Working Poor

By Barbara Ehrenreich

Journalist Barbara Ehrenreich recounts her experiences — and the effort to make ends meet — at a series of near-minimum-wage jobs. Here she writes about an interval as a contract cleaner of elegant homes in Portland, Maine.

Liza, a good-natured woman in her thirties who is my first team leader, explains that we are given only so many minutes per house, ranging from under sixty for a 1-1/2-bathroom apartment to two hundred or more for a multi-bathroom "first timer." I'd like to know why anybody worries about [the official] time limits if we're being paid by the hour but hesitate to display anything that might be interpreted as attitude. As we get to each house, Liza assigns our tasks, and I cross my fingers to ward off bathrooms and vacuuming. Even dusting, though, gets aerobic under pressure, and after about an hour of it — reaching to get door tops, crawling along floors to wipe baseboards, standing on my bucket to attack the higher shelves — I wouldn't mind sitting down with a tall glass of water. But as soon as you complete your assigned task, you report to the team leader to be assigned to help someone else. Once or twice, when the normal process of evaporation is deemed too slow, I am assigned to dry a scrubbed floor by putting rags under my feet and skating around on it. Usually, by the time I get out to the car and am dumping the dirty water used on floors and wringing out rags, the rest of the team is already in the car with the motor running. Liza assures me that they've never left anyone behind at a house, not even, presumably, a very new person whom nobody knows.

In my interview, I had been promised a thirty-minute lunch break, but this turns out to be a five-minute pit stop at a convenience store, if that. I bring my own sandwich - the same turkey breast and cheese every day - as do a couple of the others; the rest eat convenience store fare, a bagel or doughnut salvaged from our free breakfast, or nothing at all. The two older married women I'm teamed up with eat best—sandwiches and fruit. Among the younger women, lunch consists of a slice of pizza, a "pizza pocket" (a roll of dough surrounding some pizza sauce), or a small bag of chips. Bear in mind we are not office workers, sitting around idling at the basal metabolic rate. A poster on the wall in the office cheerily displays the number of calories burned per minute at our various tasks, ranging from about 3.5 for dusting to 7 for vacuuming. If you assume an average of 5 calories per minute in a seven-hour day (eight hours minus time for travel between houses), you need to be taking in 2,100 calories in addition to the resting minimum of, say, 900 or so. I get pushy with Rosalie, who is new like me and fresh from high school in a rural northern part of the state, about the meagerness of her lunches, which consist solely of Doritos — a half bag from the day before or a freshly purchased small-sized bag. She just didn't have anything in the house, she says (though she lives with her boyfriend and his mother), and she certainly doesn't have any money to buy lunch, as I find out when I offer to fetch her a soda from a Quik Mart and she has to admit she doesn't have eighty-nine cents. I treat her to the soda, wishing I could force her, mommylike, to take milk instead. So how does she hold up for an eight - or even nine-hour day? "Well," she concedes, "I get dizzy sometimes."

Cash poor

How poor are they, my coworkers? The fact that anyone is working this job at all can be taken as prima facie evidence of some kind of desperation or at least a history of mistakes and disappointments, but it's not for me to ask. In the prison movies that provide me with a mental guide to comportment, the new guy doesn't go around shaking hands and asking, "Hi there, what are you in for?" So I listen, in the cars and when we're assembled in the office, and learn, first, that no one seems to be homeless. Almost everyone is embedded in extended families or families artificially extended with housemates. People talk about visiting grandparents in the hospital or sending birthday cards to a niece's husband; single mothers live with their own mothers or share apartments with a coworker or boyfriend. Pauline, the oldest of us, owns her own home, but she sleeps on the living room sofa, while her four grown children and three grandchildren fill up the bedrooms.

But although no one, apparently, is sleeping in a car, there are signs, even at the beginning, of real difficulty if not actual misery. Half-smoked cigarettes are returned to the pack. There are discussions about who will come up with fifty cents for a toll and whether Ted [their office-bound supervisor] can be counted on for prompt reimbursement. One of my teammates gets frantic about a painfully impacted wisdom tooth and keeps making calls from our houses to try to locate a source of free dental care. When my — or, I should say, Liza's — team discovers there is not a single Dobie in our buckets, I suggest that we stop at a convenience store and buy one rather than drive all the way back to the office. But it turns out I haven't brought any money with me and we cannot put together $2 among the four of us.

The Friday of my first week at The Maids is unnaturally hot for Maine in early September — 95 degrees, according to the digital time-and-temperature displays offered by banks that we pass. I'm teamed up with the sad-faced Rosalie and our leader, Maddy, whose sullenness, under the circumstances, is almost a relief after Liza's relentless good cheer. Liza, I've learned, is the highest-ranking cleaner, a sort of supervisor really, and said to be something of a snitch, but Maddy, a single mom of maybe twenty-seven or so, has worked for only three months and broods about her child care problems. Her boyfriend's sister, she tells me on the drive to our first house, watches her eighteen-month-old for $50 a week, which is a stretch on The Maids' pay, plus she doesn't entirely trust the sister, but a real day care center could be as much as $90 a week. After polishing off the first house, no problem, we grab "lunch" — Doritos for Rosalie and a bag of Pepperidge Farm Goldfish for Maddy — and head out into the exurbs for what our instruction sheet warns is a five-bathroom spread and a first-timer to boot. Still, the size of the place makes us pause for a moment, buckets in hand, before searching out an appropriately humble entrance. It sits there like a beached ocean liner, the prow cutting through swells of green turf, windows without number. "Well, well," Maddy says, reading the owner's name from our instruction sheet, "Mrs. W. and her big-ass house. I hope she's going to give us lunch."

