85

p The introduction of an individual income tax was an important landmark in the development of the fiscal system. The history of its introduction in the United States is indissolubly linked with a sharp aggravation of the political struggle. The government utilised this tax for financing expenditures during the Civil War. But subsequently the collection of an income tax was discontinued. In 1895 the US Supreme Court ruled as “unconstitutional” the income tax law enacted in 1894.  [85•1  At the beginning of the 20th century the federal government had no income tax and only one state (Wisconsin) had direct income taxes. But the increasing strain of the financial situation of the federal government and democratic pressure compelled the legislative authorities to adopt in 1913 the 16th ammendment to the US Constitution, according to which Congress was empowered to introduce a federal income tax. Since then the income tax has become a consistent component of the 86 US financial system and its role in the revenue of the federal budget has been more or less steadily rising.

p From its very inception, the income tax structure bore an internally contradictory nature. On the one hand, the introduction of this tax was directly linked, as pointed out earlier, with the struggle for a more equitable fiscal system, somehow commensurating the size of the tax with the economic possibilities of the taxpayer. It is not accidental that the decision of the Ways and Means Committee gave as one of the reasons for introducing the income tax the “general demand for justice in taxation".  [86•1  According to the idea of a number of liberal political leaders, an individual income tax had to embody the principle which in modern financial literature has become known as the “ability-to-pay approach".  [86•2  The spread of the money economy relations made the money income (and not, for example, real property) a universal indicator of the material possibilities of the taxpayer.

p Accordingly, income taxation at the first stage affected only persons who received big incomes. During this period the tax-exempt minimum was above the incomes of the overwhelming majority of American families. It should be noted that the rate of the tax for the big income was quite modest. The maximum rate (on incomes in excess of $500,000 annually) did not exceed 7 per cent. That is why a progressive tax on the income of capitalists was playacting, according to Lenin; the entire income tax paid by the American bourgeoisie, together with payments in the form of indirect taxes, did not exceed 1.5 per cent of their income.  [86•3  At the same time the very structure of the federal taxation system, introduced in the USA in the first third of our century, contained elements making it possible to sharply expand the sphere of compulsory taxation. Moreover the further development of state-monopoly capitalism facilitated the utilisation of these possibilities.

p The main method of expanding the federal tax base was through a reduction of the minimum tax exemptions. The 87 development of this tendency was directly linked with the system of financing the governmental countercyclical measures in the 1930s and especially with the steep rise in budgetary appropriations during the Second World War.

p In post-war years the level of the minimum tax exemptions continued to decline but the forms of development of this process were somewhat different. The nominal sum of the income tax exemptions has remained unchanged in recent decades (as compared with 1944 it was even somewhat raised). But the inflationary rise of prices results in the gradual erosion of the real non-taxable minimum. The sum of the non-taxable minimum expressed in constant (1970) prices, in 1970 was for a family of two only onetwelfth and for a single taxpayer one-seventeenth of what it was in 1913 and correspondingly from 33 to 41 per cent lower than at the end of the Second World War.

p Thus the burden of inflation and the almost steadily rising cost of living, as it were, are intertwined with a further increase in the tax load.

p As a result the non-taxable minimum is now much lower than the average level of income in the United States and the tax burden extends to the poorer sections of the population.  [87•1  Whereas in 1913 the federal income tax was paid only by a very small part of the population (less than 1 per cent) now about four-fifths of all Americans have to hand over to the federal government a substantial part of their incomes. As a result, the share of the taxes contributed by those in the lower income brackets is rapidly rising: in 1929 persons with the lowest incomes, up to $3,000 annually, paid only 0.2 per cent of the total individual income tax, while in the mid-1950s taxpayers with incomes of up to $5,000 annually (the size of income of the given group of the population was changed in order to take into account the 88

p Table III-2

Expansion of the Sphere of Federal Taxation 1913-1970

1913 1939 1950 1970

p Sum of minimum* tax exemptions (dol-

p lars, current prices)

p 3,000

1,000

600 600

p Real purchasing power of minimum tax
exemptions (dollars, 1960 prices)

p 8,982

2,128

716 444

p Number of individual income taxpayers,

p per cent of total US population

p 1.0

p 5.0

p 72.6

p 80.2

p Tax paid, per cent of total individual
income

p 0.1

p 1.2

p 8.0

p 11.9

p * For a single taxpayer.

p Sources: Historical Statistics ... 1957; Richard Goode, The Individual Income Tax, Washington, 1965.

p factors linked with the approximate depreciation of the dollar) accounted already for more than 30 per cent.  [88•1 

p The system of income tax rates contains an internal contradiction. The existing progressive tax rates  [88•2  above all reflect the pressure of the struggle for a more just taxation system. But it should be noted that periods marked by a serious rise in taxation of large personal incomes have invariably coincided with a sharp expansion of the tax base and an increase in the financial burden borne by the mass of the population. Thus, just prior to the Second World War, the tax rate on an income of $200,000 and more was 66-79 per cent and at the end of the war it reached the record figure of 94 per cent. But during the same period the minimum of tax exemptions was sharply reduced and the rate of taxing the less well-to-do taxpayers was raised from 4 per cent to 23- 25 per cent. The overwhelming share of the additional 89 budget revenue came from an increase in the taxation of the less prosperous sections of the population.

