. . . we would have a fascinating, first-hand history of the roller-coaster first century of federal income taxation.
By Sam Pizzigati
The modern federal income tax turns 100 this year. In Washington, D.C. this coming week, a distinguished panel of tax experts and historians will be marking the occasion with a special symposium. More such 100th anniversary events are coming. All will no doubt make an important scholarly contribution.
But if we really want to understand just what the federal income tax has accomplished — and failed to accomplish — over the course of the last 100 years, the best place to start just might be a majestic century-old mansion that overlooks Santa Barbara in Southern California.
This mansion and the federal income tax both entered the world the same year, 1913. The manse reflected the prodigious wealth of America’s original Gilded Age plutocracy. The income tax represented an attempt to shrink that plutocracy down to democratic size. That attempt succeeded, but only for a time.
Our latest contemporary sign of federal income taxation’s ultimate failure: A luxury realtor has just placed Santa Barbara’s grandest fine old mansion up for sale — for a whopping $57.5 million.
Frederick Forrest Peabody would be pleased.
A century ago, Peabody rated as one of America’s richest corporate execs. The company he ran manufactured Arrow shirts, and Arrow had become one of America’s most recognizable brand names. The rewards from this recognition? Immense. In 1909, Peabody’s company would declare a 300 percent dividend.
America’s captains of industry faced no taxes back then on dividends or any of their other earnings, and Peabody took full advantage of his rapidly expanding fortune. In 1906, for a sunny getaway from his upstate New York business base, he bought 40 ocean-view hilltop acres in Santa Barbara and a few years later dotted his new acreage with 7,000 eucalyptus trees.
In 1913, Peabody would begin building the home of his dreams amid the eucalyptus, a palace he would call Solana, Spanish for sunny place. Money would be no object. He filled the over 20,000 square-foot edifice with only the finest of finishings, from hand-carved mahogany to 17th century French oak paneling.
Money would be no object because Peabody didn’t have to worry about sharing any of his money with Uncle Sam. The new federal income tax enacted in 1913, right after the ratification of a constitutional amendment that opened the way to income taxation, would prove no more than a minor inconvenience.[pullquote]Before 1913, America’s captains of industry faced no taxes on any of their formidable earnings.[/pullquote]
Progressive lawmakers in Congress had pushed for a steeply graduated tax that subjected income in the highest income brackets to rates as high as 68 percent. The legislation finally adopted set that top rate at just 7 percent.
This top rate would bounce up during World War I but then sink to 25 percent in the 1920s. By that time, Frederick Forrest Peabody had stepped down from his captain-of-industry perch and settled into a comfortable life as a country squire. In 1919, he would move full-time to Santa Barbara from New York and entertain as many as 150 guests at a time within his opulent Solana space.
Solana, even so, would not prove satisfying enough for Peabody. He divorced, picked up a trophy wife in 1920, and then honeymooned at a 4,500-acre ranch he had bought the year before near a hot springs resort in central California.
Peabody would continue his extravagant spending ways as the low-tax 1920s wore on. In 1926, his outlays for landscaping would win Solana a stop on the annual tour of the posh Garden Club of America.
Peabody would not live to host another tour. He died in 1927, late in his 60s. His widow carried on at Solana. But her plutocratic world was changing, and the federal income tax was rushing that change along.
In the 1930s, under the pressure of growing mass movements for economic justice, tax rates on America’s highest incomes would begin to rise. By 1944, the tax rate on income over $200,000 had soared to 94 percent. The top federal income tax rate would hover near that level for the next 20 years.[pullquote]By 1944, the top federal tax rate on income over $200,000 had soared to 94 percent. [/pullquote]
Some of America’s rich, mainly the nation’s oilmen, had depletion allowances and other loopholes that shielded them from any significant tax squeeze. But the rich overall felt a real tax bite. By 1958, the year Peabody’s widow died, the nation’s top 0.1 percent had seen their share of national income shrink by two-thirds.
In America’s new tax-the-rich environment of the mid 20th century, manses like Solana, with their huge maintenance costs, had a hard time finding private buyers able to afford their pleasures. Great palaces of America’s plutocracy would soon, in the years after WW II, be turned into suburban subdivisions.
Solana, for its part, would sell in 1959 for just $283,000, a fraction of the estate’s former value. The buyer: the Center for the Study of Democratic Institutions, a nonprofit led by former University of Chicago president Robert Hutchins. The robust debates that took place at his Center, Hutchins announced, would serve as an “early warning system” for American democracy.
But Hutchins and his fellow deep thinkers never saw the danger to democracy that could come from a re-emergent plutocracy. The nation, they believed, had leveled plutocracy forever. Stiff taxes on the rich, they assumed, had become a permanent fixture of American life. They would be wrong.
By the mid 1980s, the high tax rates on high incomes that helped make Frederick Peabody’s Solana such a hard sell in the 1950s had all faded away. With their disappearance, America’s plutocratic order would soon reappear.
The nation’s top 0.1 percent, newly updated research from Berkeley economist Emmanuel Saez documents, collected 9.4 percent of the nation’s income in 2011, the most recent year with stats available, triple the top 0.1 share in the late 1950s. This hefty top 0.1 percent share, Saez noted last month, “will likely surge” even more once the 2012 figures become available.
In other words, the luxury realtors from Sotheby’s now hawking Solana — for $57.5 million — don’t figure to be disappointed.
Veteran labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, writes widely about inequality. His latest book, The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, has just been published.