Mrs. W. is not in fact happy to see us, grimacing with exasperation when the black nanny ushers us into the family room or sunroom or den or whatever kind of specialized space she is sitting in. After all, she already has the nanny, a cook-like person, and a crew of men doing some sort of finishing touches on the construction to supervise. No, she doesn't want to take us around the house, because she already explained everything to the office on the phone, but Maddy stands there, with Rosalie and me behind her, until she relents. We are to move everything on all surfaces, she instructs during the tour, and get underneath and be sure to do every bit of the several miles, I calculate, of baseboards. And be mindful of the baby, who's napping and can't have cleaning fluids of any kind near her.

Heat and Dust

Then I am let loose to dust. In a situation like this, where I don't even know how to name the various kinds of rooms, The Maids' special system turns out to be a lifesaver. All I have to do is keep moving from left to right, within rooms and between rooms, trying to identify landmarks so I don't accidentally do a room or a hallway twice. Dusters get the most complete biographical overview, due to the necessity of lifting each object and tchotchke individually, and I learn that Mrs. W. is an alumna of an important women's college, now occupying herself by monitoring her investments and the baby's bowel movements. I find special charts for this latter purpose, with spaces for time of day, most recent fluid intake, consistency, and color. In the master bedroom, I dust a whole shelf of books on pregnancy, breastfeeding, the first six months, the first year, the first two years — and I wonder what the child care-deprived Maddy makes of all this. Maybe there's been some secret division of the world's women into breeders and drones, and those at the maid level are no longer supposed to be reproducing at all. Maybe this is why our office manager, Tammy, who was once a maid herself, wears inch-long fake nails and tarty little outfits — to show she's advanced to the breeder caste and can't be sent out to clean anymore.

It is hotter inside than out, un-air-conditioned for the benefit of the baby, I suppose, but I do all right until I encounter the banks of glass doors that line the side and back of the ground floor. Each one has to be Windexed, wiped, and buffed — inside and out, top to bottom, left to right, until it's as streak-less and invisible as a material substance can be. Outside, I can see the construction guys knocking back Gatorade, but the rule is that no fluid or food item can touch a maid's lips when she's inside a house. Now, sweat, even in unseemly quantities, is nothing new to me. I live in a subtropical area where even the inactive can expect to be moist nine months out of the year. I work out, too, in my normal life and take a certain macho pride in the Vs of sweat that form on my T-shirt after ten minutes or more on the StairMaster. But in normal life, fluids lost are immediately replaced. Everyone in yuppie-land — airports, for example — looks like a nursing baby these days, inseparable from their plastic bottles of water. Here, however, I sweat without replacement or pause, not in individual drops but in continuous sheets of fluid soaking through my polo shirt, pouring down the backs of my legs. The eyeliner I put on in the morning — vain twit that I am — has long since streaked down onto my cheeks, and I could wring my braid out if I wanted to. Working my way through the living room(s), I wonder if Mrs. W. will ever have occasion to realize that every single doodad and objet through which she expresses her unique, individual self is, from another vantage point, only an obstacle between some thirsty person and a glass of water.

Hands and Knees

When I can find no more surfaces to wipe and have finally exhausted the supply of rooms, Maddy assigns me to do the kitchen floor. OK, except that Mrs. W. is in the kitchen, so I have to go down on my hands and knees practically at her feet. No, we don't have sponge mops like the one I use in my own house; the hands-and-knees approach is a definite selling point for corporate cleaning services like The Maids. "We clean floors the old-fashioned way — on our hands and knees" (emphasis added), the brochure for a competing firm boasts. In fact, whatever advantages there may be to the hands-and-knees approach — you're closer to your work, of course, and less likely to miss a grimy patch — are undermined by the artificial drought imposed by The Maids' cleaning system. We are instructed to use less than half a small bucket of lukewarm water for a kitchen and all adjacent scrubbable floors (breakfast nooks and other dining areas), meaning that within a few minutes we are doing nothing more than redistributing the dirt evenly around the floor. There are occasional customer complaints about the cleanliness of our floors — for example, from a man who wiped up a spill on his freshly "cleaned" floor only to find the paper towel he employed for this purpose had turned gray. A mop and a full bucket of hot soapy water would not only get a floor cleaner but would be a lot more dignified for the person who does the cleaning. But it is this primal posture of submission — and of what is ultimately anal accessibility — that seems to gratify the consumers of maid services.

How the Income Tax Became a Tax on Labor

Jonathan Rowe and Clifford Cobb outline the surprising history of the income tax.

In the midst of a heated controversy over taxes, the young Winston Churchill articulated a guiding principle. "Formerly the only question of the tax gatherer was, 'How much have you got?'" he told his fellow-MPs. "Now we also ask, 'How did you get it?'"

A tax system should reinforce the fundamental moral connection between contribution and reward, Churchill argued. Did you earn your income through enterprise and toil, or at least by providing capital for these? Or did you reap where you did not sow -- garnering profits from what nature, rather than you yourself, had created? "Was the income gained by supplying the capital which industry needs, or merely by denying, except at an extortionate price, the land which industry requires?" The underlying tension was not between capital and labor, as Marxists contended. Rather it was between capital and labor, on the one hand, and something else on the other --- unearned gain arising from the mere ownership of land and natural resources.