p In such a situation one gets the impression that the basic change in the system of individual income tax rates, dictated by the tremendous growth of the military expenditure, adds up to increased taxes paid by the mass of working people, while the rise in taxes on big incomes performs the function of a political “safety valve”. It is indicative that the ruling class resorts to the use of this safety valve above all in periods of sharpening socio-political conflicts and intensified movement by the working people against a steep increase in the tax burden.

p At present the bulk of the income tax revenue in the federal budget comes from taxation of the lower rates. At the end of the 1950s the entire progression of tax payments (above the lowest rates) ensured only about 13 per cent of this revenue. As for the highest rates, 50 per cent of the income and more, they constituted only one-sixtieth of the taxable income and brought into the federal budget less than one per cent of the total tax receipts.  [89•1  Moreover the lowest tax rates in the United States are (in respect to their absolute level) by far not so low. Comparison with the taxation system in other countries reveals that in the USA the groups with the lowest incomes contribute a much larger share of the tax than taxpayers with approximately the same incomes in France, Great Britain, Japan or Italy.  [89•2 

p Reference to high tax rates on big incomes is often utilised as one of the main points in discussions on more general ideological questions.  [89•3  The much publicised high 90 level of nominal individual income tax rates actually proves to be quite modest. Assertions that the individual income tax actually absorbs more than half of the rich taxpayer’s income are characterised as naive by many financial experts like Professors Richard Musgrave, Robert Lampman, and many others.

While the nominal rates of the federal individual income tax are characterised by a quite steep progression, from 14 to 70 per cent of the entire income, the real rates change little as the size of the taxed income increases. This is demonstrated in particular by the results of investigation made by R. Herriot and H. Miller, some of the figures are given in Table III-3.

Table 111-3 Real Rates of the Federal Individual Income Tax, 1968 Annual income of taxpayers (thousand dollars) up to 2 2-4 4-6 6-8 8-10 15-25 Real tax rate (per cent of income) 25.6 24.7 27.9 30.1 19.9 31.1 Source: Wall Street Journal, May 9, 1972.

p There is also the following regularity: as the size of the income grows so does the gap between the nominal and the real tax rates. Thus, according to data of the US Treasury Department, the wealthiest families with incomes of $1,000,000 and higher, paid in 1968, 38 per cent of their income as the federal income tax.  [90•1  But these data by no means cover the entire income of the rich taxpayers. According to estimates of J. Pechman and B. Okner, financial experts of The Brookings Institution, the individual tax on incomes of $1,000,000 and more actually does not exceed 91 32 per cent  [91•1  (at the highest nominal rate of 70 per cent). It is easy to see that such a gap between the nominal and real tax rates spells the biggest benefits for the wealthiest taxpayers. Pechman and Okner made a number of interesting calculations, trying to pinpoint the difference between the actually paid tax and the sums which individual groups of taxpayers would have to pay in accordance with the rates officially fixed by law. Here are some results of these calculations: taxpayers with an income of up to $3,000 can “save” $16 annually on tax payments; those with incomes of from $3,000 to $5,000, $48; incomes from $5,000 to $10,000, $340; from $25,000 to $50,000, $4,000; from $100,000 to $500,000, $41,000; from $500,000 to $1,000,000, $202,000 and with incomes above $1,000,000, $720,000.  [91•2  These figures require no additional comment.

p Thus, nominal and real tax rates of the top incomes are separated by a gulf, which largely makes the entire tax progression a fiction. The actual progression of tax rates can be and in many cases is not so much a result of legislative decisions as, according to Richard Musgrave, an “accidental (or worse: intentional, but hidden) result of legislation for loopholes in the tax base and tricks. .. ."  [91•3 

p The rising cost of living which has become a chronic affliction of the American economy, inevitably gives rise to a number of additional problems linked with progressive rates of taxation and increasing nominal incomes. In such a situation a rise in the general level of prices, all other conditions being equal, inevitably increases the tax burden. Let us illustrate this point with the following hypothetical example. Let us assume that the nominal taxable annual income at the initial moment, say, 1965, was $5,600 and, consequently, under the existing law, 22 per cent had to be paid as the income tax. If in the next two years prices, say, rose by 10 per cent, and the level of real wages remained unchanged, then the nominal wages at the end of the period 92 had to be $6,160 and, according to this scale the tax rate had to rise to 25 per cent.

Let us sum up in brief. The introduction of a progressive income tax system was a definite gain for the democratic movement. But this system by itself cannot ensure a true conformity or even a preservation of the former proportions between the amount of taxes paid and the ability to pay. Objective tendencies and contradictions inherent in the capitalist taxation system transform this system into a burden, the main brunt of which is borne by tens of millions of US working-class families. That is why the redistribution effect, connected with the existence of a progressive tax and calculated, say, for every million dollars of budget revenue, is today much lower than before the Second World War.