The United States marked an important milestone this past weekend. Exactly a century ago this week, the 16th Amendment to the Constitution was ratified, creating a national income tax. The Amendment reads, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Many have characterized this event as the moment the government stepped across a sacrosanct line. Others regard it as the necessary tariff to guard our way of life.
With all the ringing of hands and false courage against raising the tax rate on the wealthiest Americans, a bit of global perspective is merited. If we look at taxes as a portion of the Gross Domestic Product (GDP), we see that taxes at all levels of the U.S. government equal 26 percent of GDP. We can then compare this with an average of 35 percent of GDP for the 33 member countries of the Organization for Economic Co-operation and Development (OECD). The Christian Science Monitor notes that Americans are tied with Japan for the lowest tax rates among the G-7 nations.
In fact, going down a list of developed nations, we see that the United States ranks 30th on the list of taxes versus GDP. It also bears note that citizens of most OECD nations also enjoy fewer work days per year and universal health care. They also spend less on defense contracts, farm subsidies and other corporate welfare.
Another way these disparities manifest is in corporate obligations to workers. According to the non-profit Tax Policy Center (a joint venture of the Urban Policy Center and Brookings Institute), “U.S. employees, on average, contributed more in taxes for retirement and disability insurance — 10 percent of total tax receipts — than many of their OECD counterparts, where such taxes accounted for 9 percent of total receipts on average. U.S. employers, however, contributed less: 12 percent of the total compared with OECD employers’ average of 15 percent.”
The Obama administration recently brokered a deal predicated on raising the tax rate only on those making $250,000 per year or more. The goal is to bring budget deficits down to 3 percent of GDP or less — The Obama administration argues that this, coupled with the natural growth of the economy, would essentially keep the national debt from growing larger as a percentage of GDP.
Hitting that target is a tough trick according to Roseanne Altshuler of the Tax Policy Center. As the White House has already leaned heavily on one revenue-raising option – hiking taxes on high-earning households – to pay for healthcare reform. A plan will be needed that goes beyond taxing the rich. As Altschuler argues, the current course “would require taxing the rich at 77 percent.”
Less we dismiss this out of hand, we should consider other potential contribution of other revenue streams, the estate tax for instance. In 1937, when John D. Rockefeller, Sr. died, his fortune — even factoring in all of his philanthropy — was on the high side of $2 billion. The government yoked his heirs with a 70 percent estate tax.
As history has shown, this Communistic theft was the death knell for the Rockefeller dynasty — not. While David Rockefeller’s present holdings are worth only 10 percent of his grandfather’s (factoring for inflation), a $2 billion fortune in 2013 still keeps the wolf away from the door.
Such horrid travails will never visit most of us. What John Steinbeck said all those years ago is still true today: “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”
While we don’t need socialism, we need to consider the consequences of carrying the financial “water” for a stratum of society to which most of us will never belong.