U.S. Tax Policy, Inflation, and the Euthanasia of the Individual Investor in the 1970s: The Views of Gadfly Journalist Wilma Soss
By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University for the Philosophy, Politics, and Economics Society Annual Meeting, New Orleans, Louisiana, 16 March 2018.
Since the financial fiasco of 2008, some U.S. investors have been subjected to a subtle but invidious injustice: they have paid income taxes on interest earnings that are below the rate of inflation. Although they enjoyed nominal gains they suffered real, by which I mean inflation-adjusted, losses. This has not become a major policy issue because many such investors did not itemize their deductions and many fewer will do so under the “Tax Cuts and Jobs Act” of 2017. Moreover, the difference between the savings and inflation rates was just a few percent at most and interest rates have been so low that interest earnings typically pale compared to income. The stakes are simply too low to get riled up about the situation.
But what if the U.S. economy were to suffer a major bout of inflation? Although the Federal Reserve has found it difficult to increase inflation to its target, key policymakers and economists have admitted that they do not understand why that is the case. The Panic of 2008 and Great Recession basically broke their models, and all the Fed chairperson’s economists and all the Fed chairperson’s computing power has not been able to put the econometric Humpty Dumpty back together again. Nobody seems much concerned about this but the last time the Federal Reserve was as clueless about the causes of changes in the price level was in the wake of the shocks that occurred in the early 1970s, including the end of the Bretton Woods gold exchange standard and the oil crises. Those events triggered a decade-long bout of inflation unparalleled in peacetime America. That episode, commonly known as the Great Inflation, exposed the grave injustices of a tax code built upon nominal values.
Bracket creep is a fairly well understood injustice from the era, a time when tax protesters “sent in band-aids with their returns to show it hurts … a lock of hair to indicate that they’ve been scalped … and a piece of shirt off their backs” (PN, 4/12/70). Basically, as inflation drove up nominal incomes, taxpayers in essentially unchanged material circumstances were forced to pay a higher percentage of their incomes in taxes, as if their real incomes had increased. The euthanasia of fixed-income investors, who saw their real incomes decline as nominal prices rose, has also been studied by researchers such as Niall Ferguson in his classic The Cash Nexus (PN, 95/1973). Less well understood is the fact that the financial death of investors in bonds and stocks was aided and abetted by a tax code that treated nominal income from coupons and dividends as income even when it sagged far below the rate of inflation and that did not adjust asset prices for inflation when computing capital gains.
One of the leading popular critics of the nominal tax code was Wilma Soss, a corporate activist, or “gadfly” in the parlance of the day, and the host of a radio show called Pocketbook News that ran weekly coast-to-coast on NBC Radio from 1954 until 1980. Although less famous than Sylvia Porter, Wilma, a 1925 graduate of Columbia’s then new school of journalism, wrote and produced the show herself and kept its quality high throughout her career. In fact, her show’s final decade was arguably its best, as Wilma leveraged her long investment experience and vast network of professional contacts, which ranged from big banker David Rockefeller to monetary expert Franz Pick, to help her listeners to understand the titanic shocks that rocked the American economy throughout the 1970s. Born in 1900, she finally gave up her show at age 80 and died just a few years later.
Although not formally trained in economics, Soss had studied the subject in college and was constantly interacting with economic experts for her show and as founding president of the Federation of Woman Shareholders in American Business, an NGO dedicated to corporate governance reforms aimed at aiding small investors, over half of whom were females in many companies. A Republican in politics, Soss gravitated towards standard neo-classical theory infused with practical understandings gained over decades of managing her own investment portfolio.
For the most part, Soss jousted with the corporate grandees who had seized control of American big business and turned companies into personal piggybacks to be raided at will, always at the expense of stockholders, or shareowners as Soss came to call them to stress their proper relationship to management as she saw it. When government policies threatened the value of her investments, however, Soss turned on the responsible parties in Washington. That included Republican president Richard Nixon, whom Soss at first admired, after it became clear that his New Economic Policy price controls included de facto ceilings on corporate dividend payments (PN, 10/10/1971) and that he favored Big Labor over small shareowners (PN, 11/20/1971).
Soss, who took the last name of her husband Joseph, enjoyed what appears to have been a very modern marriage. The childless members of the Soss pair enjoyed relatively lucrative and interesting careers. Soss even commuted weekly from their apartment in New York to her P.R. job in Detroit during World War II and to a similar position in Philadelphia after the war, both by train of course. She claimed on air that Joseph did the couple’s shopping but that she paid many of the grocery bills (PN, 10/15/1976). Soss undoubtedly at least worked with Joseph on their taxes and she may have filed an individual return in some years. In short, she had working knowledge of the individual tax code and personally felt the pressures caused by rising prices and lagging returns. On 18 March 1977, for example, she complained on air that she “received a $6.00 3 months dividend on 12 shares of International Paper at the same time as a bill for $7.10 for two veal chops!”
