Taxing The Wealthy: A Historian's Perspective
If the tax cut for the wealthiest Americans is allowed to expire, those households making over $250,000 would see their income tax rate rise from 33 percent to 36 percent and those making upwards of $375,000 would go from a 35 percent rate to 39.6 percent. But does it make sense for the tax rate for someone making six figures to be the same as for multimillionaires?
Joseph Thorndike, who directs the Tax History Project at the nonprofit group Tax Analysts, tells NPR's Melissa Block that there may be better ways to tax the wealthiest of the wealthy than through high rates -- but that hasn't stopped the government from trying since the income tax was created in 1913.
When the income tax was first levied, the top tax rate was 7 percent for people earning more than $500,000. The top rate began skyrocketing after that.
"The rate during World War I got up to 77 percent in very short order. There was a lot of pressure on the federal government to raise money quickly, and the income tax was quite a tempting target for them," Thorndike says. "By the time of [President Franklin D. Roosevelt] and the next war, the rate topped out at 94 percent, which is almost inconceivable today but was consistent with FDR's political philosophy and with the revenue needed at the time."
FDR explained the need for a 94 percent rate, Thorndike says, largely in terms of sacrifice.
"He believed that if America's young boys were sacrificing on the battlefield then the least we at home could do was sacrifice from our pocketbooks," Thorndike says.
But were those at the top rate actually paying it or were they finding ways around it?
"There are always ways around tax rates," Thorndike says. "People will avoid taxes even in those moments of national sacrifice."
The wartime rates were retained for more than a decade after the end of the war.
As for present-day, there are reasons both for and against taxing the superrich at superhigh rates, Thorndike says. For one, he says, the wealthiest of the wealthy will find a way around them.
"To some extent, high rates on the rich are self-defeating because they promote a lot of tax avoidance. Tax avoidance in turn irritates regular taxpayers, and that undermines support for the tax system in general, which can actually end up having a perverse effect. You can end up discrediting the income tax itself. It's an irony of progressive taxation," he says.
Thorndike says there's a better way to raise the effective rates on the rich: close loopholes. However, he says, eliminating tax preferences means killing popular tax breaks that everyone enjoys, like the mortgage interest deduction.
"It's very hard to muster the political will to take things away from people," he says. "We'd love to take away the loopholes from the rich guys. We don't want to give up our own."
Thorndike says it's useful to examine the phrase "their fair share" when discussing what wealthy people should owe. "Is it the share of wealth? Or is it the share of the tax burden? Historically, the share of the tax burden has really been what's driving the debate."
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