In 1909, with Churchill's strong support, Britain enacted a special tax on gains from land. A few years later, the U.S. Congress faced the need to finance America's entry into the First World War. Though not much emphasized in the standard texts, there was significant support for what might be called the Churchillian view, which did much to shape the new income tax that eventually emerged. In concept, the tax spared the earnings of the working person and the productive entrepreneur. It fell instead upon unearned gains that sprang either from the control of land and natural resources, or from the exercise of monopoly power in all its subtle forms.

The Inversion of the Income Tax

That was almost a century ago. Since then, the original vision has been turned upside down. The income tax has come to fall almost entirely upon the workers and entrepreneurs it was intended to spare. In 1918, some 85 percent of American households paid no income tax at all, and almost 80 percent of federal income tax revenue came from the top one-half of one-percent of households. In those days, very little of the burden fell on work. By 1990, almost three-quarters of it did.

The payroll tax, which finances Social Security, has become a monument to this inversion. It falls exclusively on the wages and salaries of working people (up to the $65,000 level, at which point earnings become exempt). The payroll tax constitutes more than half of the federal taxes that the average American pays. The rate today is double -- yes, double -- the top income tax rate in 1913. In payroll taxes alone, nurses and janitors are paying twice the rate that millionaires paid in the version of the tax that Congress first enacted.

Then there's the corporate income tax, which back in the 1920s yielded almost a third of federal revenues. Today corporations pay just a little over one-ninth. "New Economy" and all, a surprisingly large share of corporate income still derives from real estate and natural resources. As recently as 1990, these comprised over 40 percent of the total assets of almost a third of the Fortune 500 companies. So the decline of the corporate tax has been part of the larger reversal of the basic concept behind the original income tax.

Today the federal tax system is essentially a work tax system. It falls hardest upon the human activities the nation most needs to encourage -- ingenuity, intelligence, constructive endeavor of all kinds. It promotes the waste of natural resources, and pure speculation --(in real estate for example) -- that produces no new real wealth. The work tax system especially burdens those who struggle hardest to make ends meet. Yet mainstream debate rarely acknowledges this fundamental perversity. For all the partisan polemics and chest-thumping about "radical reform," there is little disagreement about where the federal tax burden should mainly fall: on work.

In this historical context, there's nothing exceptional about the tax proposals put forward by the Bush Administration. To the contrary, they are entirely consistent with the larger trend. By tilting his cuts implicitly toward upper income Americans, George W. Bush is causing the burden of the overall system to fall more heavily on work. His desire to eliminate the estate tax approaches self-parody in this regard. Inherited money is practically by definition money a recipient did not work for. Typically it includes large capital gains, often from real estate, that were not taxed in the owner's lifetime. Bush wants to eliminate the tax on this money entirely, leaving workers to carry that much more of the burden.

To be sure, there have been a few detours over the years. The Clinton Administration's increase in the Earned Income Tax Credit was a gesture towards the working man and woman, for example. But among the flurry of ambitious reform plans in recent years, only one even began to address the work tax load. In the early 1990s Senator Pete Dominici and former Senator Sam Nunn proposed, among other things, a credit for payroll taxes. If you even heard of the Nunn-Dominici plan, you were more attentive than most. Far more notice has been given to the sundry "flat tax" proposals, which would eliminate any pretense that federal taxes should fall upon anything besides work.

The quiet drift into a work tax system has had large implications for the politics of the Postwar years. It helps explain why the Democrats have lost their grip on working class voters. The original Democratic coalition was a producer coalition, composed of farmers and laborers in particular. The moral drama animating that coalition aimed upwards rather than downwards. The villains weren't welfare queens. Rather, they were those who heap burdens upon producers through financial manipulation or monopoly control, or through the speculative holding of large tracts of land or good water supplies. By focusing on such activities, the income tax affirmed a belief in the work ethic and productive enterprise at the same time.

As postwar prosperity lifted American workers into the middle class, they may have responded less to the class politics of the New Deal. But they still believed fervently in the value of hard work, and in the idea that rewards should be proportional to effort. The work tax system violated those basic values. It reinforced the emerging view that Democrats were the party of entitlement and therapy rather than of honest effort and due reward.

Republicans certainly shared the blame--more than shared it, in fact. By heaping more burdens on labor, they cynically -- and effectively -- contrived to sour the attitude of American workers toward government. Democrats, to their credit, have resisted such things as capital gains breaks for nonproductive investment. But as the Congressional majority for most of the Postwar years, they did much to create "precisely the kind of revenue system that business groups had sought in 1916," as W.Elliot Brownlee, a historian at the University of California at Santa Barbara, has observed.

It is instructive to pause and consider how this happened. The early advocates of the income tax saw the world quite differently than do the "liberals" of today. Their vision combined the entrepreneurial enthusiasm of the supply-siders with the concern for social justice that moves the best of liberal thought. Applied today, these insights could promote economic justice and prosperity, together with a healthy environment.

Early History of Income Taxes

The first income tax in modern history was essentially aimed at land. The year was 1799 and England faced invasion from revolutionary France. The treasury was running dry; and the aristocracy had used its sway in parliament to keep land taxes to a pittance. In desperation, William Pitt, the Chancellor of the Exchequer, came up with another way to skin the cat. Technically it was an income tax. But in practice it affected mainly large landowners, along with factory owners and a few urban professionals. (Government employees also paid, because their jobs were deemed so secure as to be a form of property.)

That British model set the basic pattern for the next century and a half, in America at least. Starting with the Civil War, the income tax was the part of the tax system that the very rich paid, to balance off the excises and tariffs -- and the draft -- which fell heavily on the masses. Like most expansions of the federal revenue system, the tax was primarily a way to pay for wars. The Civil War version actually started in Congress as a land tax, and evolved later into a tax on incomes.

