Michael J. Graetz. The Power to Destroy: How the Antitax Movement Hijacked America. Princeton: Princeton University Press, 2024
The title of this book comes from the classic statement by Chief Justice John Marshall in 1819, “The power to tax involves the power to destroy; the power to destroy may defeat and render useless the power to create.” Graetz ends his book by adding, “So, it turns out, does the power not to tax.”
Over the past half-century, advocates of low taxes have had some success in cutting taxes, especially taxes on high incomes and great wealth. Taxes in the United States are generally lower than taxes in other economically advanced democracies. “In 2021, counting state as well as federal taxes, U.S. taxes as a share of the economy were 7.5 percentage points lower than the average of the 38 OECD member countries.” Graetz is a tax lawyer, not an economist, so he describes the legislative and political accomplishments of the antitax movement more than he analyzes its economic consequences. Nevertheless, he is obviously skeptical that the benefits of low taxes outweigh the costs to society.
Sources of antitax sentiment
Graetz begins by saying that Americans have complained about taxes for a long time, but only since the late 1970s have so many joined together in an organized antitax movement. One reason for that is the unusual combination of income stagnation and inflation during that decade. Taxes were easier to tolerate when government seemed to be delivering strong economic growth without inflation. As times got tougher, the clamor for tax relief grew louder.
However, the reasons for antitax sentiment go deeper than that. Graetz argues that support for government programs to benefit the needy is lower in racially heterogeneous countries. The antitax movement was preceded by a time when the federal government was promoting civil rights legislation and funneling public money into a “war on poverty.” Since Blacks and Latinos were disproportionately poor, many whites felt that too many of their tax dollars were going to help people who were different from themselves, people who were often looked down upon. Southern whites especially left the Democratic Party in droves after it embraced civil rights. “The modern antitax movement rose and gained strength within the Republican Party alongside the party’s “Southern Strategy,” an electoral effort explicitly linked to racial division.”
Racial issues were also entwined with religion. Evangelical Christians were drawn to the antitax movement when the IRS was threatening to withdraw tax-exempt status from racially segregated religious schools. Republican activist Paul Weyrich, founder and first president of the Heritage Foundation, claimed that this issue enabled him to mobilize Christian conservatives more than abortion or school prayer. As president, Ronald Reagan sided with the churches against the IRS, saying that its effort to enforce racial integration “threatens the destruction of religious freedom itself.” He lost that battle when the Supreme Court ruled in favor of the IRS, but he won the hearts of many white Christians.
Another source of antitax sentiment was the increasing popularity of libertarian views, which were previously out of step with the pro-government sentiment of the New Deal and World War II era. The novels of Ayn Rand and the economic theories of Friedrich Hayek were dusted off and popularized. Their thinking celebrated the freedom to work and to enjoy the rewards of one’s own effort, not so much the obligation to support the collective good through government. Taxation was increasingly regarded as a threat to personal liberty and work incentive.
Many economists were turning away from Keynesian thought and rediscovering the glories of the unencumbered free market. Previously, economists had seen tax cuts as one tool that could stimulate a sluggish economy by increasing the demand for goods and services. But stimulating demand was not as clearly desirable when a sluggish economy was accompanied by double-digit inflation. Milton Friedman attracted attention and support by calling for tight monetary policy—high interest rates—to curb inflation. He also supported tax cuts, but for non-Keynesian reasons, to force government to cut spending and thereby reduce demand. In theory, cutting taxes would also give people more money to save and invest, which would stimulate the economy from the supply side, easing inflation. Cutting taxes for the wealthy should be especially effective, since they could afford to save and invest more.
The best-known supply-side economist was Arthur Laffer. He reasoned that if government taxes too little, it loses revenue. But if it taxes too much, it also loses revenue by discouraging people and businesses from producing as much as they could. There must be a happy medium, an optimal tax rate that produces the maximum revenue. Laffer always insisted that current tax rates were above the optimal rate, so that tax cuts would pay for themselves by actually increasing revenue. Few economists agreed, but Laffer’s argument became a major talking point in the antitax movement.
Graetz identifies three myths that motivated antitax crusaders:
(1) cutting taxes will increase government revenues, or, at the extreme, cutting taxes is the only way to raise government revenues; (2) lowering taxes will necessarily “starve the beast” by cutting government spending; and (3) reducing taxes at the top is the best way to grow the nation’s economy no matter the circumstances. These claims have been repeatedly debunked, but for more than four decades they have never disappeared from antitax advocates’ playbook.
