Vic Socotra

09 February 2009

Cold Dead Fingers

(1943 Photo of noted Economist and pick-pocket Secretary Henry Morgenthau)

Sunday morning- it is going to be in the low sixties today, soft on the skin after the bitter cold last week. Washington blows hot and cold, or better said, it just blows.

The dog extended his reservation in Tunnel Eight, and is watching me pecking at the keyboard. I could try to write something fun this morning, poking at the politicians, or analyzing Joe Lieberman, Olympia Snow and Susan Collins and what makes them tick.

If I had time, I would dive into what the Senate and House Conferees are going to tackle tomorrow- most of the difference in the two stimulus bills is centered around direct aid to the states, which is either good or bad, depending on whether you live in one or are suspended in space like the District.

There is also a patch to fix the 2008 version of the cold dead fingers of the Alternate Minimum Tax, or AMT.

For the life of me, I do not understand why that would be part of the stimulus- I mean, I will spend all of my tax return, assuming the government is still solvent in the next few months, and don’t really have any choice. I would save it if I could, but I have no confidence it will be worth anything in the long haul. Most of it will go back to the Credit Union to retire existing debt, which theoretically would fund the loans they are not making.

That is assuming I get a tax refund. There is so much that is up in the air these days. I brushed up against the AMT the last couple years. Once for several hundred dollars, back in the days before the legal trap was sprung on me by that evil attorney, Ilona Brigadier, and I was fat dumb and happy, only paying for two college educations.

Last year I had to give away so much after-tax money that it was only an irritant- a case of Popov Vodka's worth of insult.

The AMT, as you well know, was imposed in 1969 and effective in 1970. It was a carefully crafted to go after just 155 households that came equipped with battalions of tax attorneys and a phalanx of shelters and schemes by which they avoided paying taxes altogether.

The curious thing about the AMT was that it was not indexed to inflation- which is to say that bracket creep over the last 39 years has now brought 20% of taxpayers into the realm formerly occupied solely by the plutocrats.

Congress normally gets around to patching the AMT every year. There must be a reason that they do not fix the basic legislation, rather than forcing the IRS to re-program the computers every year at the last moment. Maybe it would open up the entire tax code to revision, which goodness knows would be an awful thing.

If it were not for the current troubled of all those cabinet nominees, we probably would not be that concerned with the annual debate about the Tax Code that precedes the inevitable filing in April.

The Code is a daunting thing. You can order a complete set of Title 26 of the US Code of Federal Regulations from the US Government Printing Office. You can get all twenty volumes and 13,458 pages for the bargain price of $974. Shipping is free.

But wait, there’s more! The full text of Title 26 of the United States Code (the legislation only) is available for a low-low additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845.

The National Bureau of Economic Research claims the combined federal, state, and local government average marginal tax rate for most workers to be about 40% of income. The Tax Foundation concluded that government at all levels will collect 30.8% of the nation's income for 2008.

Naturally, this is only possible due to Secretary Morgenthau’s withholding tax, which scoops up the money before it gets to us. If it didn’t exist, the Revolution would have come long ago, in the merry month of April.

I’m surprised he hasn’t been as much in the news as the cold calculations of Lord Maynard Keynes. Maybe it is because we have not stumbled into the next part of this cycle. Mark Twain said that history doesn’t repeat itself, but does rhyme, and I expect once we get through the stimulus and the growing realization that the President cannot wave his hands and make economic magic happen, we will be seeing more reference to FDR’s Treasury Secretary.

At the close of 1941, Henry Morgenthau had the toughest job any treasury secretary ever faced, which was to finance the Second World War, the single event that ended the Great Depression, Lord Keynes notwithstanding.

I heard some idiot on NPR arguing that it wasn’t war, and roaring factories producing munitions that ended the Depression for the reason that people’s quality of life did not improve. Only a Boomer could spout such nonsense. The United States government built the largest army, navy, and air force in the history of the world while simultaneously supplying lend-lease arms and ammo to Russia and the British Empire.

To do it, Henry Morgenthau needed "dough," and plenty of it.

War bond drives helped raise cash, but bond sales were voluntary and the money raised fell far short of the government's massive needs. Some suggested a national sales tax, but while it was fair enough, it was extremely regressive and hit the lowest wage earners hardest. That is the essence of the fight about “fairness” in the system, and the dynamic tension is still very much with us.

The top 20% of wage earners pay 82% of the total income tax collected. That is the essence of progressive taxation. On the other hand, everyone pays Social Security and Medicare, with the top wage earners placing out at the cap of around $104,000.

Is it fair? I dunno. Seems to me, if 80% of taxpayers are paying only 18% of the tax bill, it probably is.

Shoot, with the “earned income credit,” the two lowest quintiles in the population are actually getting direct payments from the top one, with a generous handling charge from Uncle Sugar. That seems to be a sort of social treaty that could be fragile. Of course, if I get laid off this year I might change my tune.

Back in 1943, the only means of raising the enormous sums necessary to fight the war was the more progressive tax on income, which was politically acceptable to the liberals in the FDR administration.

The income tax amendment was added to the Constitution in 1913, but in the law's first quarter-century only the wealthiest Americans paid income tax. Henry got the Congress to place a flat 5% gross income tax on all annual incomes over $624. In constant dollars that is something like $8,000 bucks. The measure added millions to the tax rolls and had the prospect of brining in billions to the treasury.

That is when a billion dollars was a lot of money. Do you have any idea what a billion dollars in 1941 is worth now? Try $14 billion. If the cold dead hands of Lord Keynes did not, at the end of the day, try to steer the Empire out of depression by inflating away the debt, you will have to hit me with a two-by-four.

Even with the increased revenue to the Treasury, the actual payments were not due until March 15 of the year after the money was earned. Henry had bills to pay now. Accordingly, in early 1943, FDR signed off an a plan known as "current collection at the source."

That measure essentially placed the Federal Government between employer and employee, skimming the tax months before it was due and before it got to the worker. The “withholding tax” helped the war effort in two dramatic ways. It provided a steady stream of tax money to the Treasury, and helped to dampen the inflation rate of the overheated wartime economy.

In the middle of a world war and a desperate struggle for the American Way of Life, most citizens realized the treasury needed money quickly and agreed that current collection at the source was an unfortunate, though temporary measure for the duration.

But even with public acceptance of withholding, the change over from the old system to the new one brought a chorus of howls. Patriotism is one thing, but taxing current income in 1943 paychecks while expecting a lump sum for 1942 in March (the old tax date) was almost too much.

The nation stumbled through that one, and with the war over, one would have thought that extraordinary measures were no longer necessary. There was a new world order to support, though, and we had all became used to the feel of Henry Morgenthau’s ghostly hand in our wallet.

It is only now that the AMT makes me feel exactly like tax time in 1943- I already paid once, and then I get to pay again on what they mistakenly allowed me to have, thinking I had earned it.

If I sound querulous, I apologize. I should be thankful I have a job, even if I have to hustle on to it on this day of rest. There are many things we have learned to live with, and I can only presume there are going to be a lot more.

Oh well. There is a war on, right?

Close Window