The vast majority of Americans -- some 98 percent -- were untouched; and over half the revenue came from New York, Pennsylvania, and Massachusetts, the industrial states which benefited most from the tariff. (Had Lincoln simply pushed an income tax in the first place, instead of raising the tariff and antagonizing the South, it is conceivable that he could have averted the Civil War in the first place. As it happened, both North and South enacted income taxes to fight one another.)

Under pressure from industrial-state Republicans, Congress repealed the tax in 1871, after paying off the war debt. The main revenue source was now the tariff, which eventually got as high as 45 percent; some accused Republicans of deliberately enlarging the government to justify such high rates. The system provoked growing resentment among rural populists and urban reformers; and finally, in 1894, following a financial panic, Democrats managed to attach a small 2 percent income tax to a tariff bill. The Supreme Court struck it down a year later because it was not apportioned among the states according to population, as the Constitution arguably required (for property income at least).

In 1909, the Republican Congress passed the 16th Amendment, which removed this restriction. The ratification of that amendment set the stage for a heated series of debates over how to pay for the First World War.

These debates raised basic economic questions in a way rarely heard today. It was a time of wrenching economic change. America's traditional producer ethos was coming unglued. Giant corporations such as Standard Oil and the railroads seemed to reap gains far beyond their deserving; the old face-to-face business culture of Main Street was yielding to the amorality of a corporatized market. Novelists and muckrakers portrayed this new economy in unflattering detail, and intellectuals analyzed it with foreboding. Thorstein Veblen argued that the corporate system was wasteful to its core, the privileged recipient of what he called a "run of free income."

Influence of Henry George

This rich contentious brew was the setting of the original income tax debates. Especially important was the work of Henry George, the journalist and self-taught economist who crystallized the issue for the masses. It has become fashionable today to dismiss George as a fringe figure, of which more in a minute. Yet his influence was enormous. His 1879 classic "Progress and Poverty " sold more than two million copies world-wide. George's views on taxation had a major influence upon both Winston Churchill and income tax advocates in the U.S. Congress.

To simplify greatly, George resurrected a question that the dominant economic theory had quashed -- namely, the difference between earned and unearned gain. He asked the question in particular as it related to land and natural resources, which were the objects of so much speculation and graft, in cities as well as on the frontier. Gain from these is fundamentally different than is gain from productive enterprise and toil, George argued. Land values are "created by the whole community," and not by the land owner. (Political machination could also play a part, as illustrated in the movie "Chinatown.")

Landowners "get rich in their sleep," John Stuart Mill had written. He called such gains "unearned increment" because they arise from mere ownership rather than from any productive effort on the owners' part. (Land development and resource extraction, by contrast, are endeavors that deserve reward, conservation issues aside.) George amplified Mill's argument. The question was not just moral but economic as well, he said. Rising land prices, for example, inflict a heavy burden upon those who do produce. When entrepreneurs pay more for land, there's less left over to construct the factory and build the business.

If taxes should fall on anything, George said, it is these unearned -- and counterproductive -- gains. Tax a factory, and beyond a certain point you arguably get less production. Tax land, and you don't get less land. To the contrary, you get cheaper land because owners are more eager to sell. The money that the owner would have gotten as profit goes to the public revenues instead. Then taxes on work can be reduced, and wages effectively rise.

The Georgist analysis was a happy marriage of economics and social justice. It also rewrote the political drama in a uniquely American way. Instead of pitting the heroic worker against the sordid capitalist, George and his followers stood for producers generally against the passive owners and monopolists who rode their backs. "Well may the community... let the laborer have the full return of his labor, and the capitalist the full return of his capital," George wrote. Shifting the tax burden onto Mill's unearned increment would "lift the whole enormous weight of taxation from productive industry."

That argument touched a deep anxiety at a time -- not unlike today -- when an old order seemed to be coming apart. The frontier was closing; the gap between the very rich and everyone else was getting larger than ever. Even farmers, the archetypal landowners, embraced George as an ally against both the hated railroads and corporate encroachment on the family farm. The impending war in Europe seemed of a piece with these developments. Not surprisingly, Georgist views seeped into national politics, playing a prominent role in the discussion leading up to the original income tax.

Republicans and Conservative Democrats favored consumption taxes, in the form of tariffs and excises. If not that, they wanted a broad-based income tax that fell on everyone, the better to dampen enthusiasm for government and its activities. The populist reformers, by contrast, thought ordinary Americans were paying enough in excises and tariffs already. Rep. Dan V. Stephens of Nebraska spoke for many when he said that new revenues should come from the "surplus wealth of the nation that has already been collected into private hands in abnormal proportions."

The idea of "surplus" or "unearned" wealth was a leitmotif in these debates. As Professor Brownlee has observed, the coalition that congealed behind the tax -- farmers, labor, and outright Georgists -- "believed that income taxation should reach only those incomes earned by monopoly power; the incomes of workers and the profits of firms in competitive sectors like agriculture should be exempt."

Paying for the military

The military build-up reinforced this view. Many in Congress felt that the war would benefit primarily the same interests that were gouging the American people in other ways. Therefore, these interests should pay for it. "The luxury of a large standing army and a great navy," declared Congressman Warren Worth Bailey, from Johnstown, Pennsylvania, should be "supported by those whose interests demand that kind of army and navy." A newspaperman and Georgist, Bailey introduced a 5 percent "supertax" on all incomes over $20,000 to pay for naval construction. He also proposed an inheritance tax on "swollen fortunes."

