Sunday, November 09, 2008

Lessons from the Great Depression and One of The Biggest Tax Hikes in History of the U.S.

The chart above shows the highest marginal individual income tax rates from 1925 to 1945, using data from the IRS. The highest income tax rate was increased from 25% in the early 1930s, to 63% in 1932, and then to 79% in 1936. If you want to turn a recession into a depression with perverse fiscal policy, there's probably no better, more effective way to accomplish that outcome than by more than tripling marginal tax rates from 25% to 79% in the face of an economic slowdown. Talk about an "economic buzzkill"....

Perhaps the new administration and Congress should seriously reconsider whether 2009 would really be a good time to raise taxes. If you want to turn an economic slowdown into a recession, or an average recession into a severe recession, or a severe recession into a depression, raising taxes would surely help make that happen. It surely helped turned the recession of 1929-1933 into the Great Depression.

15 Comments:

At 11/09/2008 9:56 AM, Anonymous David said...

Great post, sadly people like Obama, Reid, and Pelosi probably wouldn't even listen to something like this.

 
At 11/09/2008 11:01 AM, Anonymous Anonymous said...

The problem is just too much debt. Taking more ability to service that debt will only make this worse just as more stimulus money will make it worse. Insolvent institutions, individuals and unprofitable companies such as the auto makers need to fail as giving money to them will only drag down profitable companies that don't receive it. Shifting bad debt buying worthless asserts to the government doesn't change the mix only who will get to absorb the losses. Assert prices need to fall, not be propped up above level that are supported by income. Depression dead ahead either your prepared or your not.

 
At 11/09/2008 12:25 PM, Anonymous Machiavelli999 said...

He is not going to raise the taxes now, but once we are out of it does have any real suggestions as to how we will pay back the $10T debt.

Or does that problem not exist in the fantasy world of "conservatives"?

 
At 11/09/2008 1:23 PM, Blogger Arman said...

>If you want to turn a recession into a depression <
The economy contracted steadily from 29 to 32. It STOPPED contracting in 33 and started strong growth again! Check the GDP! Your notion of the depression STARTING with FDR is the perversion and certainly NOT FDRs policies.

 
At 11/09/2008 1:53 PM, Anonymous Anonymous said...

Data mining again Carpe Diem.

The top marginal tax rate of 63% in 1932 was levied on incomes in excess of $1,000,000 in 1932 dollars and the tax rate of 79% in 1936 was levied on incomes in excess of $5,000,000 in 1936 dollars.

The CPI-U adjustment factor is about 14.

Therefore, in today's dollars, the top marginal tax rate would be levied on incomes of $14,000,000 and $70,000,000, respectively.

The Great Depression rentiers did not suffer very much just like the Great Ought Recession high income earners will not suffer much, if and when, the top marginal tax rate is increased from 35% to 39.6%.

 
At 11/09/2008 2:04 PM, Blogger Acton. said...

I agree with anonymous. Raising marginal tax rates is bad during a recession, but in the case of the Depression, the tax hike in 1932 came after the severe decline from 1929-1932.

It's quite possible that there may have been a much stronger recovery if not for the tax hikes, but saying that higher marginal tax rates caused a Depression is misleading.

 
At 11/09/2008 3:28 PM, Anonymous Frederick Davies said...

And why wouldn't the Democrats want to turn a recession into a depression? Last time they did so they got their candidates re-elected again and again despite obvious incompetence. I mean, look at it from their point of view, if you could do a lousy job and still keep your job, wouldn't you want to keep doing it?

 
At 11/09/2008 5:10 PM, Anonymous Fred said...

One thing I have never understood is the Democrats' nostalgia for the depression. It's sort of a that was the worst of times but, those were our times view.

 
At 11/09/2008 8:27 PM, Anonymous Kevin said...

999 - you are a dope. The PUBLIC DEBT is only $5T - don't include money we owe ourselves via SS transfers

 
At 11/09/2008 9:51 PM, Anonymous Dr. T said...

