The Lonely Centrist

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Friday, April 11, 2008

Tax Hypocrites

With Tax Day just around the corner, the Centerman is stirred from another long hibernation to note the hypocrisy of so many politicians who want to raise taxes.

James Thorndike of Tax Analysts has a wonderful little bit of history on the differences between Franklin D. Roosevelt's sanctimonious excoriations of others, and his own efforts to avoid taxes.

Roosevelt's returns, not made public until long after his death, reveal his private behavior quite at odds with his attacks on others. Thorndike writes:

Roosevelt reserved special scorn for the "clever little schemes" devised by tax lawyers, insisting that they posed a threat to the tax system, and even to society as a whole. "In this immediate problem the decency of American morals is involved," he declared. "The example of successful tax dodging by a minority of very rich individuals breeds efforts by other people to dodge other laws as well as tax laws."

Roosevelt's 1937 message on tax avoidance decried a variety of popular techniques, including the use of overseas and domestic personal holding companies, the creation of multiple trusts for the support of family members, and the incorporation of money-losing country estates and personal yachts.

Such bombast carried the day in 1937, when FDR pushed a tax bill through Congress that tried to eliminate some of the more glaring loopholes. Other high points in Rooseveltian tax policy -- including the Wealth Tax Act of 1935, the undistributed profits tax of 1936, and the tax bill veto of 1944 -- were also rooted in a conviction that rich Americans were gaming the tax laws.

But Roosevelt's tax returns reveal him to be something of a hypocrite. At various points, both before and after his election to the White House, he indulged in the sort of tax avoidance that he claimed to find so objectionable.

For instance, Roosevelt repeatedly urged Congress to end the tax-free treatment of interest on state and municipal bonds. The special treatment accorded to those financial instruments, he told Congress in April 1938, "has created a vast reservoir of tax-exempt securities in the hands of the very persons who equitably should not be relieved of taxes on their income." Congress should act to end the injustice, he declared.

Yet just a month before, FDR had filed a tax return indicating that he owned some $17,000 in tax-free bonds. Defenders of the president might insist that he was doing nothing wrong; after all, the tax-free status of those bonds was a deliberate and long-standing element of the tax law. But Roosevelt himself dismissed those legalistic arguments:

Methods of escape or intended escape from tax liability are many. Some are instances of avoidance which appear to have the color of legality; others are on the borderline of legality; others are plainly contrary even to the letter of the law.
All are alike in that they are definitely contrary to the spirit of the law. All are alike in that they represent a determined effort on the part of those who use them to dodge the payment of taxes which Congress based on ability to pay. All are alike in that failure to pay results in shifting the tax load to the shoulders of others less able to pay, and in mulcting the Treasury of the Government's just due.

Roosevelt's income from tax-exempt bonds was not grand; it shrinks to insignificance when compared to the exempt income reported by the nation's richest taxpayers. Still, his fondness for investing in those bonds stands in stark contrast with his public pronouncements on the subject.

But it gets better - catch this little gem of creativity:

FDR repeatedly claimed that he was exempt from the high tax rates on personal income that Congress had enacted -- and Roosevelt had approved -- in the revenue acts of 1934 and 1935.

In a series of letters to internal revenue officials, Roosevelt insisted that he could not be taxed at the heavy rates imposed on rich taxpayers during the mid-1930s. Article II, section 1 of the Constitution forbids any reduction in the president's compensation during his term in office, Roosevelt pointed out. Since the new rates enacted in 1934 and 1935 effectively reduced that compensation, they could not be applied to the president's salary.

Thorndike's post even includes a copy of a note from Roosevelt making that claim to the IRS. Now that's chutzpah: pass a tax increase, excoriate others for looking for legal ways to avoid paying it, and then claim a constitutional exemption, available only to an elite few in government (presumably federal judges would have also benefited), from the increase.

In this election cycle, two very wealthy presidential candidates - Hillary Clinton and Barack Obama - are telling us that we simply have to raise taxes. I don't know if they makes claims rising to the hypocrisy of FDR, but it really doesn't matter. Of course, when you are earning over a million bucks a year, it's pretty easy to pay more in taxes. When wealthy politicians say that "we" have to make sacrifices, they usually mean "you."

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