Celebrating The 16th Amendment: What We Pay For Civilized Society

Derek Pugh

Engraved onto the front of the Internal Revenue Service building is Oliver Holmes’ wise words: “Taxes are what we pay for civilized society.”

This year, the 16th Amendment, which grants Congress the right to levy an income tax, will be 100 years old. The anniversary falls during a unique time in our nation’s history: Middle-class workers are feeling payroll taxes take a bigger bite out of their paychecks even as the wealthiest continue to enjoy a slew of tax breaks. This was never the intent of the 16th Amendment.

In 1907, much as it did in 2008, the country was faced with a recession and growing income inequality. Both periods featured stock market crashes, a strident tightening of credit, and an extended recession. Populist outrage led both political parties to favor an income tax during the election of 1908, and in 1913, the 16th Amendment was born. At the time, the richest one percent of households held roughly 18 percent of the Nation’s wealth.

With the possibility of the United States’ entering into World War I, the Revenue Act of 1916 was passed. Rates on the wealthiest Americans were raised from 7 percent to 77 percent, taxes on corporate earnings doubled, the exemption for dividend income was eliminated, and an estate tax was introduced. At the time, only 5 percent of American families paid personal income taxes, yet they accounted for about 80 percent of revenues.

Not surprising, business interests fought back and in 1921 Republican candidate Warren Harding was elected to office. Harding appointed Andrew Mellon, who held office under three Republican presidents, as Secretary of Treasury. Under Mellon, the top tax rate was capped at 25 percent, the estate tax was cut, and capital gains were exempted from income. Income inequality reached its peak: in 1928 the wealthiest held almost a quarter of all income. These conservative tax policies contributed to the stock market crash of 1929, and the Great Depression soon followed.

In a way similar to the recession of 2008, the Depression called for more progressive spending policies in the form of The New Deal. Under President Roosevelt, the top tax rate climbed up to 79 percent, and income inequality began to shrink as the economy recovered. More progressive tax reform was passed in The Revenue Act of 1942 to broaden the American tax base and to fund World War II. After the act became law, 85 percent of households were filing a return. Between 1941 and 1945 federal taxes as a share of the gross domestic product grew from 7.6 percent to 20.4 percent. Income from taxing corporations also accounted for more than 5 percent of GDP, compared to the 1.3 percent of GDP they comprised in 2010.

Once again, big business and lobbyists continued to hammer away at the 16th Amendment, with conservative Robert Dresser leading the way. Notice the trend yet? Dresser drafted a change to the amendment that would make Mellon’s 25 percent cap on the income tax permanent. In 1961, the House’s Joint Economic Committee reported that the change would cost $13.1 billion annually. Today, there are still corporate CEOs and conservative leaders who advocate for the repeal of the amendment. Grover Norquist has called it “a terror and torment to the honest citizen.”

Since the 1960s the economy has suffered under the proliferation of tax exemptions, credits and loopholes. The 1980s were a perfect storm: President Reagan lowered the top income tax rate from 70 percent to 28 percent, and under Reagan’s conservative policies the debt rose from $933 billion to $2.6 trillion.

In the decades since, the 16th Amendment has continually suffered abuse, income disparity has been increasing, and once again, the richest 1 percent of households hold almost a quarter of America’s wealth.

As history has proven, conservative policies hurt the economy and the middle class, and serve the interest of the wealthiest. In September, economist Thomas Hungerford at the Congressional Research Service examined our history of tax policies and concluded that “changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth” but do “appear to be associated with the increasing concentration of income at the top of the income distribution.” Yet, as evident by the current fiscal showdown, many House Republicans are neither historians, economists, nor the stewards they have sworn to be.

Recently, even Thomas J. Wilson, CEO of Allstate and former member of the Fix the Debt campaign, has said that companies who use public services and pay no taxes “are not good citizens,” and the practice is “fundamentally unfair.” He also stressed good corporate citizenship and this “crazy” fact that when the middle class thrives, so do businesses because our economy is so interconnected.

In his inauguration speech, President Obama also stressed the importance of unity, saying, “Now, more than ever, we must do these things together, as one nation,” and reiterated the fact that taxes are “the commitments we make to each other.”

Obama understands that the wealthiest are still taking more than their fair share, and that further cuts to programs will only hinder the growth of the middle class and the economy: “For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class.”

Will Obama repeat history by sticking to his guns and, like Roosevelt, secure a more progressive tax policy in the coming fiscal showdown? Whether or not Obama makes that his cause, we should make it ours.

Comments