Taxing the Wealthy

With President Obama’s recent speech on closing the budget gap, the topic of taxing the wealthy comes to the forefront again. This has been a strategy for Democrats from the beginning of our Individual Federal Income Tax (FIT). For approximately half of our Nation’s history we had no FIT. From the beginning, taxes levied by the Federal Government on individuals had to be done on a per head basis or so much tax per person. In 1913 the Constitution was changed to allow for individuals to be taxed based on their earnings. It was sold as a minor tax on the very wealthy. There were two components to the tax. The first was a 1% tax that applied to all individuals and all income. The second was the super tax on higher incomes. The maximum rate was 6% on income over $500,000. That meant the tax on incomes above $500,000 was 7%. Those rates didn’t last long and by 1918 the top rate was 77%. It reached as high as 94% beginning in 1944.

The Democrats’ definition of wealthy has stayed the same over the years. Just as they often fail to inflation adjust many things, they have failed to inflation adjust the level of income that defines wealthy. We often hear that wealthy is defined as making over $200,000 (or $250,000). $200,000 was first used as the top income tax bracket in 1922. Then someone was wealthy since that’s the equivalent of $2,600,000 when adjusted for nearly 90 years of inflation.

Republicans typically counter the “tax the wealthy” strategy by telling us the wealthy are job creators, small business owners and those who invest in new ideas. While this is true, this leaves out two important points. The first is what the wealthy do with their wealth. Americans have been generous people and they give much of their money away to support community projects that they deem of value. Our healthcare system is “the best in the World” because at its core is the not-for-profit system that receives charitable donations. There is no better example of that than the Cleveland Clinic. It opened its new facilities beginning in 2008. Approximately 2/3s of the cost to construct and furnish those facilities was raised through donations. Our Universities are supported by endowments that come from donations. Our cultural institutions such as churches and art museums have benefited by gifts from wealthy donors. And a wide array of support groups count on donations for much of their budget revenues. So taxing the wealthy means less support for these types of organizations.

I usually think of the wealthy in more personal terms. I have three children and many nieces and nephews. In our family we’re now seeing a new generation of grand children and grand nieces and nephews. I want them to be successful in life, however they define success. And if that success brings them above average wealth, I’d like them to have the opportunity to use it for the things they value, not see it taken by government. I want the same for other people’s children and grand children and future generations too. If a young man from Chicago’s “south side” grows up to be a sports star, I want him to be able to use his money to help his community. What if a young women from Cleveland’s “east side” becomes a successful business person, shouldn’t she be able to do something positive for her old neighborhood? So if someone works hard, is creative, has an outstanding talent, comes up with a unique idea or just gets lucky playing the lottery, I’d like to see them retain more of their “earnings” so as to use it to help those they feel are most deserving of their support.

For approximately half of our Nation’s history we didn’t allow the Federal government to tax individuals based on their earnings. During that period we built the foundation of our industry, educational and healthcare systems that have become the “best” in the world. Was it coincidence that the two coincided? Or was a tax policy that allowed individuals to retain their earnings and direct their wealth to those activities and organizations they felt best reflected their values a key element of that success? If it was, why is taxing the wealthy such a good idea after all?