Taxes are a necessary evil, and they're about to get a bit more necessary, with Congress seemingly poised to raise taxes on a least some Americans beginning in 2013.
But Americans didn't always view taxes with the dread and indignation they do today. In fact, during World War II, as the government was hiking taxes on most workers to help pay for the war, Irving Berlin wrote an upbeat patriotic ditty called "I Paid My Income Tax Today," which Danny Kaye sang and hundreds of radio stations played. And until the 1980s, many Americans paid income taxes at far higher rates than we have today, with little of the antipathy that taxpayers feel toward Washington now.
The paradox today is that the tax burden on most Americans is at the lowest level since at least 1979, according to the Congressional Budget Office. That's one reason Democrats are pushing for tax hikes on the wealthy, to help narrow the huge annual deficits that have pushed the national debt above $16 trillion. Yet even as tax hikes on the wealthy are starting to seem inevitable, a huge fight is brewing over keeping them modest and exacting sharp cuts in government spending in exchange. The fight that's starting now over fairly modest tax hikes reveals a country that has changed dramatically over the last 30 or 40 years.
The first U.S. income tax was enacted in 1862 to help pay for the Civil War, according to Michael Lind's economic history, Land of Promise. It expired a decade later, and no permanent income tax was established until the 16th Amendment became law in 1913. (Don't expect much in the way of a centennial celebration next year.)
Tax rates rose during World War I, fell sharply during the 1920s, rose again during the Great Depression, and rose more during World War II. They began to drift down starting in the 1950s, with the Ronald Reagan tax cuts of the 1980s eventually establishing the basis for today's tax code. Here are the tax rates paid by a household earning the equivalent of $50,000 -- today's median income -- along with the top tax rate, during different points in the 20th century:
1918 tax rate on median income: 6 percent; top rate: 77 percent
1928 median: 1.5 percent; top rate: 25 percent
1938 median: 4 percent; top rate: 79 percent
1948 median: 26 percent; top rate: 91 percent
1958 median: 22 percent; top rate: 91 percent
1968 median: 19 percent; top rate: 70 percent
Today's median: 15 percent; top rate: 35 percent
Looking back, what seems extraordinary is that Americans were generally content with across-the-board tax rates during the 1950s and '60s that were far higher than tax rates today. Obviously World War II created a sense of national urgency unlike anything Americans feel today, which is why taxpayers felt a sense of pride in paying taxes and contributing to the well-being of the country--even a decade or more after the war had ended.
But there are some other differences between then and now that reflect the tough new reality politicians and taxpayers face getting American back on track. For one thing, the U.S. economy grew about 4.3 percent per year on average from 1950 to 1970, a powerful rate of growth that made the majority of Americans feel like they were getting ahead. The U.S. economy today is growing at a sickly 2 percent or so, with many frustrated workers feeling like they're falling behind. Nobody wants to contribute more to a system they feel is failing them.
Americans also had far more trust in government in the '50s and '60s, before the Vietnam War and Watergate cast Washington as inept and corrupt. Trust in government seesawed from 1980 to 2008, but it is now at record lows. This affects tax policy directly, because Americans are loath to give more money to the government when they feel it's likely to be wasted -- even if they're willing to do their fair share in other ways, such as contributing to charity.
If there's any good news in these changing attitudes, it's that a sour attitude toward government is likely to keep tax rates relatively low for the indefinite future. So compared to the '50s, '60s and '70s, Americans will most likely continue to keep more of their own money. The problem is that we need to get used to the lower levels of government spending on programs like Medicare, Social Security and defense that sooner or later must accompany lower taxes. Maybe Washington needs to commission some fresh musical propaganda to glorify sharp cutbacks in government benefits.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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