower marginal rates, and less tax preferences (a broader base) would be a more "efficient" and less-distortionary tax in that there would be less distortion and waste in the private economy from manipulating the tax system. Liberals would still favor a more progressive structure albeit with lower rates, and some conservatives would still favor a "flat" tax, but TRA 1986 showed that compromise was possible. Bartlett's pessimism (he would call it realism) indicates he sees no sign today of any emerging consensus among our two parties on tax reform, and a major (implicit) explanation is the ideological rigidity of today's tea-party and Grover Norquist-dominated Republican party, particularly at primary time.
Of course another impediment to tax reform is the political clout of those groups wishing to preserve tax preferences and who thereby hinder the attempts to broaden the tax base. For example, the author indicates the difficulty it would take to eliminate the mortgage interest deduction in the face of the real estate industry and its Congressional friends. The elimination of the state income tax deduction would be opposed by forces in high-tax states like New York and California. A good many of these tax preferences are targeted toward specific economic sectors and industries. Economists call these tax subsidies "tax expenditures", and it's suggested that the government spending, which is what it amounts to, should be part of the appropriations process, where the annual level can be budgeted and monitored, rather than part of the tax system where it's permanently maintained in the absence of tax law changes. Thus, we're left with Bartlett's advocacy of a value-added (consumption) tax, that would tax, in the words of its proponets, what taxpayers "take from the economy" and not what they "contribute to the economy" (income). Nonetheless, even Bartlett acknowledges that the value-added tax has been politically unpopular in the U.S. (although widely used in advanced economies), is difficult to administer and particularly to implement, and is difficult to incorporate a progressive structure. For students of public finance, this was a rewarding book.
