The Rise and Fall of Tax Reform
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BOB GARFIELD: This is On the Media. I’m Bob Garfield.
BROOKE GLADSTONE: And I’m Brooke Gladstone.
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Last week, the Republican Senate passed a tax bill intended to restructure the world's largest economy with stunning haste, without expert consultation, filled with indecipherable handwritten additions, riddled with errors and which no one had time to read. But the gist was clear. It was a big win for the 1 percent.
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FEMALE CORRESPONDENT: The President, apparently, waking up a happy man this morning. He just tweeted a few moments ago about the tax bill, saying, “Biggest Tax Bill and Tax Cuts in history just passed in the Senate. Now these great Republicans will be going for final passage.”
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BROOKE GLADSTONE: The bill flew in the face of conservative rhetoric about stabilizing the deficit, and that may be the clearest thing about it. Slashing tax rates for corporations and the ultra-rich will send the deficit soaring. No one argues with that. But not to worry, Paul Ryan has signaled his intention to cut Medicare and other entitlements to balance the books. Never, it seems, has the rhetoric of those who back a bill so belied the actual impact of the bill.
Molly Michelmore is a historian at Washington and Lee University, and she says to understand how we arrived at this moment, we have to go back to the late 19th century, before the age of income tax.
MOLLY MICHELMORE: What the federal government did for most of the 19th century was collect money through tariffs, that is to say, taxes on imported goods. And state of local governments collected taxes through property taxes, through excise taxes, particularly on sinful things like tobacco and alcohol.
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: But what the populists said was that this system of taxation wasn't fair. It didn't get at the extreme wealth of a lot of the Gilded Age robber barons, it didn't tax things like stocks or bonds and the tariff raised the price of consumer goods. And so, what these populists did is they organized around the idea of an income tax, something that would get at the extreme wealth of these Gilded Age millionaires.
BROOKE GLADSTONE: Hence, the populists wanted an amendment to the Constitution.
MOLLY MICHELMORE: That's right. There is a provision in the Constitution which prohibits the federal government from levying a direct tax.
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: And they amended the Constitution, they organized in all of the states and, ultimately, they convinced enough of the states to ratify the 16th Amendment in 1913.
BROOKE GLADSTONE: And there was an immediate backlash, I assume, from the rich people, at the time, the DuPonts and the Mellons, that the amendment and the income tax was aimed at.
MOLLY MICHELMORE: They didn’t like the constitutional amendment but they could live with it, in part because the first income tax was pretty modest. What happens though is World War I. The federal government needs a way to pay for American mobilization, and what they decided to do was levy fairly steep taxes on the wealthy and on corporations. And it's those excess profits taxes, as well as the estate tax, which is also instituted around this time, that really get under the skin of people like the DuPonts. And so, in the 1920s, you begin to see a proliferation of loopholes, of ways that the wealthy can exempt certain kinds of income from taxation.
BROOKE GLADSTONE: In that period, how much did the taxpaying base of Americans grow?
MOLLY MICHELMORE: It expanded tenfold. So in 1939, some 4 million people, a little bit less, are liable for the income tax. By the end of the war, that's grown to over 40 million. And it took a lot of work to not only convince Americans that they should be paying taxes but also to educate them how. And so, the Roosevelt administration and the Department of Treasury enlisted Hollywood. The Disney Studios produced two short films featuring Donald Duck filing his taxes.
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NARRATOR: Help your government by paying your tax and paying it promptly.
DONALD DUCK: Ah, what’s the big hurry?
NARRATOR: What’s the big hurry? Your country is at war. Your country needs taxes for guns, taxes for democracy, taxes to beat the Axis!
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BROOKE GLADSTONE: Do you think that worked?
MOLLY MICHELMORE: It did. There was a great deal of support, both for the war and for the taxes that funded it.
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DANNY KAYE/SINGING: I paid my income tax today.
BROOKE GLADSTONE: [LAUGHS]
MOLLY MICHELMORE: Right, this idea that ordinary Americans can play as significant, as strong a role in this war effort as the Rockefellers, if you will.
DANNY KAYE/SINGING: You see those bombers in the sky Rockefeller helped to build 'em, so did I. I paid my income tax today.
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BROOKE GLADSTONE: You argue that the supporters of the Republican tax bill are borrowing the rhetoric of liberals past. MOLLY MICHELMORE: Liberals in the postwar period were really interested in economic growth and they were really interested in using the tax code to generate that growth. So one of the things that you see in the 1950s and 1960s is that liberal policymakers cut taxes for ordinary middle-class men and women and, at the same time, build these liberal state institutions, what we might think of as postwar welfare state.
BROOKE GLADSTONE: Like?
MOLLY MICHELMORE: Social Security is, of course, created in 1935 but it grows. In the 1950s and 1960s --
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: -- you can look at the Great Society and the War on Poverty. And one of the things that allows them to do that is that until 1983 or ’84, as a result of the 1981 tax cut, the federal tax brackets were not indexed to inflation. So every year if there's a little bit of inflation, and there was just a little bit of inflation in the 1950s and 1960s, the federal government takes in a little more money, without actually having to raise those tax brackets, right?
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: And, in fact, they can cut taxes but because of that inflation they can actually see more revenues coming in.
BROOKE GLADSTONE: So we had a big income tax cut, the Kennedy tax cut but it was signed by Johnson, and the theory was if middle-class America had more money in its pocket it would spend more and spur economic growth.
