The income tax rate on the top income tax bracket is currently 33%. Lately, there have been calls to raise the rate on the top bracket to bring back some level of progressive taxation to our income tax system. The discussion in the media and on blogs rarely gets past petty name-calling and one-liners. Income taxation is a bit more complicated.
When income taxation came into permanent existence in 1913, just less then 100 years ago, the sales pitch was that the taxation would be progressive. People who gained the most from the infrastructure and government (transit, law enforcement, defense of business operations and trade through the use of the military abroad, and most importantly protection of contracts through the court system) would be taxed at a higher rate than others. Before 1913, income taxation had been lurking around, but failed to become a permanent feature of US government. Until 1913, the US government was funded almost exclusively through trade tariffs, a system put in place by the first Treasury Secretary of the US, Alexander Hamilton.
After 1913, income taxation was indeed progressive for most of the 99 years of its existence reaching nominal taxation percentages for the richest 1% as high as 94% under FDR and staying above 90% throughout Republican Dwight D. Eisenhower’s administration. In fact, income taxation remained progressive until 1988 under George H.W. Bush when the tax rate for the top income bracket was dropped from 50% to 28%. Ronald Reagan began the move away from progressive taxation when he dropped the top bracket from 70% to 50% while simultaneously embarking on an endeavor to drop trade tariffs, a radical new federal trade policy called variously Free Market Trade or Globalization. The loss of revenue from the changes in trade policy caused President Reagan to actually raise taxes several times on all of the other tax brackets below the top. He also doubled the FICA taxes on the self-employed in order to create a “social security surplus” ostensibly to deal with the perceived future crisis due to the size of the baby boom generation. This new, radical policy of Reagans caused an ever widening gap between productivity and wages which led to our current income inequality. The Social Security “surplus fund” was immediately used by the Reagan and Bush administrations as a personal bank account from which they “borrowed” over $2 trillion dollars to fund various pet projects; everything from Star Wars to the Contras in Nicaragua to black budgets for the various intelligence agencies and the Pentagon.
Meanwhile, regulations were relaxed to the point of nonexistence on corporations. The new trade policy benefitted big business and the corporations by allowing them to arbitrage labor, environmental regulations and tax laws. Thanks to the dropping of tariffs, corporations could move manufacturing to low wage, developing nations and pay drastically lower wages while encouraging despotic foreign governments to discourage any and all union activity that might raise the standard of living of those foreign workers. These same developing nations had/have no environmental laws to burden the manufacturers, so all costs could be externalized to the environment. Finally, the corporations could use the new “globalization” to move capital all over the globe and effectively avoid taxation of their vastly higher profits thanks to the exploitation of what amount to slave laborers, lax environmental laws and no or drastically reduced tariffs.
Back here in the good old USA, the economy cratered because of the ever increasing wage gap and the lack of decent jobs while the people in the top income bracket found ways to lower their taxes even further by paying themselves in stocks and dividends. Hedge Fund managers and Venture Capital fund managers like Mitt Rmoney were able to drop their effective tax rate to less than 15% with this maneuvering. Because the US no longer manufactured many goods and no longer created actual value, speculation became the only way to make vast sums of money. Essentially gambling.
Like most people, I don’t like income tax and I actually hate the IRS. I’m all for ending it before its 100th birthday. Let’s bring back trade tariffs to fund the government. Let’s drop the tax percentage on corporations (nominally the highest in the industrialized world at 35% though none but small business actually pay that) to something like 15% and force them to pay every single dime with no deductions or loop holes. For corporate behemoths like Bank of America, Exxon Mobil and Citigroup their actual tax rate was 0% in 2011. That’s right, you probably paid far more than they did in taxes last year.
Let’s stop this experiment that began just about 32 years ago under Reagan and that has continued under Bush, Clinton, Bush and now President Obama. This radical free market fundamentalism has collapsed the global economy and hollowed out the US economy. All we need do is bring back the trade policy of Alexander Hamilton. Corporations like Apple that use what amounts to slave labor to manufacture products would be forced to either move their operations back to the US to avoid the import teriff or continue with their exploitative practices and pay 30+% for each iPad it ships back. By the way, don’t worry about the price of your precious macs, learn a little economics and look up something called price inelasticity. There is an upper limit people will pay for an iPad. Apple knows that number and is currently charging that amount or close to it. That is reason why Apple was one of the most profitable corporations in 2011 with over $100 BILLION in profits. Profits they can use to lobby government and modify regulation buy up or destroy competition and fund their colossal ad budget to encourage demand. If we changed our trade policy back to our traditional tariff based trade, the price of iPads wouldn’t go up faster than the rate of inflation, but Apple’s exorbitant profits would go down. I’m using Apple as a particularly high profile example here, not picking on them. After all, I’m writing this on an iMac.
All of our problems stem from bad policy choices. Policy choices that are new if you look at the historical sweep of our country. There is a reason polls about taxation alway pit the rest of us against the “rich”. There is a reason the corporatists in both parties rely on simple, one line appeals to emotion or red herrings about how only 50% of people pay taxes (the 50% that don’t are too poor from lack of decent employment to have to pay income taxes, but they do pay every other tax at a much higher rate than do the rich) or how we have the highest taxes on business in the world. This issue IS complicated, but anyone can understand if they just take the time. If you do take the time you will see just how badly you are being robbed everyday by what amounts to a corporatocracy that has captured our democracy and corrupted our governments. The last thing the free market fundamentalists want is a functioning, strong US Republic that regulates corporations to maintain competition and stop cost externalization. That is the reason they have done everything in their considerable power to destroy this capture our democracy and install corporatist puppets.