Politics & Policy

War Is the Health of the Taxman

Democrats want a temporary war tax on the rich, like the one from 1898.

Rep. David Obey, the Democratic majordomo of the House Appropriations Committee, is proposing an income-tax hike, something that Democrats are congenitally disposed to do, with one familiar condition — it’s only on the “wealthy” (wink, wink) — and one slightly less common condition — it’s presented as a dedicated surtax to fund the war in Afghanistan. The politics of the move are vulgar and obvious (The rich can afford it! Why don’t you support the war? Taxes are patriotic!), but there’s a bit of history with temporary emergency war taxes on the rich that ought to make Americans wary: They are not temporary, they outlive their emergencies, and they end up punishing Americans who are far from rich. (Not that even the rich need to be taxed any more than they already are.)

The most irksome example of such a tax is the 3 percent levy Americans pay on telephone services, which they also paid on long-distance charges until 2006. That tax was a temporary emergency levy on the rich adopted in 1898 to pay for the Spanish-American War. At the time, a telephone was a very high-end item — something that only businesses and the wealthy might have. The Spanish-American War lasted four months (We won! Cuba libre!), but the tax is now into its second century. And the only reason it was partly repealed in 2006 is that Uncle Sam lost a lawsuit challenging its collection as illegal (on baroquely complicated technical grounds having to do with changes in the way long-distance bills are collected). In 2009, when people of very modest means own iPhones, nobody would think that the mere possession of an old Bakelite rotary landline set qualifies a family as belonging to the gentry, but many of the poorest Americans still pay this tax for the luxury of access to 911 services and the occasional chat with Grandma. Damn the Monroe Doctrine.

#ad#At its height, the phone tax was, relatively considered, only a nuisance, good for few tens of billions of dollars a year in Washington’s coffers. The big money-suck is that other emergency wartime levy on the rich: the income tax. Those of you who are not recent graduates of a government-run high school will recall that there was some 19th-century unpleasantness between the states, which got totally out of hand after that lamentable episode at Fort Sumter, known to American historians as the Civil War. On Aug. 5, 1861 — talk about a day that will live in infamy! — the United States adopted its first income tax. Thankfully, the United States had a Republican president at the time, Abraham Lincoln, so the taxpayers got off relatively easily, with a 3 percent flat tax on income above $800, equal to about $18,000 a year in scandalously depreciated 2008 dollars. The statute was admirably comprehensive and straightforward in its language, demanding that the tax be “levied, collected, and paid, upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever.” No mortgage-interest deductions or pantywaist progressive brackets for these Republicans! They were pretty hardcore — think about it: The United States was in the midst of its worst crisis ever, the only real, imminent existential threat the nation ever had faced, and the worst we got was a 3 percent flat tax. (Where are those Republicans when we need them?)

#page#But those were the golden days, and the tax of 1861 was soon replaced by the more ambitious revenue regime of 1862. There was a war on, and paying even more taxes was the price of victory, supposedly. But the war was long over in 1894, when a Democratic Congress (ahem!) enacted the first non-war-related regular income tax. Taxes are like cocaine for politicians: A nice brisk dose of instant hubris accompanied by feelings of euphoria and potency that are in themselves at least as addictive as any inherent property of the drug itself. These being Democrats, it was a tax on “the rich” — those making more than $4,000 a year had to pay a rate of 2 percent. My handy inflation calculator tells me that’s $98,312.51 in 2008 dollars. Those of you (of us!) with incomes under $98,312.51 may have noticed that you do, in fact, pay federal income taxes, and at a rate a bit more than 2 percent.

The 1894 tax was thrown out by the Supreme Court, we got the 16th Amendment, yadda yadda. (Dear 16th Amendment tax-protest theorists: I’ve already heard it all, so save your crayons!)  We ended up with a permanent federal income tax, but it was a low, flat, highly restricted tax. And then we had some more wars and some more “emergency” measures. War is the health of the taxman.

#ad#In 1914, the top tax rate was 7 percent, and you had to make the equivalent of $10 million a year to pay that rate. The Great War gave Congress the great idea of just appending another 7 onto that rate, and the maximum was thereby jacked up to 77 percent. Still, you had to make $1 million a year in 1914 dollars to pay that, or about $16 million in contemporary dollars. Postwar, the top rate was reduced to 24 percent, but the top income bracket was lowered, too, and radically so: down to $100,000, or just over $1 million a year in contemporary dollars. World War I thereby brought us much closer to the familiar modern “progressive” model of income taxation in the United States. The run-up to World War II repeated the Great War model, with a very high rate of taxation on very high incomes: 75 percent on incomes of more than $5 million, or $77 million in 2008 dollars. (For comparison, Goldman Sachs CEO Lloyd Blankfein, Wall Street’s highest-paid executive, made $54 million in 2006, less than three-fourths the income needed to hit that top rate.) As before, that model was followed by a reduction in the rates, along with a much more radical reduction in the income threshold at which one gets taxed at those rates.

One may observe, without disrespecting the brave and fierce Americans serving in Afghanistan and Iraq, that whatever challenges we face in those countries, this isn’t the Civil War, World War I, or World War II. The Civil War was the bloodiest conflict in American history, and we fought it, for a time, with a 3 percent flat tax. In 1945, at the height of the truly emergency measures necessitated by the actual emergency of World War II, government spending as a percentage of GDP hit a high of 53 percent. By 1946, spending was down to 36 percent of GDP.

Think about what was going on in 1946, which was no slouch of a year: World War II had been concluded only a few months before, the U.S. already was building up its nuclear arsenal with all deliberate speed, the Cold War was just starting to get very cold indeed. In 1946 there were disasters ranging from a tsunami in Hawaii to a revival of Showboat to the election of Republican majorities in both houses of Congress, and our government managed to handle all of that, while mopping up after the worst military conflict the world has ever seen, on 36 percent of GDP. In 2009 we’re going to spend 45 percent of GDP, practically none of it related to saving the world from Nazi Germany — and Democrats in Congress want a special, temporary, emergency tax on the rich to fund the war in Afghanistan. Stop them if you’ve heard this one before.

– Kevin Williamson is a deputy managing editor of National Review.

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