History (Revisited)

Oh, to be a high school history teacher today… with the endless GOP philippic about “taxes and income redistribution and socialism” ratcheting up it would be fun to send home children to educate their parents. The fiscal “geniuses” of the right wing claim that raising taxes to increase Federal spending will kill any chance of economic recovery. Okay class, what does history teach us about the association of taxes with the economic crisis?

In early 1920s, the highest tax rate was 77%. In 1924, Treasury Secretary Mellon advocated that tax rates should be reduced to encourage investment and job growth. The tax rate was gradually lowered to 25% in 1928. What happened in 1928? The Great Depression started. Reducing the tax rate caused wealth to become consolidated to an increasingly smaller percentage of the population and job growth rate remained stagnant.

President Roosevelt greatly increased Federal spending and raised the tax rates on the richest Americans. The highest tax rate during the Roosevelt Administration? 99%. The result? Job growth every year (except one year when he decided to cut back on Federal stimulus spending), the end of the Depression and the start of the greatest economic boom in the world’s history. We not only rebuilt the Country, we rebuilt Europe.

In 1993 President Clinton inherited the Reagan-Bush (H.W.) recession. The Clinton tax increase in 1993 raised the tax rate on the upper 10% of incomes from 31% to 39.6%. What happened? The longest period of economic growth since WWII and the first budget surplus in nearly 100 years.

In 2003, the Bush tax cut was followed by flat rates of job growth, record budget deficits and the current financial crisis. Reducing the tax rate caused wealth to become consolidated in an increasingly smaller percentage of the population, and job growth rate remained level (see 1928).

So, what is the historic association of raising taxes on the wealthiest Americans and the economy? Job growth and prosperity. What is the historic association of lowering tax rates on the wealthiest Americans and the economy? Reducing the tax rate caused wealth to become consolidated to an increasingly smaller percentage of the population and job growth to remain level (see 1928 and 2008).