Bailey was part of a swing block in the House that pulled President Wilson's initial proposal in this populist direction. The version ultimately enacted in 1913 started at 1 percent for incomes over $3,000 ($36,000 in today's dollars), and rose to a top rate of 6 percent for those over $500,000. Less than 1 percent of citizens had to pay -- a lower percentage than pay the estate tax today. That was just the start. By 1917, tax rates on the wealthy were ten times higher than in 1913. There was also a special tax on arms dealers. ("Jingoes should pay for jingoism," Congressman Bailey said.)

Wilson's Treasury Secretary went so far as to require annual increases in property values to be reported as taxable income, thus aiming the income tax still more pointedly at unearned gains. The Supreme Court struck down this rule in 1920 because Congress had not specifically authorized it, but the overall pattern of World War One finance continued.

When the war ended, the American tax system came about as close to the producer-populist ideals as it ever would. Some eighty percent of personal and corporate income tax revenues came from the top one percent or so. Eighty-five percent of households paid no federal income tax at all, and there was a widespread feeling that this was right. Henry Ford took out full-page newspaper ads proclaiming it "wise and just" to compel the very wealthy to "bear a fair share of the load which has hitherto rested all too heavily on the backs of the poor."

This was the income tax that the early advocates intended, and the one that remained in force through the Coolidge-Hoover years of the 1920s. Through that decade, only about a third of the federal tax burden fell on working people, mainly in the form of excises. Over 60 percent of federal revenues came from individual and corporate income taxes, over 75 percent of which came from the richest 1 percent of the public. To be sure, Republicans softened the blow at the top by cutting the top rate from 77 percent to 24 percent; they also cut corporate rates by three-quarters.

Yet that patron saint of the supply-siders, Treasury Secretary Andrew Mellon, also pushed a special break for earned income. "The fairness of taxing more lightly income from wages, salaries, [than] from investment is beyond question," Mellon asserted in his book Taxation: The People's Business. "Surely we can afford to make a distinction between people whose only capital is their mental and physical energy and the people whose income is derived from investments." One strains to imagine President Bush or the current Congressional leadership asserting a principle such as that.

The New Deal and the Payroll Tax

It was the New Deal, however, that set the federal revenue system on a different course. Franklin Roosevelt initiated a great expansion of social programs, of course. What is less noted today is how he paid for them. While FDR didn't start out as a tax reformer, pressure from populists such as Huey Long led him to embrace measures that caused dyspepsia among the very wealthy. He revived the estate and gift taxes. To curtail the use of corporations as personal tax shelters, he imposed a special tax on undistributed profits. Roosevelt also raised income tax rates at the top.

But these were minor sources of revenue, affecting relatively few people. Far more significantly, FDR increased taxes on the middle class, beginning with his decision to finance the social security system with a payroll tax.

Contrary to common impression today, this was not a foregone conclusion. Some of Roosevelt's key advisors didn't like the idea at all. The opponents included Rexford Tugwell, a key member of the White House Brain Trust, and Frances Perkins, FDR's Secretary of Labor, who cited the warning of then-Senator Hugo Black of Alabama. "The burden on small employers and the poorest paid workers would be too great," Black had said, "to allow of the gradual expansion of the coverage and benefits, unless the tax resources of the whole United States were involved from the beginning."

Others were concerned about the injustice of relying on a payroll tax that let rich investors off the hook. But FDR was adamant. He genuinely believed that people should pay for what they get (which is why he insisted that the rich pay their share, too). In any case, he didn't think Congress would go along with a social security bill that had the slightest suggestion of welfare.

On top of that, he calculated, future administrations would be loath to tamper with retirement insurance that people felt they had paid for out of their own pay checks. "With those taxes in there," FDR said, "no damn politician can ever scrap my social security program." His political instinct was astute; but the fact remained that for the very first time, the federal government was dipping directly into the paychecks of ordinary Americans.

World War Two: The Income Tax Becomes a Mass Tax

During the Second World War, the federal government dipped even deeper. Once again, FDR had no shortage of proposals to make the wealthy share the load. He even proposed to limit incomes to $25,000 a year. But once again, such moves were gestures against a larger tidal shift. The needs of war finance were massive, and Congress looked towards the middle class. To pay for a mass war, Roosevelt finally had to resort to a mass tax.

The result was a radical shift in the tax burden -- downward. The top rates went up, reaching 94 percent for incomes over $2,000,000. But with the exemption level for low-income Americans cut in half, families making $600 a year -- $6,300 in today's dollars -- paid federal income taxes for the first time. By 1948, the number of Americans affected by the income tax - was ten times what it had been a decade earlier.

The economic logic was ominous, for Democrats in particular. War finance was not the only exigency driving the new taxes on working people. Equally important was the desire to stop inflation on the home front. Military production had created a surge of prosperity, while leaving consumer products in short supply. Too much money chasing too few products -- it was a classic recipe for runaway prices.

Since there couldn't be more products, there would have to be less money sloshing amidst the populace. War bonds could sop up only so much, so taxes would have to do the rest. As a New York Times editorial put it "taxation must be broad enough and stiff enough to siphon off a large part of this excess purchasing power from every one. It must take back a sizable amount of the great rise in income that has gone to these two groups, the farmer and the wage and salary earners."

Let those words linger in your mind. They define the agenda behind the wartime tax system, which soon became the Post-war norm. Working people had too much money, and the tax system would have to take it away. A host of forces worked to keep this arrangement in place once the war was over. Many people believed, not without reason, that massive government expenditures for the war had pulled the nation out of the Depression. Could they take the risk of shutting the federal spigot down suddenly? There were new social programs to pay for -- not least, a GI Bill -- and soon a Cold War to keep defense factories churning.

On top of this, there was the influence of a new generation of Democratic policy whizzes. Under the sway of Keynesian economists, they came to view the income tax as a wondrous lever with which to macro-manage the economy. Raise taxes when the economy is "over-heating," cut them when it slows down; and with spending adjustments to match, the dreaded business cycle would be gone forever.

The Postwar Period: The Burden on Labor Grows
While Congress kept the new broad-based income tax, it repealed the excess profits tax and waged the Cold War without it. In so doing, it let the jingoes off the hook; working men and women would pay instead. Yes, rates nominally were very high at the top Ð officially, 92 percent in 1953. Ridden with loopholes, however, the tax code rarely hit anyone that hard. Worse, the appearance of high top rates tended to cause liberal Democrats to overlook the growing burdens lower down.

In war, Americans could accept such burdens. Their leader even refused to call it sacrifice. It was a "privilege," FDR said, to contribute to the fight for the democratic ideal; and therefore the shared national burden should be called an "equality of privilege." Such sentiments roused the nation to great heights of achievement. But in the postwar consumer culture, people became less inclined to regard their contributions to the federal government as a "privilege." Yet they remained subject to a tax system premised on a need to keep the average Josephine and Joe from spending too much.

To liberal minds, the progressive rate structure was supposed to reduce the sting for working people. They would bear their burdens happily, in the knowledge that executives were paying a higher rate than they. Instead, the rate structure became the sting, as inflation kept pushing working people into tax brackets originally intended for the upper-middle classes. As early as 1952, a worker making $8,000 (about $46,000 in today's dollars) paid about the same effective rate as a millionaire twenty-five years before. Work itself now bore over half of the federal burden relative to corporate profits and investment gains.

On top of that, the payroll tax began to explode, as Hugo Black and others had foreseen. When first enacted in 1937, it was only 2 percent of wages. By 1960 the rate had tripled to 6 percent; and by the time Ronald Reagan took office, it had more than doubled again, to 12.3 percent. (In 1917, that income tax rate had applied to people making today's equivalent of $500,000.) By 1996, the payroll tax stood at 15.3%, split between employers and employees. That was more than the effective income tax rate paid by all but the richest 5% of US taxpayers. A family of four today making $40,000 pays almost twice as much in payroll taxes as income taxes.

In other words, both major parts of the federal tax system -- income taxes and payroll taxes -- now fall largely on the same thing -- work. While the Bush agenda would push this cause with brazen abandon, in fairness it must be said that the Democrats themselves got the ball rolling long ago, when they forsook the principles of the original income tax. The political implications have been profound. As federal taxes crept into their paychecks, working Americans began to question whether Democrats really were on their side. Other factors were involved as well of course, but paycheck issues do not loom small where working voters are concerned.

Back in the Wilson Administration, Mortimer Schiff, an investment banker with Kuhn, Loeb and Co., worried aloud about the "popularity of the [income] tax among the great mass of our people through their escaping this form of taxation." That's no longer a worry. The Democrats, who set in motion the current tax system, have reaped what they sowed.

Tax Reform, Yesterday and Today

Perhaps they did the best they could. But today, with the tax system under broad attack and degenerating into a toll on work, we need to step back and consider where we started. Respectable opinion has attempted to bury the principles of the populist reformers. Yet they are as relevant today as ever. The speculative excesses of recent decades -- from leveraged buy-outs and the Savings and Loan fiasco to the more recent IPO boom and bust -- bespeak a need for tax reform to encourage productive, job-creating gain. The threats of pollution in its many forms -- the waste of energy and resulting "crisis," the costs of suburban sprawl -- demand policies to encourage wiser and more efficient use of land and other natural resources.

That's pretty much what the supporters of the income tax were aiming at. In fact, the Kennedy Administration tried to move in this direction too, though few realized it at the time (including probably JFK himself.) Walter Heller, the chairman of Kennedy's Council of Economic Advisors, had done his Ph.D.work at the University of Wisconsin under Harold Groves, an economist of the Georgist school. Heller's proposals for encouraging new investment-accelerated depreciation and the investment tax credit-harkened back to the ideas of the early reformers for distinguishing productive new investment from, say, unproductive land speculation. (Under the Kennedy approach, land and resource gains still were subject to corporate rates which remained fairly high.)

The approach was oblique and far from perfect. There were still big loopholes for oil depletion, for example. (The Vice President at the time was Lyndon Johnson of Texas.) Still, on the basic question of work and enterprise versus natural resources, the Kennedy approach was in the right direction.

More recently, however, the federal tax system has moved the other way. It has done so under the guise of a principle called "neutrality," which sounds unobjectionable and even worthy. The Tax Reform Act of 1986, for example, has received widespread praise on this account. It reduced complexity and lowered rates somewhat, which was good. But treating all forms of economic activity the same -- that is, "neutrality" -- makes sense only if all activity is the same in terms of economic or social value, which it is not. Should the income from a productive factory be taxed as heavily as royalties from an oil well or gain from the sale of an urban parking lot held off the market until the price peaked? The neutrality principle would suggest yes.