I agree with Frederick Davies. The more socialistic Democrats would love a total economic collapse. They could then combine the worst policies of FDR and LBJ and turn our nation into Sweden 2. And, unlike in FDR's time, today's Supreme Court is a lapdog to Congress and the White House. Thomas, Scalia, and Roberts won't be able to stop Stevens and crew from ignoring the Constitution.

 
At 11/10/2008 12:06 PM, Blogger Arman said...

>It's quite possible that there may have been a much stronger recovery if not for the tax hikes,<
Check the growth slope of the GDP from 33 to 37. There had never been stronger growth! Why at all would you suspect that the recovery could have ever been stronger??
FDR abandoned firmly held right wing THEORIES and the results validated his policies, but because he killed the agenda founded on Adam Smith's propaganda, no amount of success could ever placate the wounds felt by the intelligencia of right wing beliefs. Hence the revisionist history that is taught by economist and ingrained into the future economists.

 
At 11/10/2008 1:08 PM, Anonymous Michael Smith said...

In 1939, Henry Morgenthau, Jr., Secretary of the Treasury, close confidant and dear personal friend of Franklin D. Roosevelt, went before the House Ways and Means Committee to testify on the results of the New Deal. He had a problem: unemployment was back up to 20%. Here is what he told that committee:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…..somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…. I say after eight years of this Administration we have just as much unemployment as when we started…. And an enormous debt to boot!"

So there is a dedicated New Dealer testifying as to exactly what the New Deal achieved.

 
At 11/10/2008 2:49 PM, Blogger Arman said...

We are spending more than we have ever spent before and (nothing can ever make me believe that) it does not work.

The fact is, that the recession of 37 was a surprise, because EVERYONE was under the impression (because of what they were observing in their own conditions) that the depression was long gone! No one suspected that the overturning of the NRA should have ANY negative effect, but it DID!
Even though the seriousness of the 37 recession was much shorter lived than the real depression of 29-32, the contraction slope was just as steep.
You take educated opinion as being more relevant than factual observation. Too bad.

Although Thayer Watkins comprehension for the causes of the GD is a bit superficial, he does collect a few of the facts that you might like to peruse.
http://www.applet-magic.com/dep1929.htm

 
At 11/10/2008 11:26 PM, Blogger Jim Hass said...

Arman. Democrats consistently won bye-elections after 1929, so by the time 1932 came along, Democrats were firmly in control of congress. They passed the ic tax increase. Remember, prior to the New Deal, excise taxes and tarriffs dominated Federal finance. Most new rates for new items in the Smoot-Hawley act were around 60%. Coupled with the hostile policy environment, perhaps these things helped to create the central puzzle of the thirties--why the economy did not recover like other times past and present, but lingered weekly for years.
Even the influx of private gold from US citizens and refugee gold from Europe did not reduce unemployment to notmal levels until wartime wage controls.

 
At 11/12/2008 4:28 AM, Blogger Arman said...

Democrats consistently won bye-elections after 1929, so by the time 1932 came along, Democrats were firmly in control of congress.
So??? The depression started in 29 and ended in 33. What are you saying?

Remember, prior to the New Deal, excise taxes and tarriffs dominated Federal finance. Most new rates for new items in the Smoot-Hawley act were around 60%.
And these measures have no effect to the trend of the contraction slope. They added insult to injury to jurisdictions abroad that almost wholly depended on the spending of the US, but the measures had no effect on the US.
why the economy did not recover like other times past and present
The economy of the 20s was unlike any time past. Previous so called depressions turned really really poor circumstances into really really really poor circumstances (by the standards of the 20s). The so called depressions really didn't matter much. There just wasn't anything there to crash and burn! Your questions should be about why the 20s were so good, and why they weren't maintained. The 30s just don't compare to other eras because the 20s just don't compare to anything experienced before.

 

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