Whither the Tax Revolt?

Poll after poll shows that Americans today feel overtaxed, frustrated, and ready for change. So why hasn't there been a tax revolt?

Twenty years ago, when Howard Jarvis and his ragtag team struck the match that ignited a national tax revolt, federal taxes were 18.1 percent of our economy. In recent times, they have been bumped up to more than 20 percent. Our tax code contains even more pages than it did on June 6, 1978, when California voters overwhelmingly approved Jarvis and Gann's Proposition 13. Poll after poll shows that Americans today feel overtaxed, frustrated, ready for change-all the things they were when Jarvis and his partner, Paul Gann, first applied paintbrush to poster.

So Where's Our Tax Revolt?

The answer is that Americans would dearly like to revolt. They are just trying to figure out how. Today the tax problem is wider and more diffuse than in the days when Proposition 13 froze property taxes for Californians. The income tax lays a crushing load on middle-class families, a load that worsens when they achieve a modicum of success. And citizens are bedeviled by problems beyond the purview of the House Ways and Means Committee. There is Social Security and Medicare: Our individual contributions in payroll tax alone amount to a flat tax of more than 7 percent, greater than the income tax rate imposed on plutocrats in the early days of that levy. Regulatory edicts from Washington impose hidden taxes. Most of our school and property taxes are higher than before, yet our public schools are less satisfying than ever. A thousand state and local taxes edit our private lives.

We feel like Gulliver, a giant tied down at a million points. Even lawmakers seem unable to help us; they are like hundreds of Lilliputians, worsening our pain by fussing and fiddling at tiny strings. None of them seems, or feels himself, quite big enough to wield the shears.

The Last Tax Revolt

To understand this national paralysis, it helps to look back at the very different disease that afflicted America in the 1970s. Those years saw a sudden rise in a powerful and astounding tax, a tax never before seen in peacetime: the tax of inflation. Inflation imposed tax increases without lawmakers' or voters' permission. Within several years, Californians saw their homes' assessed values go up by 100 percent, 200 percent, even 300 percent. Wages were also rising, but bracket creep ensured that taxes rose faster. The Boston firm H.C. Wainwright & Co. calculated that a family earning $25,000 in 1978 saw its marginal income tax rate rise to 28 percent from 19 percent. A family earning $50,000 lost even more.

Proposition 13 struck a chord with Californians, who didn't know how they were going to pay. One woman, quoted in Glenn Fisher's 1996 book The Worst Tax? verbalized her reaction to the news of her 250 percent tax hike: "I forgot all about where I was and what I was doing and fixed, like tunnel vision, on the bill. . . . I was filled with fear and also with anger, and it was such a mix of emotions that I just stood there, and I think vibrated for about 10 minutes." Rising up seemed a matter of survival.

Then there was the economy. In those days America was growing, but Silicon Valley was in its infancy; Stanford, a mere college town. There was no computer revolution to fuel productivity, growth, and the stock market. Californians, and the rest of the nation, had no extra economic strength to confront their sudden hardship.

Another factor drove Proposition 13. In 1976 the state's highest court, in a case called Serrano v. Priest, ruled that schools must spend equally on students across the state. To achieve this goal, property tax revenue was redirected from local schools to Sacramento. This infuriated taxpayers. Not only were they seeing their property taxes skyrocket; they were also losing control of their money. A "good tax"-a tax for local schools-became a bad tax. Dartmouth economist William Fischel argues that Serrano caused Prop 13.

The Next Tax Revolt

Today, things feel very different. There is little inflation and a powerhouse economy. After California's uprising, Representative Bill Steiger (R.-Wis.) led a move to respond to the 1970s disease: He launched a historic and successful effort in Congress to pull down capital gains tax rates so that business could grow. The Wall Street Journal marked the moment with an editorial titled "Stupendous Steiger."

Today, thanks in large part to efforts like that of "Stupendous Steiger" and the lower income tax rates of the Reagan years, our economy has been healthy long enough to provide the world's best environment for technological advance. We see the benefits of these advances in our jobless rate and our voluminous 401(k)s. However painful government's intrusions are, and they are painful, our mutual funds console us. We know that we have money somewhere, money we did not have before.