The "Tax-Neutrality" Trap

The "tax neutrality" gambit is not new. In fact it was designed specifically to quash the questions that the early reformers were raising. In no small part it was the establishment's attempt to vanquish the ghost of Henry George. Professor Mason Gaffney of the University of California at Riverside tells this forgotten story in his book, The Corruption of Economics. The popularity of George and other progressive reformers was a big worry for the nation's financial elite. Marx they could dismiss. But George wrote in the American idiom; and his ideas spoke to an idealism that was thoroughly American as well.

The Captains of Industry responded by re-engineering the field of economics. They established new universities. The benefactors of many founded around that time -- Leland Stanford, J.P. Morgan (Columbia), John D. Rockefeller (University of Chicago), Ezra Cornell, and others -- had made their fortunes in land and natural resources, including railroads built on land grants. They were not enthused about an economic teaching that questioned the basis of those gains. Their institutions proceeded to recruit economics faculty who would erase the troublesome distinction between "earned" and "unearned" income and put the "land question" to rest.

The result was what is now called "neoclassical" economic doctrine that dominates the field today. Neoclassical economics reduced the world to just two "factors" of production, labor and capital. Land and natural resources were quietly slipped into the latter category, thus bestowing a protective halo upon the land speculator and resource royalist. These became providers of productive "capital," on equal moral plane with the risk-taking entrepreneur, and deserving of benefits (albeit sometimes different ones) of the tax laws.

Soon we will be hearing a renewed chorus of demands in Washington for "capital gains" tax breaks. The imagery will be of factories and equipment -- the musculature of productivity and growth. Yet in the mid-1990s Professor James Poterba of MIT found that only about 1percent of capital gains flowed from real venture capital. The rest came from such things as antiques, fine art, and existing stock certificates. On top of that, much of the value of those existing stock certificates comes from land and natural resources in corporate disguise. Corporations hold a significant portion of the real estate assets in the US, so increases in stock prices often arise from underlying increases in real estate values, not from job-creating capital. That's a crucial distinction for economic policy. Yet the blinders of neoclassical orthodoxy render it obscure.

Listen closely, though, and you can hear the lingering echoes of the older debate. When Democrats try to restrict capital gains tax breaks to job-producing new investment, they hark back to the original concern over productive versus unproductive gain. The issue even strikes a residual chord among supply-siders -- the more honest ones, at least. In his best-selling Wealth and Poverty (whose title is a tip of the hat to George's Progress and Poverty), George Gilder distinguishes between productive and unproductive gain. When increasing numbers of people spend their money on "relatively nonreproducible objects" such as land and works of art, he writes, "the economy is reoriented away from productive enterprise."

Jack Kemp even has made the connection to taxes -- local ones. In his book The American Renaissance, Kemp proposed a shift in local property taxes to make them "fall more heavily on land, rather than, as at present, penalizing property improvements." Kemp's prose is circumspect; he greatly prefers to talk about what shouldn't be taxed rather than what should. But the thought is pure George, and it makes good sense. When cities shift part of the property tax burden away from structures and onto land -- as some in Pennsylvania have done -- the result is more improvement of property.

Such changes reduce the absurd penalty, in the form of higher assessments, that falls upon those who make such improvements under the current system. They encourage development closer to urban centers and mass-transit nodes, because higher land taxes prod owners to use the land more intensively to generate revenue to pay the tax. The result is more compact development and less sprawl.

If supply siders weren't so blindered by their ideology, they might apply the same logic to the income tax. If the property tax should fall more heavily on land than on improvements to land, so too should the income tax when it comes to land-related gains. If it's wrong to "penalize" property improvements, it's equally foolish to tax penalize the labor that creates those improvements. The answer, in other words, is not a "flat tax," which as generally proposed is a work tax in disguise. (Whether the income tax has a single flat rate is a separate question from what it taxes in the first place.)

Nor is the answer the liberal Holy Grail of steeply progressive rates applied to all income. If a tax concept ignores Churchill's query about the sources of income, it discards the moral and economic vision that animated the original income tax debates, and leaves little more than sterile arithmetic of governmental levy.

Reform to Return to the Original Income Tax
Rather we should reconsider the federal tax system from the standpoint of productive versus unproductive gain. The aim should be to reduce the burden on wealth-creating enterprise and labor, and shift it toward unearned gain in all its sundry forms: financial manipulation, monopoly power, natural resource speculation and the free use of the public broadcast spectrum. This involves some tricky issues, as does any approach to taxation. But the broad outlines are clear enough.

We could begin with that perennial Republican bugaboo, capital gains. As described, conventional thinking lumps together two entirely different things: real capital such as factories and machinery on the one hand, and land and natural resources on the other. Any new tax breaks for capital gains should be limited to job-creating new investment. There's no reason to court a deficit in order to reward gains that create no new jobs or wealth. (That includes sales of antiques, jewelry, fine arts and the like.)

By the same token, we could eliminate provisions in the current law that reward the reshuffling of existing assets with no gain to anyone except the owner. An example is when property owners trade buildings back and forth and can deduct "depreciation" from their taxes over and over.

Then we could eliminate special tax breaks for land and other natural resources. Such breaks serve no economic function; they give rise to no new land and no new coal or oil. (We are talking about mere ownership here, not investment in actual extraction.) Intrepid political souls could attack the array of subsidies for home ownership for the well-to-do, from mortgage-interest deductions to the exemption of capital gains at death. Some two-thirds of the benefit of the mortgage interest deduction goes to the richest 10 percent, which means most federal housing subsidies go to those who need them least.