One influential proponent of these ideas was The Wall Street Journal under the leadership of Robert Bartley.
Finally, the prospect of lower tax rates for the wealthy thrilled large political donors. They stood to gain the most from lower individual tax rates, lower corporate tax rates (which increased profits and shareholder dividends), lower capital gains rates (whenever they sold appreciated assets), and lower estate tax rates (when they left their fortunes to their heirs). Wealthy donors like Richard Mellon Scaife, Joseph Coors, and Charles Koch poured money into conservative think tanks like the Heritage Foundation and CATO Institute, which heavily promoted the antitax philosophy. “Money to organize meetings, produce favorable polls, generate supporting research by friendly experts, and contribute to political campaigns is more readily available to those who want to reduce their taxes than it is to their opponents.”
Proposition 13
The antitax movement began with a revolt against property taxes in California. The inflation of the 1970s had dramatically raised housing prices and property tax bills. But as with tax issues at the federal level, more was involved.
Property taxes financed public schools, but changing demographics and efforts to equalize spending across different kinds of districts undermined support for education funding. In the Los Angeles public schools, Black and Latino students were increasing in number, while many white students were leaving. In 1976, the California Supreme Court placed a limit on how much spending per pupil could vary from district to district across the state. The state legislature responded by redistributing some funds from wealthier districts to poorer ones. Now richer homeowners could complain that their high property taxes were going to support someone else’s schools.
Proposition 13 was a referendum to amend the California state constitution in 1978. It called for limiting local property taxes to 1 percent of a property’s assessed value. It also required a two-thirds vote of the legislature to raise any state or local taxes. The amendment passed with most white voters supporting it and most black voters opposing it.
Graetz describes some of the results:
California ranked fourth among the states in per capita income, but after the enactment of Proposition 13, the state dropped to thirty-first in public school spending per child. Other services also suffered: community colleges, police departments, public hospitals and health programs, public works, local parks, and welfare and social services.
California was the first, but within the next four years, thirty-four other states cut property taxes too.
Reaganomics
The antitax movement soon targeted federal taxes. In the 1980 presidential election, Ronald Reagan campaigned on the promise that he could cut taxes, increase military spending, but still balance the federal budget by cutting other spending. President Reagan fulfilled the tax-cutting part of his promise with the Economic Recovery Act of 1981. This act immediately reduced the top bracket income tax rate from 70% to 50% and phased in cuts for lower brackets over the next two years. It created large tax savings for businesses and real estate investors by allowing them to deduct the cost of new investments more quickly. “New tax benefits for business were so generous that corporate tax receipts declined from about 15 percent to less than 9 percent of federal revenues.” The law provided additional benefits for the wealthy by cutting estate taxes and creating new ways for them to shelter income from taxation.
To assess the fiscal impact, I supplement the book with Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis. Between 1980 and 1983, federal receipts fell from 18.1 percent of GDP to 16.5 percent, while federal outlays rose from 20.7 percent of GDP to 22.2 percent. That means that the federal deficit rose from 2.6 percent of GDP to 5.7 percent, the highest since World War II.
The ink was hardly dry on the 1981 tax bill when pressure began to build in Congress for a change of direction. The Tax Equity and Fiscal Responsibility Act of 1982, which passed with bipartisan support, recouped some of the lost revenue by cracking down on underreported income. Reagan wasn’t happy, but he signed it in order to hold the deficit down.
The Tax Reform Act of 1986 also recovered some revenue by placing limits on tax shelters. But this time much of the gain in revenue was offset by another rate reduction for high earners. The bill replaced the many tax brackets ranging from 11 to 50 percent with just two rates, 15 and 28 percent. Taxpayers with high incomes got another windfall, while those with low incomes were protected from a tax hike by increases in the standard deduction and personal exemption.
By the end of Reagan’s administration, moderation of tax cutting and reductions in domestic spending brought the deficit down from 5.7 percent of GDP to 3.0 percent. Still, over the course of his eight years, “President Reagan added nearly twice as much to the federal debt as was accumulated during all of the presidencies that preceded him.” His tax cuts had neither paid for themselves nor forced equivalent cuts in spending.
In the 1980s, Congress still included many Republican moderates like Bob Dole, who were willing to raise taxes in order to keep the gap between receipts and outlays from growing too large. Over the next few years, positions would harden, so that Republicans united to resist any tax increases, regardless of economic or fiscal conditions.
Beneath the Surface 