August 5, 2022
On this day in 1861, President Abraham Lincoln signed into law a new tax law to help fund the United States government during the Civil War. Far more than writing a traditional revenue act to address the catastrophic war that had demonstrated its horrors just two weeks earlier at the Battle of Bull Run, Congress deliberately constructed the law to shift ownership of the American government away from the bankers who had previously provided Treasury funds, to the American people.
Over the next four years, the Republican Congress would put taxes on virtually every product in the country and then, to guarantee that “the burdens will be more equalized on all classes of the community, more especially on those who are able to bear them,” as Senate Finance Committee chair William Pitt Fessenden (R-ME) put it, they invented the nation’s first income tax.
In 1861, Congress levied a 3% tax on income over $800; in 1862, concerned that the level of taxation necessary to pay for the war would be too much for most Americans to bear, Congress placed a general tax at 3% and created a progressive income tax. It taxed income over $600 at 3% and income over $10,000 at 5%. “The weight must be distributed equally,” Representative Justin Smith Morrill (R-VT) said, “not upon each man an equal amount, but a tax proportionate to his ability to pay.” In 1864, Congress revised those numbers upward. They put general taxes at 5% and raised the income tax brackets to 5% for income from $600 to $5,000 and 7.5% for income from $5,000 to $10,000.
Morrill thought it was important for the federal government to collect the tax directly to illustrate that people were supporting the United States of America, not individual states, as they might think if states collected the taxes. The federal government had a right to “demand” 99% of a man’s property for an urgent necessity, he said. When the nation required it, “the property of the people… belongs to the Government.”
Indeed, the new taxes cemented loyalty to the United States. With their money behind the war effort, Americans became more and more committed to their cause. As the war costs mounted, far from objecting to taxes, Americans asked their congressmen to raise them, out of concern about the growing national debt. In 1864, Senator John P. Hale (R-NH) said: “The condition of the country is singular…I venture to say it is an anomaly in the history of the world. What do the people of the United States ask of this Congress? To take off taxes? No, sir, they ask you to put them on. The universal cry of this people is to be taxed.”
Enlisting more than 2 million soldiers and sailors into the war effort, moving them, equipping them, and arming them eventually cost the United States more than $5 billion. Taxes paid for about 21% of that cost.
This day in history seems relevant again in 2022 as today’s Republicans stand united against the Inflation Reduction Act.
This new bill, announced by Senator Joe Manchin (D-WV) and Senate majority leader Chuck Schumer (D-NY) on July 27, will invest $386 billion into addressing climate change and new energy development, and $100 billion in new health care spending, including extending subsidies for the Affordable Care Act. The measure will raise about $790 billion in savings and revenue over a decade. It will save money by enabling Medicare to negotiate the prices for certain prescription drugs and by beefing up funding for the IRS to enforce existing tax laws. It also will raise revenue by requiring corporations to pay a minimum tax of 15%. The measure is projected to raise about $50 billion a year for 9 years, which will be used to reduce the federal deficit by $300 billion.
Last night, Arizona senator Kyrsten Sinema, the last Democratic holdout on the bill, said she would support it if leaders added drought money for Arizona and removed the carried interest loophole that lowers taxation for certain wealthy hedge fund managers. The carried interest loophole would have raised $14 billion, but Democrats instead added a 1% tax on stock buybacks, which is expected to make up that money.
The measure is expected to pass the House but can make it through the Senate only because Democrats will pass it under the system known as reconciliation, which cannot be filibustered. Republicans are dead set against the measure, although all of its pieces are widely popular. Indeed, the Inflation Reduction Act seems to reflect the sort of government the Republicans constructed during the Civil War: one that answered to the American people, and one in which the government is making an effort to distribute the costs of that government among people according to their ability to pay.
Today’s Republicans reject the idea. Instead, echoing Republican rhetoric since the 1980s, Senate minority leader Mitch McConnell (R-KY) has taken the position that taxes do not build the country, but destroy it. He says that Democrats “want to pile on giant tax hikes that will hammer workers and kill many thousands of American jobs.”
And yet, in the Wall Street Journal, Princeton economics professor Alan S. Blinder, who served as vice chair of the Federal Reserve from 1994 to 1996, points out that the proposed tax changes “are tiny compared with the Trump tax cuts,” which “slashed the top corporate tax rate from 35% to 21% and allowed more items to be expensed.”
What is at stake in this contest is the same issue Republicans grappled with in the 1860s, guaranteeing that “the burdens [of taxation] will be more equalized on all classes of the community, more especially on those who are able to bear them.” Now, though, it is the Democrats taking up that cause.
The Senate will work on the bill this weekend.
The introduction of the Inflation Reduction Act caps what has turned out to be a spectacular week for the Biden administration. Jobs numbers out today showed not the downturn that many expected, but instead the addition of 528,000 new jobs, restoring the U.S. job numbers to where they were before the pandemic and putting unemployment at 3.5%, the lowest rate in 50 years. The United States Chips and Science Act (CHIPS) and the Promise to Address Comprehensive Toxics Act (PACT) have both passed Congress. The president authorized and troops achieved the killing of al-Qaeda leader Ayman al-Zawahiri. And gas prices have hit a 50-day low.
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Notes:
https://www.crfb.org/blogs/whats-inflation-reduction-act
https://www.cnn.com/2022/07/27/politics/schumer-manchin-deal-build-back-better/index.html
https://www.nytimes.com/2022/08/04/us/politics/sinema-inflation-reduction-act.html
https://www.cnn.com/2022/08/04/economy/monthly-jobs-report-preview-july/index.html
A progressive tax seems to be the answer to many problems. In the 50s we were a prosperous nation with a growing middle class and a 90% top bracket. Why not go back to what worked? This Republican Party is no longer the party of Lincoln. They abandoned that a long time ago, and with it they abandoned the American people.
Senate Majority Leader and Whip Kyrsten Sinema certainly held the Senate hostage for $5 billion in drought money and narrowing the carried interest loophole. Not sure why such a tax is of interest to her. Business interests. It was suggested private parties were after her to stop it from going into effect.
By her lonesome this time. Can't blame Manchin. Instead, Democrats added “a new 1 percent excise tax on stock buybacks that will bring in $73 billion, far more than the $14 billion raised by the carried interest provision, according to a Democrat familiar with the deal.”
Ok, that is sweet as it reduces the deficit. MMT proponents would argue, "who cares, we are sovereign."
We need a few more Senators so we can take away Sinema and Machin's temporary title of Senate Majority Leader.