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Bloomberg/ ­- Politics, Ter, 17 de Abril de 2012
CLIPPING INTERNACIONAL (Supreme Court)
Have the Rich Ever Paid a Fair Share of
Taxes? (Part 2)
As the 19th century wound down, the industrialization
of the U.S., by then the world's largest and most
productive economy, was piling up fortunes of
unprecedented size. Cornelius Vanderbilt had died the
richest self­-made man in the world when he left his
heirs $105 million in 1877. His son William Henry
Vanderbilt doubled his father's fortune in just eight
years. When Andrew Carnegie agreed to sell Carnegie
Steel Corporation to J.P. Morgan for $480 million in
1901, Morgan told him, "Congratulations on becoming
the richest man in the world." By 1910, John D.
Rockefeller was worth $1 billion. But the rich remained
undertaxed. The government still relied mostly on the
tariff to fund its operations and the tariff fell most
heavily on those at the lower end of the socioeconomic
scale. An attempt to impose an income tax on the rich
in 1894 had been thrown out by the Supreme Court
the following year. The political pressure to make the
rich "pay their fair share," however, had not abated. It
had only increased as the country's political center
moved to the left at the dawn of the new century.
President Theodore Roosevelt belonged to the
progressive wing of the Republican Party and had
moved to enforce such measures as the Sherman
Antitrust Act, long thought a dead letter. He even
advocated an estate tax with the explicit purpose of
preventing the "transmission in their entirety of those
fortunes swollen beyond all healthy limits." By the time
William Howard Taft became president in 1909, the
short­-lived recession of 1907 had thrown the federal
government into deficit. Many, including
Representative Cordell Hull of Tennessee ­-­- later
secretary of state under President Franklin D.
Roosevelt ­-­- wanted to simply repass the income tax of
1894 and dare the Supreme Court, which had
become more liberal, to nullify it a second time. This
idea horrified Taft, who revered the Supreme Court.
He was afraid that any such move would put in
jeopardy the court's role as final arbiter of the
Constitution. (Taft would serve as Chief Justice from
1921 to 1930, a job he much preferred to the
presidency.) So Taft offered a very lawyerly alternative.
He proposed a constitutional amendment that would
allow the government to levy an income tax "without
apportionment among the states and without regard to
any census or enumeration," thus making moot the
Supreme Court's 1895 ruling in Pollock v. Farmers'
Loan & Trust. Congress passed the amendment and
sent it to the states for ratification on July 12, 1909.
Meanwhile, Taft proposed a 2 percent tax on corporate
profits. In 1909, the overwhelming majority of stocks
and bonds were owned by the wealthy. It was still
uncommon in the early 20th century for people even to
have bank accounts, let alone own securities. So a tax
on corporate profits was, in effect, a tax on the rich.
And it wouldn't have a Pollock problem because,
technically, it wasn't an income tax at all. Rather, as
Taft formulated it, it was an excise tax, measured in
income, on the privilege of doing business as a
corporation. There was, of course, a lawsuit regarding
the matter, but the high court ruled unanimously in
1911 that the corporate tax was an indirect one and
thus constitutional. The 16th Amendment was declared
in effect on Feb. 25, 1913, after Delaware became the
36th state to ratify it. A week later, Woodrow Wilson
took office and a new, strongly Democratic Congress
quickly passed a personal­-income tax bill. Wilson
signed it into law on Oct. 3, 1913. The law was only 14
pages long and called for a 1 percent tax on income
above $3,000. With an additional marital deduction of
$1,000, only 2 percent of American families were
affected. But the tax was also graduated so that it rose
to 7 percent on income over $500,000, equal to
earnings of about $10 million today. There were
numerous other deductions as well, including the first
$20,000 of dividend income, interest on all debt and
other taxes. Among the 357,598 people who filed 1040
forms (as they were called even then) in 1914 was
Assistant Secretary of the Navy Franklin Roosevelt,
whose form can be seen here. Although he had a very
comfortable gross income of $14,244.86, Roosevelt's
taxable income was only $989.67 and his effective tax
rate (the percentage of total income taxed away) would
have been only 0.6 percent. It was a modest tax at
most, but the rich were, at last, beginning to pay their
"fair share." Unfortunately, Congress didn't integrate
the new personal­-income tax with the corporate tax
that had been originally intended only as a stop­-gap
measure. The failure to do so would have many
perverse effects. One is that bond interest is a
deduction from corporate­-income taxes, but dividends
are paid out of after­-tax income and then subject to
taxation at the personal level, skewing corporate
investment decisions. Worse, the rich ­-­- or more
accurately their accountants and lawyers ­-­- soon
learned how to exploit the two separate, unrelated tax
systems in order to postpone taxes, reduce them or
escape them altogether. The personal­-corporate
income­-tax interaction has been the great engine of
complexity that has now resulted in a tax code that
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