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December 28, 2011
News Analysis: Can Taxes Prevent Social Unrest?
Joseph J. Thorndike

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Things are bad and getting worse -- and might get much worse if policymakers don't get on the ball.

At least that's the message from a recent report by the International Labor Organization.1 "The next few months will be crucial for avoiding a dramatic downturn in employment and a further significant aggravation of social unrest," the U.N. agency warned. "The world economy, which had started to recover from the global crisis, has entered a new phase of economic weakening."

The fragile state of the world economy is hardly news, but the ILO's link between economic dislocation and social unrest provides new grist for the worry mill. Social instability has been rising around the world, especially in economically advanced countries. "In 40 per cent of the 119 countries for which estimates could be performed, the risk of social unrest has increased significantly since 2010," the agency wrote.

Unrest occurs for a variety of reasons, and explanations tend to be nation specific. In some countries, for instance, political oppression seems to be the root cause. Traditional and social media have also played a disruptive role in some countries, accelerating and enabling social protest.

But among advanced nations, the central issues are economic. "Lack of employment opportunities and inequality appear to be driving the numerous protests," the ILO concluded. "The Report shows that the trends in social discontent are associated with both the employment developments and perceptions that the burden of the crisis is shared unevenly."

Other observers have offered similar diagnoses. "With people in the streets from Athens to Oakland, the ILO clearly has a point about the advanced economies," Donald Marron, director of the Urban-Brookings Tax Policy Center, blogged.2

Yale economist Robert Shiller has emphasized the corrosive effect of high and persistent joblessness. "Unemployment tears the fabric of our society," he wrote in a November 2011 article. "Some of the social discord and mistrust of government in our country of late is surely connected to long-term unemployment."3

Is Government the Solution or the Problem?

Almost everyone agrees that unemployment is a serious problem, and many would endorse government efforts to lessen it. Few today would embrace the hard-nosed advice that Treasury Secretary Andrew Mellon offered during the early days of the Great Depression. "Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate," he told President Hoover. "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."4

Assuming that government has an active role to play, what should it be doing? Shiller has suggested raising taxes and using the resulting revenue to subsidize private sector employment. In particular, he has endorsed a plan by Columbia University's Edmund Phelps to provide a range of subsidies at an annual cost of $150 billion,5 saying the program "would be well worth the expense."

The ILO, for its part, has offered a comprehensive set of tax recommendations, arguing for "innovative" revenue reforms that could be used to finance employment programs: "If properly designed, the implementation of taxes such as property and environmental taxes could serve to redistribute income towards workers without adversely impacting the productive base; while financial transaction and activities taxes could help to stem some of the excessive risk taking that has led to market volatility, particularly in the commodity market."6

Government-sponsored employment programs may be useful; indeed, they may be vital. And using progressive taxes to finance them seems reasonable, especially because new taxes on the rich are less likely to depress aggregate demand than new taxes on the less fortunate.

Moreover, if the ILO is right about inequality as a driver of unrest, then progressive taxation might help with that problem, too. If you want to save the United States from dangerous political instability, then redistributive taxes are just the ticket, right?

Historians have been dubious about that prescription. Conservative critics insist that liberal professors have commandeered the historical profession, and generally speaking they're right. But when it comes to taxation, the liberal eggheads don't always line up on the side of progressive reform. In fact, some have treated progressive taxes as an instrument of oppression.

Case in point: historian Robert Stanley's account of the early income tax. In a groundbreaking and highly influential book, Stanley argued that the income tax wasn't actually a tool for meaningful reform and instead was designed to buttress existing structures of economic power.7 Middle- and upper-income conservatives created the income tax as a means to deflect more radical calls for thorough economic reform, he said.

"To the centrist lawmakers [who created it], income taxation represented not an expression of real economic democracy through a reduced burden on the poor and middle classes, but a rejection of the far more fundamental institutional change advocated by intellectuals and street dissidents of both left and right," Stanley wrote.

