At first the income tax applied only to the 1% of top earners and was very small with a top bracket of 7%, but under the pressure of the First World War the highest bracket leaped to 77%. In the 20’s the wealthy fought the tax on two fronts: first they pressured Congress to lower the highest rates and push the tax down to capture revenue from the well off non-rich; second, they went on a “tax strike” involving tax avoidance and downright tax evasion. Despite big tax cuts passed by Congress in 1921, 1924 and 1926, the number of tax returns filed by the wealthiest dropped to 50% of the 1916 level, and a tax system originally designed to cover only the very rich was transformed into one that taxed most of the middle class at rates approximately the same as those applying to millionaires…
Taxing The Wealthy
Wealth taxes seem to get avoided and have been dumped by most odd the European nations that had them. At this point, only Spain, Norway, and Switzerland have them. In the latter case, they have no property taxes or capital gains taxes, so they are in a very different situation from the US or other nations. Hard fact is there are much better ways of taxing the wealthy than via a wealth tax, which does not work...
Progressivism will not achieve its promise without embracing the technology and market forces that enable economic growth. An advanced ageing society that does not embrace technology and well regulated markets is doomed to stagnation, and stagnation means a zero sum economy in which a small elite of the powerful and the wealthy will advance their interests at the expense of the many.
While many analysts have pointed to the role of globalization, the decline of unions and other factors in causing this reversal of fortunes, what has gone largely unnoticed is the huge impact of a change in tax policy and new wealth defense strategies of the rich. The tax burdens on wealthy has steadily become much lighter, while tax burdens on the middle class, taking into account all types of state and local taxes, grew much heavier and as a result average went from seeing rapid gains in disposable income to being mired in stagnant incomes and rising debt. Turning the tide back in favor of the middle class will require first and foremost a lengthy battle on the tax front, but the middle class and public in general, unfortunately, knows nothing about taxes and has even less interest in the subject, while the wealthy spend a majority of their time on taxes and care little about anything else.
The Threat Of Taxation
The coming of the industrial revolution brought huge accumulations of wealth in the form of company stock, other securities and urban property that quickly eclipsed landed estates as the primary form of wealth. This also made wealth much more vulnerable to taxation, and with the states getting more involved in providing services and welfare to the growing population of industrial workers, the threat of taxation became more and more the central concern of the wealthy. In the U.S. this came to a head in 1894 with the first attempt to introduce an income tax that applied only to the very wealthiest members of society.
As the nation-states grew in power and became engaged in expensive wars, the threat of taxation became a major concern, putting an entirely different aspect on the defense of wealth. One of the most successful methods of countering this threat, especially in Britain, was for the wealthy to lend large sums of money to the government by purchasing its debt obligations. This was a time when the British government and Bank of England floated huge bond issues to finance the Napoleonic Wars and expansion of the British Empire, including “gilt-edged” securities with extended maturities and perpetual bonds called “consols”. The wealthy became accustomed to holding most of their surplus and liquid wealth in these government bonds that gave them a very safe and reliable income of around 5% p.a.. Acquiring national debt with an attractive 5% coupon was seen by the wealthy as being much more attractive than submitting their estates to higher taxation.
The most strategic theater is taxes, with combat conducted on two fronts. The first is the effort to lower the published top tax rate as much as possible and also to set the income threshold for the top bracket low enough that large numbers of relatively modest income earners feel the pain of the ultra-rich. The second front is making the spread between the published tax rate and actual (or “effective”) taxes paid as wide as possible. This is one of the most important and costly fights the income defense industry wages on behalf of its patrons. In the 1970’s, the wealthy paid an average effective tax rate of about 55 percent, which was almost 80 percent of the top published rate. By 2007, the top 400 income earners in America paid an effective tax rate of 16.5 percent, which was barely 50 percent of the top published rate. Thus, the industry delivered lower tax rates on which the wealthy paid a lower proportion. The richer the client, the wider the income defense spread achieved.