When Income Was Taxed at 94%: How FDR Tackled Debt and Reckless Republicans
FlaglerLive | August 14, 2011
How much can a U.S. president committed to greater equality hope to accomplish when lawmakers devoted to helping the rich hold the upper hand?
Advocacy for equality must take a backseat, Obama administration insiders insist, when fanatical friends of the fortunate in Congress recklessly endanger our nation.
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But in 1943, a U.S. president confronted a debt ceiling crisis just like Obama’s — and came up with a different answer. Facing rabid lawmakers every bit as opposed to taxing the rich as ours today, Franklin D. Roosevelt didn’t let up on the struggle for a more equal America. He doubled down.
Roosevelt’s debt ceiling battle actually began right after Pearl Harbor. The nation needed a revenue boost to wage and win the war.
FDR and his New Dealers wanted to finance the war equitably, with stiff tax rates on high incomes. How stiff? FDR proposed a 100 percent top tax rate. At a time of “grave national danger,” Roosevelt told Congress in April 1942, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” That would be about $350,000 in today’s dollars.
The year before, steel exec Eugene Grace had grabbed $522,537, over $8 million today, in 1941 salary.
But conservative lawmakers would quickly reject FDR’s plan. Four months later, Roosevelt tried again. He repeated his $25,000 “supertax” income cap call in his Labor Day message.
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Congress shrugged that request off, too. FDR still didn’t back down. In early October, he issued an executive order that limited top corporate salaries to $25,000 after taxes. The move would “provide for greater equality in contributing to the war effort,” Roosevelt declared.
Infuriated conservatives saw red, literally. The “only logical stopping place for this movement,” fumed Princeton economist Harley Lutz, would be “a completely communistic equalization of incomes.”
Rich-people-friendly lawmakers vowed to kill FDR’s executive order by any legislative means necessary. They ended up attaching a rider repealing the order to a bill that would give the wartime debt ceiling a desperately needed lift. FDR tried and failed to get that rider axed, then let the bill with it become law without his signature. He had no choice. Our troops needed financing.
Roosevelt had definitely lost the debt ceiling battle over the salary cap, as he no doubt knew he would. But sometimes a leader can win by “losing.” FDR didn’t prevail on the cap. He did prevail in his far broader struggle to shape the wartime finance debate.
Roosevelt’s relentless campaign to cap top incomes kept that debate focused on taxing the rich. Conservatives didn’t want to do that taxing. They wanted a national sales tax, as do many conservatives today. But FDR’s aggressive advocacy for equity never let that regressive sales tax notion get traction.
The war revenue debate would be fought on Roosevelt’s terms — not on whether to tax the rich, but on how much. And, in the end, that “how much” would turn out to be quite a great deal. By the war’s end, America’s wealthy would be paying taxes on income over $200,000 at a 94 percent statutory rate.
Americans making over $250,000 in 1944 — over $3.2 million today — paid 69 percent of their total incomes in federal income taxes, after exploiting every loophole they could find. In 2007, by contrast, America’s 400 highest earners paid just 18.1 percent of their total incomes, after loopholes, in federal taxes.
The debt ceiling “solution” that White House and congressional leaders bargained does not ask these top 400 — or any other rich Americans — to pay a penny more in taxes than they do now. In the 2011 debt ceiling struggle, inequality has clearly triumphed.
So what does FDR’s debt ceiling battle teach us? Maybe this: We really can have a more equal America. We just need to fight for it.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies.