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March 12, 2009
News Analysis: A Class Act
Joseph J. Thorndike

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Is America a class-blind nation? Conservative critics of the Obama administration seem to think so. "The U.S. has never been a society riven by class resentment," declared New York Times columnist David Brooks in a March 3 op-ed. "Yet the Obama budget is predicated on a class divide."

Similarly, in a March 8 article in The Washington Post, Harvard economist N. Gregory Mankiw described Obama's proposed tax increases as a threat to prosperity -- and world peace: "If one citizen of a nation can lay claim to the wealth of his more productive neighbor, shouldn't poor nations have the right to lay claim to the resources of richer nations such as the United States?"

Mankiw seems to believe that any sort of redistribution is morally dubious. Perhaps he's arguing for a head tax. But in any case, he too seems to endorse a class-free approach to domestic taxation.

Well, that would be a first. The United States is not class blind -- not today, not yesterday, not ever. And American tax policy has never been class blind, either. The postclass conceit is a romantic misconception, grounded in political expedience and historical myopia. Ironically, whatever meager plausibility it can muster is actually testament to the importance of class in American tax politics, not its absence.

Classy Taxing

From the earliest days of the republic, tax politics have always been driven by questions of distributional justice. Sometimes class has been obscured by sectional tension. Other times, racial conflict has subsumed questions of economic stratification. But that doesn't mean class has been absent from tax politics. Indeed, every major turning point in American tax history has been formatively shaped by class conflict.

Wars have traditionally been the catalyst for durable tax reform, but the details of war finance have often been a function of class tension, not simple expediency. During the Civil War, for instance, Congress established an income tax to help ensure that rich people would shoulder their fair share of the nation's fiscal burden. "There is no stress of weather which can induce me to vote for the bill as it now stands," complained one Republican lawmaker of a bill that omitted the income levy. "I cannot go home and tell my constituents that I voted for a bill that would allow a man, a millionaire, who has put his entire property into stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax."

Similarly, lawmakers during World War I were explicit about their desire to tax the rich. In 1917 Kansas Republican Edward Little reminded his colleagues that when they decided to draft young men for military service, they also promised to conscript the wealth of rich Americans. "Let their dollars die for their country, too," he declared.

Periods of economic stress also unleash the rhetoric of redistribution. The Civil War income tax disappeared in 1872, but agitation for its revival was a fixture of late 19th-century politics. As Americans struggled to cope with the economic dislocation that accompanied the Industrial Revolution, a loose and shifting coalition of populists, Democrats, and a few stray Republicans called for new taxes on the rich. In general, they justified the income tax as a means to redistribute the tax burden rather than wealth. But surging inequality helped drive the movement for a new income tax.

Taking a Page From FDR

The most important intrusion of class into American tax politics occurred during the Great Depression. Franklin Roosevelt inherited a revenue system heavily dependent on regressive excise taxes, and he consistently resisted calls to reduce taxes on the poor. Instead he set out to raise taxes on the rich. After all, there were two ways to right the misaligned scales of tax justice: take less from the poor or take more from the rich. FDR chose the latter.

FDR's decision was important -- and relevant for today's policymakers -- because it paved the way for a wholesale reconstruction of American government. Roosevelt knew that big government would require big revenue. He also knew that big revenue could never be raised solely from taxes on the rich. But if poor and middle-class Americans were going to be asked, eventually, to pay higher taxes in support of progressive government, they needed assurance that rich people were paying their fair share, too.

To be sure, Roosevelt's new taxes on the rich were intended to raise revenue. But they were also designed to make possible a range of less visible taxes on everyone else. Steeply progressive income and estate taxes made possible the regressive financing mechanism for Social Security. They also provided political cover for the vastly expanded income tax that emerged from World War II. Both of these elements of the postwar tax regime owe their longevity to Roosevelt's soak-the-rich tax policies of the 1930s. Only by taxing the rich could FDR build a government that would help (and tax) the poor and middle class.

Notably, FDR's steeply progressive tax reforms, and the government they funded, did much to mute the class politics of postwar America. There was much to criticize in the tax regime that emerged from World War II, not least its excessive marginal rates and the preferences they encouraged. But the symbolic progressivity embodied in these high rates, coupled with the genuine progressivity of the tax and spending system as a whole, obscured (and ameliorated) the class tensions of American society.

Since the 1970s, the salience of class has been on the rise. Lately it's been catapulted to the forefront of the political debate. And I suspect we may see a replay of FDR's tax strategy.

Obama's narrowly targeted tax increases will not pay the bills of American society -- not the ones we owe today and not the ones Obama plans to incur (think healthcare reform). It seems reasonable to assume that Obama knows this. Which is why I think his soak-the-rich tax policies (if that term is even fair, given the modest increases proposed in marginal and effective tax rates for the nation's top 5 percent) are just a stepping stone toward more fundamental tax reform.

Think of it this way: If you were president, and you knew that some sort of sweeping revenue reform was inevitable, given the realities of public finance and the needs of a struggling nation, how would you prepare the nation? If you believed that America must follow the lead of other industrialized nations and adopt some sort of broad-based consumption tax to supplement a flagging income tax, how would you begin the debate?

By taking a page from FDR and thrusting class to the center of tax politics.