Samuel Cohn: Global Social Trends

Followers of this website know that it is my longstanding position that governments need adequate tax revenues to be effective. It is also my position that even if some government expenditure gets wasted, most public funding goes for useful things like defense, education, and infrastructure construction. Because of the importance of adequate government finance, I tend to view the tax revolt and the constant campaigns in modern politics to reduce taxation as extremely dangerous. A government that cannot project military power, educate its citizens, pay for crime control or clean up natural disasters is a government that can not protect or take care of its citizens.

Followers of this website also know that there are very good reasons behind the current tax revolt. Big business has always favored low taxes. However, since the 1970’s, they have been joined by a surge of wealthy individuals, small business owners and middle class people who have made cutting taxes a number one priority. This coalition of wealthy individuals, small business owners and the middle class represents a formidable political force. This alliance is militantly and outspokenly in favor of cutting taxes and shrinking government. The GOP has been the primary beneficiary of the tax revolt; cutting taxes has been a top legislative priority for Republicans both at the state and national level.

Wealthy individuals, small business owners and the middle class are incensed about taxes because they pay the lion’s share of taxes, both federal and state. Poor people pay very few taxes. They simply don’t have any income to tax. Large corporations such as those in the Fortune 500 pay relatively few taxes, because the tax laws grant them fairly generous deductions and loopholes. This leaves wealthy individuals, small businesses and the middle class with the burden of picking up the expenses of the government. Over time, these groups got tired of always being stuck with the bills for running the country. The Tax Revolt started and became a fact of modern political life.

The story I retold in the previous paragraph is a standard account made popular by James O’Connor in his Fiscal Crisis of the State. (1973, Saint Martins). I buy into James O’Connor’s analysis entirely. However, there was always one loose end in the traditional James O’Connor explanation that was never quite resolved.

For most of American history, Americans have paid their taxes. There were isolated tax protests here and there like the Whiskey Tax Rebellion in Pennsylvania in the 1790’s. However, in general, cutting taxes has not always been the all-defining political issue that it has become today. The same social groups that are protesting taxes in the twenty-first century are the same groups who have paid the bulk of America’s taxes in the nineteenth century, in the early twentieth century, in the middle twentieth century and the late twentieth century. Given that fact that rich individuals, small businesses and the middle class has ALWAYS paid the bills for federal and state government, why do we only see nationwide protests against taxation in the most recent era?

The missing piece of the jigsaw puzzle has been found … and to my embarrassment, in a work published in 2008.  (That book should have been on my reading list in 2009.) Isaac William Martin in his Permanent Tax Revolt: How the Property Tax Transformed American Politics (Stanford) was able to explain precisely the rise of the tax revolt, and why it took the intensely conservative anti-statist form it did.

Martin argues that the revolt against taxation as a whole started as a revolt against property taxes. In particular, there was a revolt against losing ways to get out of paying property taxes. America has generally funded its school districts and municipalities with property taxes rather than income tax per se. Property taxes rarely generated public protest or political mobilization, because there were lots of ways to reduce the amount one had to pay by using social influence and negotiating strategically.

Property taxes were dependent on assessments. The relationship between the value at which a house is assessed and its actual market worth has always been an arbitrary matter. I personally have never owned a home where the value of my house on the city tax rolls had any relationship to how much I could get for selling that house.

It is also the case that assessments can generally be appealed. There is generally a formal bureaucratic system for protesting an assessment; these formal bureaucratic systems may or may not produce tax relief. A more effective option, when it is available, is to contact the mayor, a city councilman or the tax assessor himself, and discuss the matter on an informal basis. Historically, those backdoor channels have been very important. Martin argues that mayors, city councilmen and tax assessors were responsive to citizens complaining about assessments for political reasons. Mayors, city councilmen and tax assessors were (and still are) elected officials. They were concerned about winning their next election. Some of those officials had ambitions to attain even higher political offices. As such, the mayors, city councilmen and tax assessors were much more interested in keeping voters happy than they were in actually collecting revenues. An appeal of an assessment could often generate a permanent reduction of substantial size. This was especially the case if the petitioner was wealthy and might be counted on in the future for political donations.

Martin argues that this system produced tax assessments that were absolutely arbitrary and unfair. One’s effective tax rate depended on who one knew and who one’s connections were rather than the actual value of the property involved. Owners of neighboring houses had widely different property tax rates. This was made possible to some extent because few people know how much their neighbors are paying in property tax. The lack of transparency allowed politically naïve taxpayers or taxpayers out of the current governing coalition to pick up the bills for more favored property owners. The system wasn’t fair. However,  nobody complained about it.

