Spread your own wealth around

When Barack Obama responded to the Ohio plumber who didn’t want his taxes raised that Obama wanted to “spread the wealth around,” I wanted to tell him to spread his own wealth around. It was in any event a rare moment of candor on the part of Senator Obama.

Obama all but told the plumber that his wealth should be seized in the name of equity. The encounter played out one of the old themes of democratic politics: the appeal to the many to take from the few. It’s traditionally an easy sell in democratic regimes.

Despite Obama’s implication to the contrary, however, It doesn’t represent much in the way of change. According to the most recent (2006) data released by the IRS, the top 1 percent of filers paid nearly 40 percent of all income taxes; the top 5 percent paid 60 percent of all income taxes. The bottom 50 percent paid virtually no income taxes (3 percent of all income taxes paid).

The personal income tax, the federal government’s main source of revenue, is collected overwhelmingly from a relative handful of Americans. The large majority of all Americans pay little or no income tax.

Given that poorer citizens always outnumber the rich, political philosophers have long worried that government based on majority rule could lead to organized theft from the wealthy by the democratic masses. “If the majority distributes among itself the things of a minority, it is evident that it will destroy the city,” warns Aristotle.

The founders of the United States were deep students of politics and history, and they shared Aristotle’s worry. Up through their time, history had shown all known democracies to be “incompatible with personal security or the rights of property.” James Madison and others therefore made it a “first object of government” to protect personal property from unjust confiscation. Numerous provisions were included in the Constitution and Bill of Rights to protect the property rights of citizens.

Given that one of the causes of the American Revolution was a tax, the founders understood very well that taxation could become a way for one group to prey on another. So while the Constitution empowered the federal government to levy taxes, it limited this power mostly to indirect taxes like tariffs, duties, and excise taxes. For much of American history the federal government subsisted solely on those fees.

The Constitution did grant the federal government the power to levy “direct” taxes on a “per head” basis, but required that all money raised this way must be given to the states according to their population. The aim here was to preserve a decentralized federal system of rule, and to make it “difficult to place a direct tax on capital, the most destructive tax in terms of economic growth and economic initiative,” according to Professor Edward Erler.

Until the Civil War, the idea of a tax on individual incomes would have seemed preposterous to most Americans. Only as an emergency wartime measure did Congress adopt an income tax in the 1860s, and the measure was allowed to lapse with little fanfare in 1872. Estimates vary regarding the percentage of citizens affected by the income tax of this era, but none places it at more than 10 percent.

The modern income tax begins with the Progressive era in American politics. In an influential 1889 article entitled “The Owners of the United States,” crusading attorney Thomas Shearman argued that the lion’s share of the country’s wealth was in a limited number of hands. If an income tax was not adopted, he warned, within 30 years “the United States of America will be substantially owned” by 50,000 people.

This marked the beginning of a never-ending campaign. Many activists since have characterized America as a permanent plutocracy. And their prescription has generally been more and higher taxes.

Shearman’s advocacy of an income tax found a receptive audience in populist politician William Jennings Bryan. Exploiting the dire economic circumstances created by the depression of 1893, Bryan avidly promoted the adoption of an income tax. His proposal succeeded when Congress passed a 2 percent flat tax on incomes over $4,000 in 1894. The following year, however, the Supreme Court held the tax to be unconstitutional.

In response, Progressives condemned the Constitution as an instrument crafted by the rich to protect their selfish interests (Allen Smith), and a document rendered obsolete by intellectual progress in the century since its drafting (Woodrow Wilson).

The Progessive condemnation of the Constitution climaxed in 1913 with the publication of An Economic Interpretation of the United States Constitution by Columbia history professor Charles Beard. Beard purported to expose the Constitution as the handiwork of a propertied elite serving its own interests to the exclusion of the majority.

Few works of American history have been more erroneous than Beard’s, as later shown by debunking historians like Robert Brown and Forrest McDonald. But by the time scholarship caught up with Beard’s book, a lot of damage had been done. Frenzied attacks on “the rich” and “the wealthy” culminated in the ratification of the Sixteenth Amendment in 1913, authorizing federal taxation of income from all sources without limit.

So why hasn’t the majority in America helped itself to more of the minority’s wealth, as Aristotle and our founders feared? Partly because the protections for individual property erected by the founders have worked. Partly, too, because many Americans’ political convictions are (thankfully) based on principle rather than immediate economic self-interest. And partly because the fraction of Americans who think of themselves as rich, or likely to become rich in the future, is quite large, undercutting the incentive for bashing the rich.

Obama’s appeal for higher taxes to “spread the wealth around” nevertheless harks back to an old theme in political philosophy and American politics. You can believe in it, but it’s not exactly change, and it is more to be worried about than hoped for.

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