Monday, May 13, 2013

How Taxation Has Everything to Do with Economic Growth, Mr. President!

"Public servants say, always with the best of intentions, 'What greater service we could render if only we had a little more money and a little more power.' But the truth is that outside of its legitimate function, government does nothing as well or as economically as the private sector."

- Ronald Reagan, 40th President of the United States (1981-1989)


(Above: President Ronald Reagan, who is credited as being the political figure in the United States to usher in modern-day conservative political practices in government.)

Taxation has been a key component in U.S. government ever since the very earliest days of this nation, for it was one of the central themes the British colonists in America opposed -- the concept of taxation without representation in Parliament -- that led to the American Revolution.  The history of Western political systems is chalk full of issues with taxation, and there have been many economists who have written books and pamphlets discussing the roll of taxation in government domestic and foreign policies.  For the majority of the 20th Century, the United States and Western Europe practiced the macroeconomic concepts espoused by British economist John Maynard Keynes, but later in the century, a paradigm shift led several governments away from this practice and toward the principles most associated with the other major economist from that era, Milton Friedman, when the phenomenon of stagflation took hold during the 1970's.  The two economists could not have been more different than night is from day, and it is clear that this difference in principles led to the transformation of the economies of Western governments from socialism that required a buoyant economy to produce tax revenues so that the government could increase taxes on its citizens, to one promoting free trade and less government interference in the ebb and flow of economic progress, including the practice of lowering taxes.

The issue of taxation has become a hot topic yet again today.  President Barack Obama pledged in this past campaign to only raise taxes on Americans earning more than $250,000 annually.  He lied, including in his 2014 budget plans to raise taxes on all levels of income, including the middle-class and the poor. The President is doing this despite an economy that is on the verge of a double-dip recession due to it actually experiencing a contraction, or decline in growth.  Inflation has risen since Obama took office, and in a 2011 article, Canada Free Press said:
"The Obama administration does not seem concerned with addressing the dire issue of inflation caused by its overspending and out of control money printing."
Such economic practices as these will surely result in further unemployment and higher inflation. The implementation of the Affordable Health Care Act (aka. "Obama Care") will cost 800,000 Americans their jobs over a period of a decade due to employers being forced to layoff workers due to not having the financial means to pay for the new health care plan. (Courtesy of cnsnews.com)  All-in-all, the practice of Keynesianism in economic policy that proved to be a complete and utter failure at the end of the 1970's has returned under Obama, and with it will result in the ruination of this nation.