Soss understood that “inflation is in itself a tax” on money balances (PN, 12/24/1972) and at least twice even called it the “greatest tax of all” (PN, 9/8/1973; PN 3/16-17/1974) and considered it a “cruel tax” (PN, 7/15-16/1974) or even the “cruelest tax” (PN, 3/25/1976?). She argued that any inflation above 2 percent was “terrible” though “not too terrible” if held below 4 percent (PN, 06/25/1972). But other inflation costs lurked, virtually unseen, in the nation’s tax code.
As early as 18 January 1970, Soss warned investors on air that their after-tax yield on bonds was likely less than the rate of inflation. On 25 July 1971, Soss, who had been born in San Francisco but spent much of her life in New York City, went on an anti-New York City tirade that included the complaint that the 7 percent city sale tax rate when “you get 5% for your money in the savings bank” was “immoral.” “It should be illegal,” she argued that day, “to have a sales tax higher than the people’s basic interest rate on savings on which they have to pay income tax besides.” She left off that somewhat nonsensical line of reasoning but on 23 January 1972 she noted that all of the gain in personal income in 1971 had been erased by increases in inflation and taxes. That was no good because, as Soss noted in her broadcast of 9 December 1973, “there is an old axiom that the cost of money has to be twice the cost of living if, after taxes, the lender [i.e., the investor] is to stay ahead of the money game.”
And Soss meant the actual cost of living. The government’s own inflation statistics, she believed, had a discernible downward bias. On 7 October 1973, she told listeners that “there is generally suspicion that government statistics have become politicized and cosmeticized. The official index for the rate of inflation seems hardly to match anybody’s family budget.” Years later, she claimed that she kept a bust of British Prime Minster Benjamin Disraeli on her desk to remind her of the claim (whether it was actually his or not) that “there are three kinds of lies -- white lies, damn lies, and statistics” (PN, 3/25/1976?) She also realized that changes in the price level could affect states, regions, and metro areas differently (PN, 4/27/1974). She knew, for example, that in the early 1970s the cost of living in New York City rose four times faster than the national average (PN, 3/20/1971).
Soss also understood that risk requires compensation so on 21 January 1973 she challenged her listeners to imagine a 10 percent increase in stock prices but then to deduct “the rate of inflation, your taxes, worry and risk. Try that on your pocket calculator and see what you have left.” A week later she complained that Exxon’s common stock yielded only 4.7 percent “while bank interest is 5 to 6%,” a very bad bargain indeed given the risk involved. “Stockholders are not an eleemosynary institution,” she reminded corporate executives and policymakers. “We invest our savings to add to our earnings or as a pension,” not as a charitable donation.
To her listeners, Soss also explained that rising stock prices might reflect nothing but fake profits generated by antiquated or even improper accounting methods. The latter stemmed from the ability of managers to manipulate financial outcomes. “Earnings,” she warned listeners on 18 January 1970, “are what management and the accountants want them to be.” (She also noted that the Ford Foundation was “critical of corporations that achieve earnings gains through liberal accounting practices” [PN, 6/7/1970]). The former was due to using inventory accounting techniques (PN, 10/14/1973; PN, 11/25/1973; PN, 12/301973; PN, 5/7/1977; PN, 4/14/1979) like FIFO, or “first in, first out,” instead of LIFO, or “last in, first out.” FIFO, she explained, “is likely to beef up profits and make earnings look better than they really are” (PN, 7/20/1974). Soss even went before the Financial Accounting Standards Board (FASB) to argue for what she called “price level accounting” in the name of transparency and full disclosure. As she explained to listeners on 11 July 1975, “if a dividend hasn’t been raised, say, since 1971, it has been cut, since the dollar has lost about 24% in purchasing power since then!” She lauded the Indiana Telephone Company for stating its earnings in constant dollars, using the GNP deflator, one of only a handful of companies to do so (PN, 4/24/1974).
All of those considerations led Soss to advocate a tax credit based on a realistically computed CPI. She never made the details clear but obviously she believed Americans should be compensated for the lost purchasing power of the dollar and inflation-adjusted capital losses. She argued on 5 March 1973 that “19% devaluation of your dollar within fourteen months means that some, possibly many of you will be paying capital gains taxes on what are capital losses, not to mention the universal tax of inflation on your income, for which there are no tax credits.” And on 12 August of that year: “Women investors are beginning to ask what good is 8% and even 9% interest on your money on which you have to pay taxes when the price of food is going up 20%?” And on 24 April 1974: “Many of us are paying taxes on non-existent profits and income.” And so forth, on and on and on (PN, 5/18/1974; PN, 7/13/1974; PN, 7/15/1974; PN 6/1/1975; PN, 3/24/1979; PN, 4/7/1979), culminating on 10 March 1978 when she reiterated her call for an inflation tax credit and argued that “it is outrageous to have to pay income taxes on five percent interest when the rate of inflation is 8 and 9%, not to mention double digit!”
