George McGovern’s proposals for tax reform and redistribution of income, originally released in January and published here in slightly revised form, should be read and reread by every one of the more than one hundred million Americans who dropped in the mailbox last Saturday or Sunday, with mixed feelings of civic pride and desperation, their income tax returns for 1971. McGovern’s brief statement contains more hard common sense and practical wisdom than the tired platitudes and inconclusive technical disquisitions that fill the 300 pages of the President’s Economic Report, which was transmitted to the Congress a few days after Senator McGovern made his program public.
The distribution of income is clearly emerging as the issue that will dominate the American political scene in the closing quarter of this century. The share that each member of our society receives in the immense and still swelling stream of goods and services produced annually by the American economy not only largely determines the level of satisfaction of his daily needs but also provides means for attaining many, if not all, of his highest aspirations. But more than this, under our political institutions the income and the amount of wealth controlled by any one group, in relation to other groups, determines decisively the power it can wield in influencing, not to say in directing, all government activities.
Twenty-five percent of the total gross national income is controlled directly by the government, and a much larger proportion indirectly. It is not surprising that by exercising a decisive influence on government policy, particularly in the economic sphere, a small group of citizens controlling a disproportionately high share of the national income and a still greater share of the national wealth has been capable of defending its economic and political dominance against all assaults.
In view of the close interdependence among all the parts of the modern industrial economy, the distribution of income and of wealth naturally depends, to some extent, on every one of its social and economic institutions. However, the power of the government to levy taxes, to borrow and to print money, and to use this immense purchasing power in any way it sees fit has long been recognized as one of the most effective means of bringing about a distribution of income compatible with the prevailing standards of social justice—or as an equally effective means of thwarting attempts to do so.
By the Middle Ages the Magna Charta had linked the notion of equitable taxation with the idea of social justice. The tea tax symbolized the English yoke to the rebelling Bostonians. None of the inequities of the Ancien Régime in France was hated more than the exemption from taxation enjoyed by the Church and the aristocratic upper class. The English orthodox economists, liberal in both senses of that term, staked their hopes for a truly free and fair society on a radical tax reform; so did the heterodox American Henry George.
But the cardinal importance of just taxation has receded in the American political conscience in the last thirty years. While government participation in the management of the national economy has mostly increased, it now consists mainly of trouble-shooting interventions rather than fundamental economic and social reform. Year after year we witness an endless sequence of rescue operations made necessary by the inability of the traditional system of private enterprise to deal effectively with all kinds of problems created by economic growth and the headlong rush of technological change. Decaying metropolitan areas, ailing transportation systems, “structural” unemployment, and a despoiled environment are only a few of the woes that the Republican administration tries to lessen—so far with little tangible success—by a flow of rules, suspended rules, and haphazard measures.
Our once equitable and effective system of taxation has fallen victim to these hapless operations. Exemptions, accelerated amortizations, deductions, and credits of all kinds—avowedly intended to protect the tender sensibilities and to encourage the timid adventurers of rugged private enterprise—have fatally weakened, if not entirely destroyed, the progressive nature of the income, inheritance, and corporation taxes. The “value added tax” now quietly engineered behind the scene, which is nothing less than a universal sales tax, would deliver a coup de grâce to the taxation system of which this country was once rightfully proud.
Senator McGovern proposes to restore and to strengthen the role of taxation as a stern guardian of social justice and an effective instrument of social reform.
Many of the ills that both the federal and the local governments are now trying to cure, or at least to camouflage by various emergency measures, will vanish with the elimination of their fundamental cause—a lopsided distribution of national wealth and income. Canceling all exemptions and deductions would not only restore the honesty and effectiveness of the income and the corporate profit tax. It would also do away with the immense effort now devoted both to legitimate and illegitimate tax avoidance and to tax enforcement. The recent shift from conventional to no-fault automobile insurance has demonstrated how large the savings from such streamlining can be.
McGovern’s tax reform proposals should become the central issue in the electoral campaign. President Nixon has again and again disarmed the opposition by making its proposals his own. It is most unlikely that he will want to do so in this case. What he would have to sacrifice are not lofty principles but hard cash.
