Tax the Rich? It's Been Done, With Depressing Results

Tax the Rich? It's Been Done, With Depressing Results
by Burton Folsom, Jr. and Anita Folsom 10/13/2011

“Raise my taxes,” is the cry from Warren Buffett​, who is playing the straight man for President Obama. But Buffett’s request poses a question. What has happened in the past when, for example, President Franklin D. Roosevelt raised taxes on the rich? Answer: Revenue went down. The Great Depression persisted. And then FDR taxed almost everyone else to pay for World War II.

Here is the story. In 1929, we had a top marginal tax rate of 24% on all income over $100,000. And, according to Historical Statistics of the United States, the federal government took in almost $1.1 billion that year from income taxes. In 1935, after FDR successfully enacted a 79% tax on multimillionaires, the federal revenue from income taxes had been more than cut in half, down to $527 million. Granted, we were in a Great Depression in 1935, but that is in part because we were steadily adding new taxes and raising taxes on income from 1929 to 1935, and those rate hikes helped cause and perpetuate the Great Depression. Why should entrepreneurs invest and take risks when they have to turn more than half of what they might make over to the government?

During World War II, FDR further expanded the federal government. He did not let that crisis go to waste. On taxes, he eventually raised marginal tax rates on the rich to 94% on all income over $200,000. In making the case for huge tax hikes on the rich, Roosevelt’s supporters argued in Congress that government had the first claim on the wealth people earned. On March 30, 1943, Rep. Emanuel Celler (D.-N.Y.) argued, “The government can at any time make income taxes as thumping big as the necessities of war require. Thus, if any plan does not raise enough money, taxes can at any time be increased. The government always has a moral if not actual lien on all our income.”

In other words, according to Celler and others, American citizens do not have the first claim on the income they earn. Government has that claim, and the citizens must accept what remaining income the government chooses to leave them. Many congressmen put up a noble fight in a losing cause. On May 3, 1943, Rep. John Jennings (R.-Tenn.) said of the American taxpayer, “Heretofore, we have sheared him annually—now it is proposed to skin him.” Jennings added, “The time will come if we continue on down the slippery steep road we are now on to the precipice that leads to the bottomless pit, the abyss of financial bankruptcy and ruin. The time will come when we can put a taxpayer on exhibition and make money charging admission for people to see him.”

Because FDR could not fund the war with only the wealth of the rich, he therefore expanded the tax base. Before the war, fewer than 5% of Americans paid any income tax at all. But before the war was over, FDR had almost two-thirds of American families paying some income tax—and the lowest rates, which were only 4% during the 1930s, were raised to 23% by 1944. Thus, from 1935 to 1945, federal revenue from income taxes soared from $527 million to more than $19 billion.

After the war, the income tax remained a mass tax—and withholding gave the government large chunks of revenue collected by employers and handed over to the government regularly throughout the year. What started as a simple and popular plan—to tax the rich to pay first for the New Deal and then World War II—expanded into a reality of near universal taxation at rates starting at 23%.

If government had, as Celler said, “a moral lien on all our income,” then all Americans, not just the rich, were servants of the state. The tax on the rich was merely a step in the process of centralizing wealth and power in the federal government. And the Great Depression and World War II were the crises needed to justify first a temporary and then a permanent transfer of income to the federal government. When FDR went to war, the American citizens went to the cleaners.