To provide an income tax credit for actual inflation and to calculate capital gains on a real basis would of course reduce the government’s incentive to cause inflation in the first place, so Soss’s proposal was a political non-starter. Political economists today, however, might consider trying to work such inflation disincentives into the tax code while inflation remains relatively tame. Ensuring that the government’s revenue automatically will decrease if it tries to inflate away its debts could do more to protect future generations from another Great Inflation than the Federal Reserve’s ever tenuous political independence.
Soss had plenty else to say about taxes. For starters, there were too many of them. She recalled for her listeners, for example, a study conducted in the 1950s that showed that bread was taxed 151 times before its consumption (PN, 9/17/1972). Even worse were taxes on tobacco products imposed at the same time that the federal government heavily subsidized tobacco growers (PN, 1/13/1978). Soss also reminded listeners that taxes, once implemented, almost invariably trended upward, like a teaser interest rate. “Remember how low the income and social security taxes started?” she asked on 6 February 1972 in response to calls for a European-style Value Added Tax of just 2.5 percent.
America’s tax codes, Soss argued, aided and abetted margin speculators while discouraging savings and promoting a “borrow and spend” mentality. “So long as interest rates are less than the inflation rate and the interest [paid on debts] can be deducted from taxes,” she noted on 2 February 1980, “people will borrow and spend.” Or, a month later, “there is little incentive to save under our tax structure” (PN, 3/?/1980).
The most insidious taxes of all were those that threatened corporate democracy, Soss’s antidote to Soviet communism and European-style socialism. “The whole capitalistic dogma falls apart,” Soss argued on 24 April 1974, if investors were not able to earn decent risk-adjusted returns after taxes and inflation. By the time Soss retired in early 1980, the end of corporate democracy was already well underway. At the end of 1968, individuals owned 80 percent of all corporate shares (PN, 2/1/1970). During the 1970s, individual investors began to pour out of the securities markets (PN, 12/26/1975; PN, 7/2/1976) due to higher commissions before the May Day 1975 brokerage deregulation (PN, 2/15/1970; PN, 7/12/1970), poor real returns -- the annualized nominal growth rate of the Dow Jones Industrial Average between 1 January 1970 and 31 December 1979 was a mere .47 percent (MeasuringWorth.com) and dividends dropped from 75 to 40 percent of corporate earnings (PN, 11/7/1971; PN, 4/24/1974; PN, 12/11/1979; PN, 12/29/1979) -- and also the continued double taxation of dividends and other anti-small investor tax policies. On 3 September 1972, contemplating a victory by Democratic presidential candidate George McGovern, Soss noted that a “McGovernment” would not end the double taxation of dividends and would likely impose the capital gains tax on inherited stock, prompting one irate listener to wonder “why do they hate children in this country?” Soss also noted that the 100 percent deductibility of short term stock market losses, compared to the 50 percent allowed on longer term investments, “encourages speculation” and “discourages investment” while it fattened brokerage commissions (PN, 9/17/1972).
Soss became hopeful in August 1973 when the Senate began “studying tax changes to spur more people to invest in common stocks” (PN, 8/5/1973), again in July 1975 when Treasury Secretary William E. Simon made some noises about tax reform, and in the summer of 1976 when double taxation was again discussed in high policy circles (PN, 7/16/1976; PN, 9/17/1976). But ultimately nothing came of any of those attempts (PN, 7/22/1977) because, as Soss noted, “the moral aspect of double taxation appeared to bother no one” (PN, 7/11/1975).
When individual investors came back into the markets after the rise of discount brokerage firms like Schwab, most did so as so-called day traders, or short-term speculators. “Inflation with a couple of stock market crashes in the seventies,” Soss explained to listeners on 11 December 1979, “killed investors’ appetite for stocks. The shift has been from long term investment into short term speculation.” Traditional, buy-and-hold value investors switched from direct ownership of shares to low cost mutual funds, most of which refused to intercede in matters of corporate governance. After sundry poison pills killed off leveraged buyouts and other forms of market discipline, corporate executives were virtually unchecked. The accounting scandals of the early Third Millennium AD and the financial fiasco of 2008 were direct results. Soss was long dead by then but would have turned over in her grave had she not ordered her remains, like those of her beloved Joseph, cremated.
 The author gratefully acknowledges the aid and input of Jan Traflet, a professor in Bucknell’s Freeman School of Management and his coauthor of a forthcoming full-length biography of Soss. Any errors of fact or interpretation found herein, however, remain Wright’s sole responsibility.
 References in this form refer to the transcripts of Soss’s Pocketbook News radio show, followed by the date of broadcast, all of which can be found in Box 9 of the Wilma Soss papers housed at the American Heritage Center, University of Wyoming, Laramie, Wyoming.