With each passing day, the tax policies of the Obama administration and congressional Democrats look more like Herbert Hoover’s Revenue Act of 1932, one of the most infamous pieces of legislation in U.S. history. The announcement from Senate Democratic leaders this week that they are considering an excise tax on soft drinks — a piece of the 1932 act that almost no one expected to see — is one of many ominous similarities.
Excise taxes like this were everywhere in 1932; they brought in more than half the Revenue Act’s money. This was in part the result of a compromise between congressional supporters of a national sales tax and an administration that preferred an expanded income tax. But the thinking at the time was that the only way to generate a big revenue increase in the face of severe economic weakness was to collect small sums across millions of transactions made by Americans of all income levels. Hoover also needed this revenue increase to make good on his promises to launch new economic programs and modernize government.
The conditions are much the same today, between the poor state of the economy and President Obama’s desire for “stimulus” (in 1932 they called it “relief spending”) and a $1.2 trillion health-care overhaul. So in some ways it’s not surprising that our policymakers have arrived at similar solutions. Yet since all Americans pay the same amount per given transaction, excise taxes become more punishing for the poor — especially when the poor consume more than the average amount of a taxed good, as is the case with soda.
The potential damage to those who choose to drink soda is staggering. The Democrats have yet to announce precise numbers, but late last year the Congressional Budget Office estimated that a three-cent tax on each 12-ounce serving of soda could raise $24 billion over four years. (Hoover’s soda tax brought in a mere $7 million.)
But the similarities don’t end with sugary beverages. The 1932 tax actincluded excises on everything from trucks, tires, jewelry, and chewing gum, to gasoline and electricity. And modern Democrats are working hard to make their list just as long. They’ve already hiked cigarette taxes. And this week, former Democratic National Committee chairman Howard Dean floated the idea of a hike in the federal gasoline excise tax to pay for health-care reform. At 10 cents a gallon, it is most of the way to the 15 cent (inflation-adjusted) gasoline excise tax of the 1932 act.
There’s also a much bigger energy excise tax on the table. The president’s cap-and-trade proposal for the 2010 budget is a de facto excise tax on items that throw off carbon emissions during production, as well as on every other technology that relies on the most affordable energy sources (natural gas, oil, and coal). In the budget blueprint, this tax is projected to raise $645 billion, but White House economist Jason Furman has said it could raise two or three times that amount.
The parallels between the tax policies of 1932 and today even extend beyond excise taxes. The income-tax hikes in 1932 were big — the top rate went from 25 percent to 63 percent, producing a revenue estimate of 0.3 percent of gross domestic product. The Obama administration has proposed a similar tax hike on the rich, although it would only push the top rate up to 39.6 percent, which is lower than the 50 percent top rate that was in effect before the 1986 Tax Reform Act. Even so, the Obama proposal amounts to $615 billion by White House estimates, which is, coincidentally, about 0.3 percent of GDP.
The estate tax offers another eerie similarity. In 1932 the estate-tax rate was hiked from 20 percent to 45 percent. Obama plans to keep that rate at its current 45 percent, and the exemption at its current $3.5 million. But this halts the Bush administration’s planned phase-out, which would have eliminated the estate tax next year. (Without new legislation, it would have risen back to the 2001 level of 55 percent in 2011.) Obama also promises to wring even more tax revenue from estates by disallowing many of the planning practices that family businesses rely on to pay less of this tax. The tax is estimated to destroy as many as a quarter of a million jobs per year.
Despite President Obama’s promise that “If your family earns less than $250,000 a year, you will not see your taxes increase a single dime. I repeat: not one single dime,” broad excise taxes on electricity, gasoline, and even soft drinks are now in play. If we continue to repeat the policies of the 1930s, we risk repeating the same result — a prolonged and painful economic slump.
Let’s hope Congress has the good sense to say no to these Hoover-style tax hikes.