When the world’s greatest power financed an overseas war with borrowed money, then turned to its elites to approve tax increases that would fall mainly on the rich, they
responded with a resounding “NO!” The debt was not a reasonable result of government needs, the elites cried. It was the result of waste and misguided government expenditures. There was no way that the elites would consent to any increase in taxes without constitutional change; anything else would be a grievous assault on basic liberties.
That was in the spring of 1787. The place was Paris, and after France’s successful intervention in the US Revolutionary War against Britain, it had debts to pay that required a boost in income. Although France was by a goodly margin the largest and richest country in Europe, and the most powerful military force in the world, its tax system was a twisted mess of special exemptions and loopholes. Different regions of France paid different rates of taxes, and most elites were exempt from the basic tax of the country – the taille,
a land tax – on most of their income. The elites did have to pay an income tax of 5% — the vingtiéme – but that was due to expire, and the country could not pay its bills unless the tax was made permanent, and other taxes were made more consistent or increased.
To accomplish this, the French monarchy convened an Assembly of Notables, opened its books, and claimed that tax increases were essential to restore the finances of the nation, and prevent the country from being overwhelmed with debts. The monarchy was absolutely correct in this – France’s population had increased by a third since the start of the century, and the population growth pressing on agriculture had raised the prices of most commodities, including the costs of keeping an army. Interest rates had also gone up, making it more expensive to service the state’s debts. Yet tax revenues had stagnated, because French taxes in those days were largely fixed and did not rise with inflation.
In fact, there should have been no problem paying the debts, because the French economy had grown handsomely, as urbanization, the expansion of manufacturing, and overseas trade had all grown enormously in the 18th century and many among the French elites and bourgeoisie were richer than ever. But these groups had the equivalent of tax exemptions or loopholes, paying relatively low rates compared to the their gains in wealth, as most of the tax burden still fell on the agricultural sector, which had grown more slowly.
It was clear to the King’s ministers that this situation could not go on. Taxes had to shift and fall on those whose income had risen the most in recent decades, both for fairness and to ensure that the country’s debts were brought under control. The King’s finance minister was certain that if he simply made the situation clear, the elites would agree to rationalize the tax system, even if it meant higher taxes for them. After all, the elites were richer than ever and could easily afford to pay the higher taxes; surely patriotism and assuring the future of the country would come before personal interests.
Of course, just as President Obama today, the King and his ministers were wrong in thinking that the elites would be reasonable. Instead, they proclaimed loudly that the debts and the budget problems were entirely created by excessive spending by the King.
They cried out that any increase in taxation was an unconscionable assault on their liberties. In an eerie parallel to today’s refusal by Congressional Republicans to increase state borrowing unless a balanced budget amendment is submitted to the states, the
Assembly of Notables refused to give its assent to any new taxes unless the King submitted plans for constitutional reform to a special meeting of the Estates-General.
The result, of course, was the destruction of the monarchy in the French Revolution, a devastating inflation when the country finally defaulted on its debts, the seizure of Church property to pay state bills, civil and international wars, the rise of radical populism in the French Jacobins, the execution of many of those same elites at the guillotine, and the loss of France’s status as the dominant nation in Europe to Great Britain. All of which could have been avoided if the elites had recognized that a modest and affordable increase in taxes was necessary to restore fiscal stability to the nation, and agreed to them.
Is there a lesson here for today, or is this ancient history? In fact, the parallels are remarkable. Just as today, the elites in the US are confusing their self-interest with principles of freedom from taxation, when in fact the critical principle is that the country must have sufficient revenues to cover its necessary expenses and service its debts. As to
the deficit, conservatives blame it on Obama just as 18th century French elites blamed their deficit on the king. But just as in France, the greater portion of the the long-term deficit
in the US is being driven by population change, which the President cannot affect. The number of Americans over 65 will double over the next forty years, from 50 to 100 million. The increases in medicare and social security costs that this will bring cannot be covered by simply cutting spending unless we decide to toss out these programs altogether. But the increased costs cannot be covered by reasonable tax increases either. The only way to cope with this coming and inevitable surge in the elderly population is with a combination of modestly higher taxes on those who can afford to pay for them, and a reduction in costs via means-testing, later retirement, slower increases in benefits, and efforts to constrain health spending.
And what of the consequences of the elites ‘no new taxes’ mantra? The US is about to move into 2012 with four factors coming into view – an unemployment rate over 9%, a trillion-dollar increase in taxes over ten years on ordinary workers when Obama’s social
security tax cuts expire (see my previous post), the expiration of long-term unemployment insurance for those out of work for two years, and the continuation of a $42 billion per year tax cuts for the rich if the Bush tax cuts are not allowed to lapse. Just as the French elites could not see that their actions would fuel an extreme populist backlash, so today’s Republicans don’t seem to realize that this combination will likely bring a populist backlash against the rich that will make any prior talk of ‘class warfare’ seem like a
The US is not facing another recession, even a large one. In the words of Robert Schiller and Carmen Reinhart, it is facing a second Great Contraction, more like the Great Depression. During the Great Depression, popular radicalization reached new heights,
launching the greatest expansion of government and the sharpest assault on corporate privileges since the Progressive era. The Republican policies seem designed to maximize popular suffering and resentment. The result can only be a new wave of populist mobilization that will bring down the very elites who think they are preserving the system, while in fact they are destroying it.
Like the weak but well-meaning Louis XVI, Obama may also be swept away by the crisis. But America is unlikely to recover. The demographic wave of aging is coming. The federal government needs to both cut benefits and raise revenues to avoid an explosion of debt and eventual fiscal collapse. The elites have dug in their heels against even a modest increase in taxes on those who can best afford it, while leaving the working poor to their own devices amidst a crushing economic contraction, assuming the latter are impotent and do not see what is happening. At some point the ordinary working people of this country will realize that the wealthy are simply rolling along and do not care if ordinary Americans get crushed under the wheels. Can the creaking of the tumbrils be far behind?