The Tax That Turned Reagan From a Labor-Loving FDR Dem to the Father of Backlash Conservatism

In the middle decades of the 20th century, the steeply graduated progressive income tax meant that the super-rich saw their share of the America's income drop precipitously.

Sam Pizzigati
AlterNet
February 1, 2011

Did Ronald Reagan change history? Well, we all change history in our own way. The more interesting question: What changed Ronald Reagan?

What changed the labor advocate -- with enough street cred to get elected president of Hollywood’s actors union -- into a labor basher extraordinaire? What turned Reagan the standard-issue New Deal Democrat into the 20th century’s premiere pusher for almost entirely unrestrained “free enterprise”?

The answer? According to Reagan himself, the federal income tax -- specifically the over 90 percent top rate on top-bracket income that went into effect during World War II -- changed Ronald Reagan. That tax levy absolutely incensed the amiable actor.

At his Hollywood height, actor Ronnie Reagan was making $400,000 per picture. With the top federal tax rate over 90 percent, Reagan used to tell his White House chief of staff Donald Regan, he always chose to “loaf” around rather than make more than two pictures a year.

“Why should I have done a third picture, even if it was Gone with the Wind?” Regan remembers Reagan asking. “What good would it have done me?”

Actually, instead of griping about his tax bill, the World War II-era Ronnie Reagan should have been counting his lucky tax stars. Things could have turned out much worse for Reagan -- and the rest of America’s high-income set -- if Congress had let President Franklin D. Roosevelt have his way.

In April 1942, just a few months after Pearl Harbor, Roosevelt asked Congress to enact a 100 percent top federal income tax rate, in effect a “maximum wage.” No individual, FDR told lawmakers, should be taking home, after taxes, over $25,000 -- the equivalent of about $335,000 today.

FDR’s call for a $25,000 personal income limit struck millions of patriotic Americans as right on the mark. A Gallup poll, in late 1942, found 47 percent of Americans supporting the notion of an income limit and only 38 percent in opposition. And the supporters of FDR’s $25,000 cap even included some of Ronnie Reagan’s fellow Hollywood stars.

“I regret,” the widely admired Ann Sheridan told reporters, “that I have only one salary to give for my country.”

Sheridan was following in the footsteps of an even more widely admired film star, Carole Lombard. In 1937, notes film historian Eric Hoyt, Lombard paid over $300,000 in federal taxes on $465,000 in income.

“I was glad to do it, too,” she told reporters. “Income tax money all goes into improvement and protection of the country.”

No other news item, the New Yorker magazine would later relate, probably “ever did so much to increase the popularity of a star.”

Most of America’s highest income-earners, predictably enough, didn’t share either Lombard’s or Sheridan’s sentiments. They howled in protest at FDR’s 1942 income cap proposal, and Congress felt their pain -- but only to an extent. Lawmakers didn’t buy FDR’s 100 percent top rate, but they came close.

America’s rich would end the war years facing a 94 percent tax rate on income over $200,000.

America’s rich would see, after World War II, only limited relief from that 94 percent top rate. In 1948, over President Harry Truman’s veto, the GOP-controlled Congress did drop the top tax rate down to 82 percent. But the top rate would jump back over 90 percent during the Korean War, and the top rate would sit fixed -- at 91 percent -- straight through the 1950s.

Not until 1964 did that top rate start dipping, down to 70 percent. In 1981, the newly elected President Ronald Reagan would make gutting that 70 percent rate his first major White House priority. By 1986, after two Reagan tax cuts, the top rate on the top income bracket had shrunk to a mere 28 percent.

Actor Ronnie Reagan had won. Never again would a B-movie star have to stew about lost windfalls. Unfortunately, never again -- in our modern age -- would America have an effective check on the accumulation of grand private fortunes.

In the middle decades of the 20th century, the steeply graduated progressive income tax that actor Ronald Reagan so detested operated marvelously well as just that sort of check. America’s super rich -- our top tenth of 1 percent -- saw their share of the nation’s income drop precipitously in those years, from nearly 12 percent before the Great Depression to under 3 percent by the 1970s.

The top 0.1 percent share in 2007, right before the Great Recession? Over 12 percent. The rich, in other words, have come all the way back -- and more.

And average Americans? After enjoying historic levels of middle-class prosperity in the tax-the-rich mid-20th century, they’ve been treading water ever since.

And Carole Lombard, the Hollywood star who welcomed the high taxes on high incomes that Ronald Reagan so abhorred, whatever happened to her?

Lombard died in a tragic January 1942 plane crash, on her way back to Hollywood from a war bond rally in her native Indiana. She never had a chance, in all the subsequent tax-the-rich political battles, to stare Ronnie Reagan down. Too bad. Now that might have really changed history.

Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.