Then we'd stop the giveaway of national assets such as mining rights on federal lands, and the broadcast spectrum. Once granted, broadcast licenses can be sold for billions of dollars; it's as though the government printed that money and just handed it to broadcasters. We can also stop giving away another precious common resource: the atmosphere. Individuals and corporations currently use it as a dump for pollution, for free. Polluters should pay, just as they would pay for dumping trash at a landfill. They could help curb pollution in the most efficient way possible--by giving companies powerful cost incentives. Measures such as these would let us dramatically cut the work tax load. The ones just outlined could raise over a quarter of the amount the payroll tax now provides. Americans would keep more of the fruits of their own toil, and pay taxes more in accordance with the costs they impose upon others, including future generations. Instead of rewarding those who passively profit from ownership of natural resources, the system would reward the inventors and entrepreneurs who find ways to use natural resources less. In Churchill's phrase, the tax system would promote "a constant relation between acquired wealth and useful service previously rendered."
 

1) For more on the ideas of Henry George see the web site of the Robert Schalkenbach Foundation at www.progressandpoverty.org.

2) For a wealth of facts, figures and policy ideas on the income tax, see Citizens for Tax Justice www.ctj.org.

Pathbreaking CBO STUDY SHOWS DRAMATIC INCREASES IN BOTH 1980s AND 1990s IN INCOME GAPS BETWEEN THE VERY WEALTHY AND OTHER AMERICANS

Study Also Shows Decline in Federal Tax Burdens for All Income Groups

A new pathbreaking Congressional Budget Office study, which includes the best data that any agency or institution has compiled on income and tax trends in recent decades, shows that the average after-tax income of the richest one percent of Americans grew by $414,000 between 1979 and 1997, after adjusting for inflation, while average after-tax income fell $100 for the poorest 20 percent of Americans and grew a modest $3,400 for those exactly in the middle of the income spectrum. In percentage terms, after-tax income grew an average of 157 percent over this period for the top one percent of the population, rose a modest 10 percent — about one-half of one percent per year — for the 20 percent of Americans in the middle of the income spectrum and was effectively unchanged for those in the bottom fifth.

Average After-Tax Income Gains, 1979-97
Top 1%	$414,200
Middle fifth	$3,400
Bottom fifth	-$100

The study shows that income gaps both between rich and poor and between the rich and the middle class widened in the 1980s and 1990s alike and reached their widest point on record in 1997. Income has grown for all groups since 1997, but while CBO does not yet have comprehensive data for more recent years, it did find that "information from tax returns suggests that the rapid rise in the share of income going to the top of the income distribution ...                                              continued in 1998 and 1999."

Data in the CBO report, which researchers at the Center on Budget and Policy Priorities analyzed, also show that the percentage of income Americans pay in federal taxes has declined since 1979 for every income group. By one key measure, the percentage of income paid in federal taxes fell the most for those with the highest incomes.

The CBO study blends Census and IRS data, counts non-cash benefits as income, and subtracts the taxes that households pay. Researchers and experts in the field regard the CBO data as providing the most comprehensive and reliable information on income trends. CBO developed the data in this study after consultation with many of the nation's leading experts on income measurement.

Income Gaps Continued to Widen in the 1990s

The CBO data show that the greatest increase in income disparities for any two-year period the study covers occurred between 1995 and 1997, the last two years for which the study provides data on incomes. In this two-year period alone, the average income of the top one percent of households jumped 40 percent, or $194,000. This suggests the growth in income disparities between the wealthiest individuals and other Americans may have accelerated in the latter half of the 1990s.

Declines in Tax Burdens

Data in the CBO study put to rest several claims frequently heard in political circles, such as that income disparities widened in the 1980s but stopped growing in the 1990s and that the share of income that different groups of Americans pay in taxes has been rising and has increased the most for those with the highest incomes. The data CBO presents show such statements are not accurate.

For example, the study shows that every group of households now pays a lower percentage of income in federal taxes than in 1979. In particular, the one percent of Americans with the highest incomes paid an average of 37.3 percent of income in federal taxes in 1979, but would pay 32.7 percent in 2001, under current tax laws. This 4.6 percentage-point drop in the proportion of income this group pays in federal taxes was the largest drop experienced by any income group. The data in the study consequently show that this group had already received large tax reductions before enactment of the tax-cut legislation that Congress approved last week, which will provide extremely large additional tax cuts to these households.

The CBO study also found that while taxpayers with very high incomes now pay a larger share of total federal taxes than in earlier years, this is because they receive a much larger share of the national income. As CBO reported, "increasing inequality of income led to similar shifts in the distribution of tax liabilities."

The CBO data show that the share of the national income after taxes that the top one percent of the population received nearly doubled between 1979 and 1997. The CBO data indicate that by 1997, the 2.6 million Americans with the highest incomes — the top one percent — had as much after-tax income as close to 100 million Americans with the lowest incomes. Similarly, the 20 percent of Americans with the highest incomes received as much as the other 80 percent of the population.

Center on Budget and Policy Priorities analysts noted that the tax-cut legislation President Bush is about to sign will further widen the income gaps between the wealthiest Americans and the rest of the population. The top one percent will receive an average tax cut of more than $46,000 from the legislation when the tax cuts are fully in effect, compared to an average tax cut of $600 for the middle fifth of the population and less than $70 for the bottom fifth. The average percentage gain in after-tax income that households will receive when the tax-cut legislation is fully in effect will be about three times greater for those in the top one percent of the population than for those in the middle fifth and more than seven times greater for those at the top than for those in the bottom fifth.

The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.
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1. The Congressional Budget Office, Historical Effective Tax Rates, 1979-1997, Preliminary Edition, May 2001. http://www.cbo.gov/ftpdoc.cfm?index=2838&type=1