Mar 17, 2025 By Kent James 5 min read

As tax season approaches and the Republicans in the House passed a budget that includes a massive tax cut that will benefit the wealthiest members of society, it is appropriate to examine taxes.

Historically, the federal government funded itself by selling land, imposing tariffs on imported goods, and levying internal revenue (mostly excise) taxes. From 1868 to 1913, 90% of government revenue came from excise taxes on liquor, tobacco, beer and wine. The 16th Amendment created the income tax (which allowed the federal government to tax both individuals and corporations) and changed the way the government was financed. In 2024, 11% of government revenue came from corporate taxes while 49% came from individual income taxes; excise taxes were only 2%.

Initially, the income tax only applied to very wealthy people (only 357,000 people paid it out of a population of 97 million when it was first enacted), and it was not a large tax (1% on income from $20,000 to $50,000, rising to 6% over $500,000). World War II changed that, when the fiscal demands of fighting the war made the income tax a mass tax, which most people paid.

During the war the government also created withholding, where employers sent a portion of a worker’s wages to the government to cover the taxes they would owe, rather than expecting people to set money aside and pay a lump sum when taxes were due. While this was a brilliant move (many people look forward to tax time because they get money back), it does create a divide between people who never see the taxes they pay (wage and salaried employees) and people who work for themselves, who have to take some of the revenue their business takes in and give it to the government, which is a more painful process (and one of the divides between anti-tax businessmen and the more liberal salaried class).

Tax rates were very high on the rich during the 1950s (over 90%) as the government tried to pay down the war debt, and the economy thrived (one of the many examples that debunks the theory that high taxes prohibit economic growth). The corporate tax rate was 52% during the Eisenhower Administration. John F. Kennedy passed a tax cut, but the real cuts came when Ronald Reagan was president (the top rates were reduced to 50%, then 33%). Supply siders in the Reagan Administration argued that reducing tax rates would stimulate so much growth there would be no reduction in tax revenue, but they were wrong (revenues dropped by about 9%). Bill Clinton raised taxes during a booming economy and eliminated the deficit, but when George W. Bush came into office, he passed tax cuts that, along with two wars, put the budget into deficit once again.

While Republicans claim to be the party of fiscal responsibility, in practice they pass tax cuts without cutting spending, which drives the deficit up (though Dick Cheney argued that Reagan proved deficits don’t matter, and recent history suggests that’s true, to a point).

President Trump’s most significant achievement in his first term was cutting taxes, which benefited the wealthiest members of society the most (the bottom 60% got a tax cut that averaged $500 while the top 1% tax cut averaged $60,000). He also reduced the corporate rate from progressive rates as high as 38% down to a 21% flat rate, and allowed sole proprietors, partnerships and S-corporations to deduct 20% of their qualified business income. Most of these tax cuts had to expire in order to avoid violating limits on deficit spending, but now, in spite of claiming to want to reduce the deficit and the deficit being much larger than it was in 2017, Trump and the Republicans want to extend these tax cuts.

When Trump was running for office in 2016, he claimed he would use his business skills to not only eliminate the deficit (annual losses), but in eight years, would eliminate the debt (at that point, $19 trillion). Clearly, he failed. Republicans like to claim that tax cuts pay for themselves (they don’t), and that they can stimulate economic growth. The latter is true, but only marginally. Tax cuts that favor the rich have limited utility as growth accelerators because the rich spend a much smaller portion of their income than the poor do. Programs that put money into the hands of the poor spur growth more effectively because the poor put that money into the economy quickly.

Cutting corporate taxes greatly enhances corporate profitability, but the people who benefit most from such tax cuts are the wealthy employees of the corporations, and the stockholders (roughly 40% of who are foreign), because the stock price goes up to reflect the increased profitability, and many of the increased profits are used for stock buy-backs (in 2018, 81% of the tax cut went to stock buy-backs). Although Trump claimed the 2017 tax cut would “conservatively” lead to $4,000 in increased household income, that did not happen; the Federal Reserve and the Joint Committee on Taxation found that families whose income was below $114,000 saw no increase in income.

The tax cuts the House Republicans passed benefit the wealthy and the corporations and will greatly contribute to the debt (an estimated $4.5 trillion over 10 years). Drastically cutting Medicaid, which is used by 72 million Americans, to fund tax cuts that primarily benefit the wealthiest Americans is immoral as well as bad policy. Half of the cost of the tax cut benefits the 5% of the population that makes over $743,000. Keeping the tax cuts for taxpayers making less than $400,000 would allow most Americans to benefit, while limiting the growth of the deficit. The Republican tax cuts only make sense if the goal is to help the wealthiest members of society get richer, regardless of the cost, though it should not be surprising when the administration is filled with billionaires.

Kent James is a member of East Washington Borough Council.