Through my reading of political history in terms of economic policies, I have come to more firmly than ever realize that the soundest economic policies that lead to solid growth are those where taxes are low, not oppressive, as well as a government that does not practice socialism.  This practice of low taxation and non-socialism is most characteristic of the conservative establishment in nations around the world, or in the United States, the Republican party.  There have only ever been five presidents who practiced sound economic policies over the past 91 years, and four were Republicans: Warren G. Harding, Calvin Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush.  They each cut taxes in order to buoy up sagging economies, and their strategies worked to perfection.  The most notable of these presidents is Reagan, who led America's drive toward the "economic miracle" after various estimates concluded that the rising unemployment and inflation that had existed from as early as 1969, after the Johnson administration's tax hike known as the "surcharge" had been in affect for close to a year. Reagan's economic policy, known both as "supply-side economics" or "Reaganomics," restored faith in the American way of life to millions of Americans, resulting in the creation of nearly 20 million new jobs, and a growth in financial prosperity at all income levels.  The follow article from Forbes describes the economic strategies of both Reagan and Obama and why "The Gipper's" was far superior:
"Reaganomics Vs. Obamanomics: Facts And Figures  by Peter Ferrara
"In February 2009 I wrote an article for The Wall Street Journal entitled “Reaganomics v Obamanomics,” which argued that the emerging outlines of President Obama’s economic policies were following in close detail exactly the opposite of President Reagan’s economic policies.  As a result, I predicted that Obamanomics would have the opposite results of Reaganomics.  That prediction seems to be on track.
When President Reagan entered office in 1981, he faced actually much worse economic problems than President Obama faced in 2009.  Three worsening recessions starting in 1969 were about to culminate in the worst of all in 1981-1982, with unemployment soaring into double digits at a peak of 10.8%.  At the same time America suffered roaring double-digit inflation, with the CPI registering at 11.3% in 1979 and 13.5% in 1980 (25% in two years).  The Washington establishment at the time argued that this inflation was now endemic to the American economy, and could not be stopped, at least not without a calamitous economic collapse.
President Reagan campaigned on an explicitly articulated, four-point economic program to reverse this slow motion collapse of the American economy: All of the above was accompanied by double-digit interest rates, with the prime rate peaking at 21.5% in 1980.  The poverty rate started increasing in 1978, eventually climbing by an astounding 33%, from 11.4% to 15.2%.  A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982.  In addition, from 1968 to 1982, the Dow Jones industrial average lost 70% of its real value, reflecting an overall collapse of stocks.
  • 1. Cut tax rates to restore incentives for economic growth, which was implemented first with a reduction in the top income tax rate of 70% down to 50%, and then a 25% across-the-board reduction in income tax rates for everyone.  The 1986 tax reform then reduced tax rates further, leaving just two rates, 28% and 15%.
  • 2.  Spending reductions, including a $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $175 billion in spending cuts for the year today.  In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983.  Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms!  Even with the Reagan defense buildup, which won the Cold War without firing a shot, total federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989.  That’s a real reduction in the size of government relative to the economy of 10%.
  • 3. Anti-inflation monetary policy restraining money supply growth compared to demand, to maintain a stronger, more stable dollar value.
  • 4. Deregulation, which saved consumers an estimated $100 billion per year in lower prices.  Reagan’s first executive order, in fact, eliminated price controls on oil and natural gas.  Production soared, and aided by a strong dollar the price of oil declined by more than 50%.
These economic policies amounted to the most successful economic experiment in world history.  The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal killed it.  This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.
During this seven-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third-largest in the world at the time, to the U.S. economy.  In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years.  Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%.  Unemployment fell to 5.3% by 1989.
The shocking rise in inflation during the Nixon and Carter years was reversed. Astoundingly, inflation from 1980 was reduced by more than half by 1982, to 6.2%.  It was cut in half again for 1983, to 3.2%, never to be heard from again until recently.  The contractionary, tight-money policies needed to kill this inflation inexorably created the steep recession of 1981 to 1982, which is why Reagan did not suffer politically catastrophic blame for that recession.
Real per-capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% in just seven years.  The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak.  The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade.
In The End of Prosperity, supply side guru Art Laffer and Wall Street Journal chief financial writer Steve Moore point out that this Reagan recovery grew into a 25-year boom, with just slight interruptions by shallow, short recessions in 1990 and 2001.  They wrote:
'We call this period, 1982-2007, the twenty-five year boom–the greatest period of wealth creation in the history of the planet.  In 1980, the net worth–assets minus liabilities–of all U.S. households and business … was $25 trillion in today’s dollars.  By 2007, … net worth was just shy of $57 trillion.  Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.'