Deflecting Social Unrest

According to Stanley, the income tax, especially in its early incarnation, was never a serious threat to wealth and privilege. Rates were low and exemptions were high. The tax provided the appearance, but not the substance, of true reform and was little more than a rhetorical sleight of hand.

In some respects, Stanley's argument is persuasive. In its early years, the income tax probably didn't do much to redistribute wealth, let alone recast the foundations of economic power. And it helps explain why some conservatives, like Social Darwinist William Graham Sumner, supported new taxes on income.

But to accept Stanley's interpretation, which treats the income tax as an opiate for the oppressed masses, you need to explain not just why some conservatives supported the legislation (a task that Stanley manages with some success, at least for some periods), but also why other conservatives fought the idea so bitterly and why left-leaning political leaders embraced it.

Were conservative opponents of the income tax just too stupid to appreciate its utility as a tool of oppression? Were populists like William Jennings Bryan simply hornswoggled by the forces of entrenched economic power?

Of course not. When it came to the income tax, conservative opponents and populist champions both understood that the levy opened the door to meaningful reform. Indeed, even Sumner warned that the income tax would be "a mischievous communistic arrangement" if enacted with a graduated rate structure. He and other conservatives understood that the income tax had the potential to play a meaningful -- and disruptive -- role in American society.

It didn't take long for that potential to become reality. If we extend our historical gaze a few years beyond the end of Stanley's story, we see something remarkable. The tepid tax of 1913, with a top rate of just 7 percent, became a fire-breathing levy just five years later, when the top rate reached 77 percent.

Sure, top rates dropped after the end of World War I. But even during the Republican-led 1920s, they never fell below 25 percent (and then only for a few years, when they again leapfrogged back into the high double digits). Once lawmakers ventured into the stratosphere of superhigh rates, they were less afraid to return.

On balance, it seems clear that progressive taxation can play both a conservative and a disruptive role. From the perspective of a left-leaning radical, anything that accommodates the existing structures of economic power is complicit in their economic oppression. The income tax is a case in point, because even in its most radical historical incarnations it has never been highly redistributive. If revolution is your goal, then progressive taxation is your enemy.

But if revolution doesn't seem appealing, then income taxes can serve a vital progressive function. They may not challenge the structures of economic power, but they can still serve the cause of economic justice.

Most of today's activists seem to recognize that fact. To the extent that the Occupy Wall Street movement has any sort of identifiable program, progressive tax reform seems to be on it. "Tax breaks for the wealthy that were untouchable before September 17th are suddenly in the crosshairs of Congress," wrote George Gresham, a labor activist sympathetic to the Occupy movement.8 "Giant corporations that pay no taxes are finally being called to account, and more progressive taxes are being promoted in Albany and elsewhere."

Ultimately, progressive interest in progressive tax reform may tell us more about modern liberalism than it does about tax policy. Today's "radicals" are generally less radical than their left-leaning predecessors. You don't hear a lot of talk these days about labor challenging capital for ownership of the means of production.

But assuming that most of us consider social unrest to be a problem (at least when allowed to escalate too far), then progressive tax reform seems like a pretty good idea. Fair taxes may not solve all the problems of the world -- or even of the left -- but they could make things better. And maybe that's enough.


FOOTNOTES

1 ILO, "World of Work Report 2011: Making Markets Work for Jobs" (Oct. 31, 2011).

2 See http://dmarron.com/2011/11/05/the-rising-risk-of-social-unrest/.

3 Shiller, "The Fire Bell of Unemployment," The New York Times, Nov. 26, 2011.

4 Hoover, The Memoirs of Herbert Hoover: The Great Depression, 1929-1941, 30 (1952).

5 See Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (2007).

6 ILO, supra note 1, at 98.

7 Stanley, Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861-1913, 230-231 (1993).

8 See Gresham, "Occupy Wall Street: The First Quarter and Beyond," The Huffington Post, Dec. 16, 2011.


END OF FOOTNOTES