Yet Americans face tax insults, a wide array of them. The top tax rate is 39.6 percent. Even average families carry a heavier tax burden than ever. The Tax Foundation, a Washington think tank, found that the average family pays more in taxes than it does for shelter and food. Shying away from grand reforms, our politicians spend their energy on microprojects. The great Republican microproject of this decade has been the $500-a-child credit. The Democratic microproject has been the tax hike on Medicare and an expansion of the earned-income tax credit. Often these efforts, meant to help people, have perverse results. Families will lose the child credit when they are "too successful." Working-class couples are punished to the tune of thousands for earning $30,000 instead of $10,000-they lose the EITC cash rebate prize. Our bulging 401(k)s and IRAs make us feel rich, but at some level we know that not all that money is "ours": Uncle Sam will step in to collect his share of it, a big share, the day we begin to draw down our accounts.

Next comes Social Security. In the 1970s, Social Security contributions were a small part of people's pay stubs. Today, for 70 percent of American households, Social Security takes the biggest bite. Thus the Social Security debate is also, at heart, a tax debate. When we push lawmakers to privatize Social Security, we are pushing to regain control of our money.

Then there are the thousands of state and local taxes, the strings on Gulliver's fingers and toes. In 1952, state and local taxes took up less than 7 percent of gross domestic product. Today that figure is close to 14 percent. Instead of fixing this by lowering rates, state and local governments use their powers to punish certain groups, increasing the burden on poor people through measures like cigarette taxes.

Or they grant reductions, but only to specific friends or industries: New York, for example, is currently dangling hundreds of millions of taxpayer dollars before the New York Stock Exchange if it will only forgo moving to New Jersey. Cities compete and spend to attract or retain sports arenas. Such metro mercantilists argue that they are retaining or bringing economic growth to their states or cities. But plainly their efforts are a zero-sum game. Citizens and businesses would be better off with lower rates overall.

Last come the schools. The Reagan revolution didn't stop the school equalization movement that first showed up in California's Serrano case. Today the high courts of more than twenty states have taken control of schools from local taxpayers and handed it to state capitals and teacher unions. Parents have responded by checking out: Today more Americans have put their children in private school than at any time in postwar history. But they still pay taxes-tuition for other people's children. Among liberals, including the sort who dominate the U.S. Senate, this is perceived as a kind of noblesse oblige. But what about the rest of us? The tax question is actually at the core of parents' rage about schools. To a great degree, our school debate is really a tax debate.

And the burden government imposes on the economy goes beyond taxes. A large share of it takes the form of regulatory mandates. In the 1970s, the philosopher-practitioners who best explained what was going wrong, and how to right it, were Milton Friedman, who pushed the nation to breathe the air of free markets, and Paul Volcker, the Federal Reserve chairman who knew when it was time to stop the inflationary vertigo. Now the doctor of our age is James Buchanan, the economist who won the Nobel Prize for a school of thought called public choice theory. Government, according to public choice theory, is like any business. It will struggle bitterly to survive. It will expand like barnacles, when and where it can, mindlessly and reflexively, despite the best intentions of individual politicians. It will fight back against the victories of a Proposition 13 and a Ronald Reagan, and it will turn those victories to dust.

Reining In The Beast

Next time around, we will know better. We will take care to lock in our change with a constitutional amendment that checks the growth of government. But to gain sufficient momentum, the amendment movement must find local roots.

Which brings us to Proposition 13's most powerful lesson, one that applies equally to our disillusioned, excited era. It is that it would be wrong to look to Washington for the start of the change. Individual fury against the Internal Revenue Service is an expression, if an indirect one, of national rage about the tax code. The rise of the school reform movement and the new awareness that change must come for Social Security are the beginnings of the next revolt. These are the stirrings of the waking giant.

© Copyright 1998 Hoover Digest, No. 4

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