Tax Analysts Blog

Healthcare Taxes: What Would FDR Do?

Posted on Jul 10, 2009

It was always going to come down to the money. Democrats have spent months hashing out the details of healthcare reform, but they left the worst for last: how to pay for the damn thing.

Sure, they floated a few trial balloons. President Obama even offered some plausible suggestions. But as a group, Democrats delayed the heavy lifting. (And of course, all but a handful of Republicans have simply dealt themselves out of this game.)

Saving the worst for last is a time-honored technique in negotiation. And sometimes it's a good one. But in this case, pushing off the tax debate was a mistake. In any reasonable world, the funding of healthcare reform would be integral to the shape of healthcare reform. But not, apparently, in this world.

Recent speculation has focused on a new surtax for high-income taxpayers. Apparently, this polls well. It also draws on a long Democratic tradition of using progressive taxes to fund social reform.

Or maybe not. If Democrats think they're channeling FDR when they suggest using a surtax, then they should think again. FDR was a great believer in soaking fat cats. He was convinced -- deeply, passionately, honestly -- that the rich were paying too little. (He may also have believed that the poor were paying too much, although his tolerance for regressive consumption taxes throughout his presidency suggests otherwise.)

But FDR did not use soak-the-rich taxes to pay for major new social programs. The obvious case in point is Social Security, which Roosevelt decided to fund with payroll taxes.

Sure, FDR also proposed a wide array of tax hikes on the rich. And he did it for three reasons:

  1. He needed the money. Like Obama today, FDR was under constant pressure to limit deficits. Progressive tax hikes promised to raise much-needed revenue ("needed" in the political sense, not the economic one, since even in the thirties, many experts understood that smaller deficits were likely to delay recovery, not encourage it).
  2. He wanted to reform the economy. Some of FDR's progressive tax reforms (like the undistributed profits tax of 1936) were designed to change the structure of American industry and finance. Others (like the so-called Wealth Tax of 1935) were designed to discourage the accumulation of large personal fortunes.
  3. He wanted to right great wrongs. FDR believed that many rich Americans were simply skipping out on their tax bills. Several of the New Deal's signature tax laws (including the Revenue Act of 1937) were designed to close loopholes and narrow the gap between effective and statutory tax rates.

In a broad sense, FDR did want the rich to foot the bill for social reform. But he pursued this goal in aggregate terms, shifting a greater share of the overall tax burden to the rich while shifting overall spending toward the non-rich. He did not ask the rich to pay for particular programs designed to help the poor.

Why did FDR eschew narrow taxes to pay for social programs? Not because he thought it was unfair. Rather, it was a political calculation, designed to ease the creation and ensure the longevity of new programs. "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits," he said of Social Security "With those taxes in there, no damn politician can ever scrap my social security program."

That FDR quote is a bit suspect, as historian Mark Leff has pointed out (link only good for those of you with JSTOR access -- sorry): it derives from the recollection of an associate some years after the fact. But even if FDR never said it, he appears to have meant it. Roosevelt insisted on using payroll "contributions" to fund Social Security, rejecting the entreaties of advisers and liberal critics. The most plausible explanation for his intransigence? His political acumen. FDR may not have been a great economist, but he was a great politician.

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