The events that started the tax revolt were various movements thoughout the country to rationalize the property tax system and make it more equitable. Accountants and assessors working in state and municipal revenue departments were fully aware of the unfairness and arbitrariness associated with informal personalistic administration of the property tax system. The reformers wished to produce a universalistic and even-handed system where all people would have the same relationship between the market price of their house and assessed value, and the same tax rate applied to that value. The strategy for accomplishing this was to centralize the administration of property tax, moving it out of the control of local politicians and city assessors, and into the hands of state revenue officers. Treasury offices located in the capital cities of states would be less subject to the local political pressures in municipalities and counties. The administrators of state tax offices were more likely to be appointed employees rather than elected officials. The elected officials would be overseeing the properties of millions, rather thousands of voters. Under the new systems, the percentage of voters who would have a direct claim on the attention of the head of a property tax office would be significantly reduced.

Nothing generates more unhappiness than taking something away from people. Taxpayers who had managed their liabilities by personal negotiations with city officials realized that the new universalistic systems would take away their traditional tax safety net. The protests came fast and furious. How these tax battles played out depended on the local circumstances in different states. Some universalistic systems were stopped. Others were institutionalized, protests and all. In some cases, angry taxpayers received no compensation for the loss of their informal channels. In other cases, some form of tradeoff was worked out.

Martin argues that what mattered was what played out in California. In California, the new formal system with no back-channels was fully implemented. Furthermore, various deal-sweetening arrangements to make this institutionalization more palatable never happened. They  were all snagged on various obstacles in the legislative process. Relief plans were discussed on many occasions. No taxpayer relief was actually implemented.

This led two tax activists, Howard Jarvis and Paul Gann, to agitate for Proposition 13, a major tax cutting proposal. Howard Jarvis would later go on to be a prominent national advocate of tax reduction. Proposition 13 was his breakthrough victory.  Proposition 13 was an amendment to the California Constitution that limited all property taxes to 1 percent of a property’s assessed value. It allowed small windows for assessments and rates to go up. However, essentially, property tax revenues were capped at levels far below prevailing levels. Proposition 13 won overwhelmingly, providing the largest tax relief package in American history.

Isaac Martin argues that this was a watershed moment for both the Tax Revolt and conservative politics.

Firstly, no one had ever imagined that tax relief of this magnitude could ever be achieved in a liberal state like California.

Secondly, no one had ever imagined that tax reduction could be a politically mobilizing cause that would allow for the convincing winning of statewide elections.

Thirdly, Proposition 13 demonstrated that the most effective solution for homeowners upset about their property taxes was to agitate for the capping of revenues at the statewide level and for absolute limits on tax liabilities as a whole. There are many conceivable solutions to disputes over property taxes that would not involve cutting taxes and restricting state revenues as a whole. Proposition 13 moved that political tool to the forefront of attainable political demands.

Since then, shrink-the-state and cut-taxation has been unifying themes of conservative political mobilization.

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I think Isaac Martin is completely correct on what determined the timing of the tax revolt. It is nevertheless interesting to speculate if other events could have produced the same outcome. The bailouts of General Motors and Wall Street banks also produced a significant amount of unhappiness. Corporate bailouts had not been a feature of American history before the 1990’s. Bailouts are particularly galling for middle class taxpayers because there is very little chance that they themselves would ever be bailed out. Some people might argue that conservatives got radicalized over the welfare state, or radicalized over ethnic or racial issues. These factors may have easily contributed to the growing conservatism of the American middle class. But losing the ability to “control” one’s property tax payments was certainly a flashpoint issue.

Is there a lesson to be learned from this? I would think so.

A. Adverse changes to terms and conditions, be they terms and conditions in the workplace, terms and conditions on how a course gets graded, terms and conditions in a marriage or terms and conditions in taxpaying – all of these lead to bitter complaint. If one does not want to make taxation a political target, don’t change the rules on people.

B. Taking away the special resources of rich people make rich people organize as an interest bloc. Rich people are much better at organizing and winning political campaigns than are poor people.

C. If one is going to extract money from the rich and the powerful, go for subsections of the rich and powerful rather than the class as a whole. Taking away all rich people’s ability to negotiate cheap assessments for their houses helped to cause all rich people to work together on a common cause. The best way to prevent upper or middle class unity is to finding ways to neutralize large fractions of these groups through apathy.

D. It is hard to make a case for higher taxes. It is easier to make a case for pressing government services. World wars are one example of a case where it was easier to raise money for the national interest due to the existence of a major crisis level problem. (Remember that during WWII, Americans not only paid taxes, but they voluntarily paid more through the purchase of war bonds.)

Getting the general public to support government spending will only be done if a powerful case is made for what government can provide. If the product is good, people can be induced to pay the price.

If all government is viewed as bureaucracy, welfare and waste, then the prospects of adequate government funding are dim.

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The time to make the case for the importance of government funding is now.

America can not afford to have its geopolitical position collapse, its technological capacity fade in the hands of more aggressive rivals, its old age security systems fall apart actuarially, its public health collapse in the face of absence of protection from pandemics, and its business suffer from roads, airports, bridges, and ports being insufficient for the traffic needed. When a society does not work, it does not work.

For America to stay functional, it has to pay its bills.

This means not screwing up on its system of paying taxes.