Taxing Progressively

Nelson Rockefeller’s Deepest, Darkest Secret

In our staggeringly unequal times, the source of Rocky’s distress can offer the rest of us some welcome public policy inspiration.

By Sam Pizzigati

Tis the season to be vetted — if you’re angling for a high-ranking post in the incoming Obama administration. Obama transition officials are currently quizzing hundreds of hopefuls, working to get them to reveal the deep, dark personal secrets that, if ever exposed, could create a distracting political embarrassment.

Vetting, of course, has been going on in Washington for years, and, last month, one enterprising reporter went around and asked veteran vetters from years gone by to reminisce about the secrets they had to work the hardest to pry out.

One of those vetters, D.C. lobbyist Tom Korologos, had grilled over 300 nominees, starting back in the Nixon administration. His most challenging vetting assignment? Probably Nelson Rockefeller, Gerald Ford’s pick for the vice-presidency in 1974.

Korologos still remembers what Rockefeller, the grandson of America’s richest man, told him when he started the vetting.

“I’ve got something to worry about,” grimaced Rockefeller.

The former New York governor, Korologos soon learned, didn’t want to publicly reveal his personal financial picture.

Charity in perspective“His concern,” the vetter discovered, “was that when it became public, he wasn’t going to be as rich as everybody thought he was.”

What had happened to the fabled Rockefeller family fortune? Taxes had happened, the steeply graduated progressive federal taxes on income and estates left behind at death that started going into effect in the 1930s.

By the 1970s, these taxes had systematically leveled down the Rockefeller family fortune — and every other grand fortune amassed over the decades of America’s original Gilded Age.

Beginning in the early 1940s and lasting into the 1960s, the federal tax rate on income in the nation’s top tax bracket annually hovered around 90 percent. The top estate tax rate in these years, meanwhile, never dipped below 77 percent.

And many states had their own progressive taxes. In New York, the state tax rate on top-bracket income stood at 15.375 percent.

Deep pockets could, of course, deduct their state taxes off their federal taxable income. But those deductions, for wealthy folk like Nelson Rockefeller, didn’t change the basic bottom line: The filthy rich, in mid-20th century America, were becoming financially leaner and cleaner.

Nelson Rockefeller passed away in 1979, just before the Reagan Revolution began undoing the progressive tax system that had so shaved his net worth. Today, the top-bracket state income tax rate in New York stands at a mere 6.85 percent. The top-bracket federal income tax rate has tumbled even farther, from 91 to 35 percent. The top-bracket estate tax rate: down to 45 percent.

Barack Obama, in his campaign for the White House, famously proposed to reverse this downward tilt in tax rates on the rich and “spread the wealth.”

Obama, to be sure, didn’t propose much of an increase, just a bump in the top federal tax rate from 35 percent to 39.6 percent. But the modesty of Obama’s proposal in no way spared him from ferocious McCain campaign attack.

Voters, on Election Day, would brush this attack aside. But voter support for Obama, interestingly, has done next to nothing to change attitudes on taxing the rich among America’s mainstream policy wonks and political leaders.

In New York State, Governor David Patterson, a Democrat, is insisting on billions of dollars in program cutbacks as the only viable answer to the state’s growing budget deficit. In the process, notes Lawrence Wittner, a historian at the State University of New York in Albany, the governor is ignoring  the very dynamics that have driven the state into such deep budget red.

“The major reason the New York State budget is out of balance today,” Wittner noted last week, “is that, for the last thirty years, the state has been cutting the tax rate for the top income New Yorkers.”

Governor Patterson is actually opposing efforts to enact a “millionaire’s tax,” despite polling data that show New Yorkers overwhelmingly favoring, by a 78-to-18 percent margin, higher taxes on anyone making over $1 million a year.

In Washington meanwhile, pillars of fiscal rectitude are also talking “sacrifice” for ordinary families and ignoring the sizeable sums that raising taxes on the wealthy could raise.

Last week, at a forum hosted by the prestigious Urban Institute, two former directors of the Congressional Budget Office — Rudolph Penner and Robert Reischauer — declined to offer support for even a modest hike in the top tax rate on the nation’s highest incomes.

Powerful Washington public policy insiders like Penner and Reischauer typically advance a variety of reasons for opposing higher taxes on society’s most financially favored. Higher taxes on the rich, they argue, choke off incentives for investment and limit economic growth.

Higher taxes on the rich, the argument continues, only serve to shove the wealthy into tax evasion mode. Facing high rates, the rich plow their money into unproductive tax shelters and scheme to skirt taxes by any means necessary.

The actual economic evidence offers scant support for any of these claims. In the 1950s and 1960s, decades of high taxes on the wealthy, America’s economy grew just beautifully. Average Americans enjoyed unprecedented prosperity.

Earlier this year, economists Christian Weller and Manita Rao updated the evidence on economic growth and progressive tax rates. The two University of Massachusetts at Boston researchers crunched global data for 1981 through 2002 and found “no evidence that progressive taxation adversely affects economic stability by reducing growth.”

Nobel Prize-winning economist Joseph Stiglitz has been trying to deliver that same message. Given a choice between cutting programs for working families and raising taxes on the rich, he told New York state leaders last spring, “economic theory and evidence give a clear and unambiguous answer: it is economically preferable to raise taxes on those with high incomes.”

What about the notion that higher tax rates merely give the rich an incentive to evade taxes? If higher tax rates do indeed increase tax evasion among the rich, then lower tax rates should decrease that evasion. But today’s lower tax rates on high incomes have put no dent on the tax games wealthy people play.

Federal prosecutors are now charging that one bank alone — the Swiss UBS — helped awesomely affluent Americans hide $20 billion in income from the IRS from 2000 to 2007. Two other major banks, in those same years, helped the wealthy conceal as much as another $30 billion.

The rich, in short, don’t like to pay taxes at any rate. They don’t use public services, and they resent having to pay for them. The best antidote to that resentment? Have the IRS, as Pulitzer Prize-winning tax commentator David Cay Johnston suggested last week, hire more auditors.

Sam Pizzigati, an associate fellow at the Washington, D.C.-based Institute for Policy Studies, edits Too Much, the online weekly on excess and inequality.

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