MOLLY MICHELMORE: You look at the debate around the 1981 tax cuts, the “Reagan Revolution,” there are a lot of people that are trying to make the comparison between what they’re doing in 1981 and what Kennedy and Johnson did in the mid-1960s. And, indeed, that Kennedy/Johnson tax cut did spur economic growth, but the philosophy behind the ‘64 tax cut and behind the 1981 tax cut were very different. The ‘64 tax cut was designed by Keynesians, the thought that the way you grow the economy is to stimulate consumer demand and a way you stimulate consumer demand is to put more money in the pockets of people in the middle.
The 1981 tax cut was a supply-side tax cut, rather than a demand-side tax cut. The idea here was that you wanted to cut taxes, again, on people at the top and that those benefits would ultimately trickle down to those in the middle.
BROOKE GLADSTONE: And the ‘81 cut hurt the economy.
MOLLY MICHELMORE: Debt and deficits explode. And that, in part, is due to the revenue shortfalls because of the 1981 tax cut and the recession of 1982 and 1983, as well as the extraordinary defense expenditures during the Reagan years.
BROOKE GLADSTONE: Now, we associate the fiercest anti-welfare, anti-tax sentiment with Republicans like Reagan and later the Tea Party, but you say that the Democratic Party played their part too in fueling the anti-tax rhetoric.
MOLLY MICHELMORE: In the 1950s and particularly in the 1960s, Democratic state builders are really wary of talking about welfare. President Johnson, for example, was very concerned that his War on Poverty, that his Great Society not be seen as a welfare program. He talked about turning tax eaters, and these are his words, about turning tax eaters into tax payers, right? So there is this real effort to avoid the stigma of welfare.
BROOKE GLADSTONE: And the result is?
MOLLY MICHELMORE: The result is that most people who do, in fact, receive significant forms of economic security from the federal government don't know that they do, right? So you have Social Security, you have Medicare after 1965. After 1972, you have Supplemental Security insurance. People understand those to be entitlements. They are entitled to them because they have paid for them.
Then you have these even more hidden kinds of benefits, and these are things provided largely through the tax code, the home mortgage interest deduction, for example. It is the United States’ de facto housing policy. We spend far more in revenues lost to the home mortgage interest deduction than we do on public housing, but because it's done through the tax code it does not feel like a benefit. And then you have welfare, which is the most visible and the least expensive of all of these programs, but it makes it possible to argue that the federal government isn't spending on people like me.
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: The federal government is spending on people who don't work. They are the takers, rather than the makers.
BROOKE GLADSTONE: You argue that the strategy of hiding middle-class tax benefits has backfired. Would you say that the Republicans have been able to wrest control of the rhetoric?
MOLLY MICHELMORE: Certainly, they have lost control of the terms of the debate. One of the best examples of this is the so-called “death tax.” Liberals ceded ground to anti-tax conservatives when that they allowed this idea that what is really the estate tax --
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: -- is, in fact, a tax on death. And, of course, there’s a very different way of framing that. It could, of course, be a tax on the unearned income of the progeny of very wealthy people. The Republicans won that fight.
BROOKE GLADSTONE: Well, what about the deficit? Throughout the Obama years, Republicans railed against the deficit and the Democrats responded by making deficit reduction a big concern in a lot of their legislation, which is why, when the Republicans passed this tax bill, it seems like the Democrats have been duped all along; the Republicans never really cared about it.
MOLLY MICHELMORE: Yeah, I think you could perhaps describe that as kind of rope-a-dope, right?
BROOKE GLADSTONE: Mm-hmm. [AFFIRMATIVE]
MOLLY MICHELMORE: And it really does begin in the 1970s, again. There’s a guy named Jude Wanniski --
BROOKE GLADSTONE: Mm-hmm.
MOLLY MICHELMORE: -- who was part of this emerging conservative counter establishment that people like Jane Mayer have talked about. He writes this editorial called “The Theory of the Two Santa Clauses” and he makes the argument that in the 1950s and 1960s Democrats had fashioned themselves into the Santa Claus of spending. They were able to give their constituents gifts in the form of federal programs. And what Wanniski says is we have to stop being deficit scolds and what we need to do is become the Santa Claus of tax reduction. And it takes a while but it is a transformation that is by and large complete by the 1990s, as the Republican Revolution really does start to expel old school deficit hawks from the Republican Party because they are not towing the new tax cut party line.
BROOKE GLADSTONE: But they were making a big deal of it during the Obama administration.
MOLLY MICHELMORE: Well, it's good politics if it's somebody else. But, certainly, if you look at the two major Republican administrations after the 1970s, both Ronald Reagan and George W. Bush’s, you see extraordinary deficits and debt happening in those two administrations. It’s a con game. And Democrats have fallen into that trap.
BROOKE GLADSTONE: How would you have us in the media talk about taxes in a more meaningful way?
MOLLY MICHELMORE: Well, one of the things that we need to remember, and perhaps Oliver Wendell Holmes said this best, are that taxes are what we pay for a civilized society. We might want to think about what it is that those taxes that come out of our paycheck every month, in fact, do and the ways in which ordinary middle-class, working-class Americans benefit from the services that those taxes pay for.
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BROOKE GLADSTONE: Molly, thank you very much.
MOLLY MICHELMORE: Thank you very much. This was fun.
BROOKE GLADSTONE: Molly Michelmore is a historian at Washington and Lee University and author of Tax and Spend: The Welfare State, Tax Politics, and the Limits of American Liberalism.
BOB GARFIELD: This is On the Media.