Many Americans feel themselves the victims of economic discrimination at the hands of the federal tax system. Although that system is, in many respects, one of the most enlightened in the world, it is an undeniable fact that millions of ordinary, working, middle-income families pay their taxes as required by law, while many of the wealthy use a variety of devices to escape their rightful tax burden. At the same time, the man in the middle sees billions of dollars going into welfare programs that don’t work. In short, many Americans pay their taxes dutifully and feel that others are exploiting the tax and welfare systems.
The most urgently needed change in our systems of taxation and public assistance is to place far greater emphasis on fairness. Each American should feel that he is getting his money’s worth and that he is being treated exactly like every other American. Each American should pay his fair share and each American should receive his fair share. That is clearly not the case now.
The purpose of taxation
In the United States, taxes pay for those activities which we wish to have carried out by government rather than by the private sector. The costs are supposed to be carried by each income group paying its share and by those within each income group paying a similiar amount. The progressive tax system asks those who are better off to bear a greater share of the load than those who have less ability to pay. In general, the progressive system is one of the most positive elements of our tax system.
Individual income taxes
Previous efforts at tax reform have failed to bring our system closer to a truly progressive one. Every effort at reform shows that the cloth of our tax codes is so worn that every patch rips another hole somewhere else. Even more importantly, efforts to promote fairness by giving everyone his own loophole are slowly dismantling the progressive federal income tax.
The actual tax system is just about half as progressive as it is supposed to be, according to the tax rates adopted by Congress. While nominal rates range from 0.1 percent at low incomes to 69.2 percent for those with incomes over $1 million per year, actual rates on average range from 0.7 percent to 34 percent.
Two taxpayers with the same annual income pay quite different taxes. A factory worker or a schoolteacher whose taxes are withheld from his wages cannot take advantage of loopholes. He may expect to pay almost $1,000 in taxes on earnings of $10,000. A wealthy person who receives $10,000 income from state and local bonds will pay no federal taxes at all. Clearly this system is unfair.
And these inequities are not theoretical. On the basis of 1969 tax returns, the last year for which figures are available, some 21,317 people earning more than $20,000 paid no federal taxes whatsoever. That includes fifty-six people with incomes in a single year of $1 million or more.
Because the effort to close one loophole at a time has been a failure and because to do so would still leave a great number of inequities until all were closed, we should shift to a really effective minimum tax. While a minimum tax was created in 1969 tax legislation, it is actually window dressing and is not effective. Recent reports indicate that some who earn over $1 million still pay no taxes.
I propose a minimum income tax so that the rich could not avoid their share of the tax burden no matter what loopholes they used. One possible formula would be a minimum income tax to apply to all those with total incomes in excess of $50,000. The entire income of any person in this range would be subject to payment of taxes at a rate of 75 percent of the current statutory rates at the rate that they would have to pay if there were no loopholes. All income regardless of source would be included. (Of course, if the computed tax exceeds the minimum tax, it would be payable.)
If this minimum income tax were now in effect it would bring in approximately $5 billion during the present fiscal year and $6 billion in fiscal 1973. That would amount to about a 7 percent increase in receipts from the individual income tax. This increase would be paid by the wealthiest 411,000 out of the 76 million federal taxpayers.
This basic tax reform would not unfairly penalize the wealthy just because they were well off. It would simply ensure that they could not dump their tax load onto the backs of already hard-pressed middle-income taxpayers.
The strength of the American economy is due mainly to the dynamic growth of the private sector led by corporations and other businesses. It is sound public policy to create the conditions for business to function effectively.
The federal tax system has been used to help the corporation. As Joseph Pechman, one of the leading tax experts in the United States, points out: “A special tax on the corporate form of doing business is considered appropriate because corporations enjoy special privileges and benefits.” In order to stimulate corporate economic activity, the federal government can and does alter tax rates. That is the principal form of assistance that has recently been given.
The present corporate tax rate is 48 percent of the taxable base defined by law. Of this, 22 percent is the normal tax which applies, without the 26 percent surtax, to the first $25,000 of corporate net income. This feature is of special benefit to small businesses—some 77 percent of the taxpaying corporations. It should be maintained.