The capital gains tax rate will soar by nearly 60%, counting the new Obamacare taxes going into effect that year.  The total tax rate on corporate dividends would increase by nearly three times.  The Medicare payroll tax would increase by 62% for the nation's job creators and investors.  The death tax rate would increase by 55%.  In his 2012 budget and his recent national budget speech, President Obama's first act was a nearly $1 trillion stimulus bill.  In his first two years in office he has already increased federal spending by 28%, and his 2012 budget proposes to increase federal spending by another 57% by 2021.
His monetary policy is just the opposite as well.  Instead of restraining the money supply to match money demand for a stable dollar, slaying an historic inflation, we have QE1 and QE2 and a steadily collapsing dollar, arguably creating a historic reflation.
And instead of deregulation we have across-the-board re-regulation, from health care to finance to energy, and elsewhere.  While Reagan used to say that his energy policy was to “unleash the private sector,” Obama’s energy policy can be described as precisely to leash the private sector in service to Obama’s central planning “green energy” dictates.
As a result, while the Reagan recovery averaged 7.1% economic growth over the first seven quarters, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a dismal 1.8%.  After seven quarters of the Reagan recovery, unemployment had fallen 3.3 percentage points from its peak to 7.5%, with only 18% unemployed long-term for 27 weeks or more.  After seven quarters of the Obama recovery, unemployment has fallen only 1.3 percentage points from its peak, with a postwar record 45% long-term unemployed.
Previously the average recession since World War II lasted 10 months, with the longest at 16 months.  Yet today, 40 months after the last recession started, unemployment is still 8.8%, with America suffering the longest period of unemployment that high since the Great Depression.  Based on the historic precedents America should be enjoying the second year of a roaring economic recovery by now, especially since, historically, the worse the downturn, the stronger the recovery.  Yet while in the Reagan recovery the economy soared past the previous GDP peak after six months, in the Obama recovery that didn’t happen for three years.  Last year the Census Bureau reported that the total number of Americans in poverty was the highest in the 51 years that Census has been recording the data.
Moreover, the Reagan recovery was achieved while taming a historic inflation, for a period that continued for more than 25 years.  By contrast, the less-than-half-hearted Obama recovery seems to be recreating inflation, with the latest Producer Price Index data showing double-digit inflation again, and the latest CPI growing already half as much.
These are the reasons why economist John Lott has rightly said, “For the last couple of years, President Obama keeps claiming that the recession was the worst economy since the Great Depression.  But this is not correct.  This is the worst “recovery” since the Great Depression.'
However, the Reagan Recovery took off once the tax rate cuts were fully phased in.  Similarly, the full results of Obamanomics won’t be in until his historic, comprehensive tax rate increases of 2013 become effective. While the Reagan Recovery kicked off a historic 25-year economic boom, will the opposite policies of Obamanomics, once fully phased in, kick off 25 years of economic stagnation, unless reversed?
What is so striking about Obamanomics is how it so doggedly pursues the opposite of every on [sic] of these planks of Reaganomics.  Instead of reducing tax rates, President Obama is committed to raising the top tax rates of virtually every major federal tax.  As already enacted into current law, in 2013 the top two income tax rates will rise by nearly 20%, counting as well Obama's proposed deduction phase-outs.
The purpose behind this blog entry, through nearly a week of study, research, and writing, is to present you the facts about the president's record on the economy using history and data that correlates a presidential administration's tax policy, coupled with the type of economic policy that president implemented (Keynesianism/socialism, monetary/supply-side), in order to determine whether that administration's economy was effective in creating the proper conditions by which the population thrived at a high-standard of living. Through this study, I hope to disprove all of the Left's assertions once and for all that the Obama administration's handling of the economy is flawed in no small part because of his philosophy behind taxation and a porous monetary policy.

The American Attitude Behind Taxation Began with the Revolution


JamesOtisJr by Blackbarn.jpg

(Above: Pictures of Founding Fathers James Otis and Patrick Henry. Courtesy of Wikipedia.)

America's founding was based in no small part on the issue of taxation.  On February 10, 1763, the French and Indian War in North America (in Europe, the Seven Years War) concluded with Great Britain and France signing the Treaty of Paris.  For the British, the spoils of war came in the form of the French being obligated to cede all of Canada to them in exchange for Martinique and Guadalupe.  Spain, in addition, was given the Louisiana territory in exchange for Florida which was given to the British.  Despite the major victory that expanded the land area of her America colonies, Britain faced stressed finances that plunged the nation into debt.  In an effort to pay down on this debt, the government began exploring possible solutions.

As the British Parliament assessed possible measures for generating funds, it was decided that new taxes would be levied on the American colonies in order to offset some of the costs of their defense.  On April 5, 1764, the Sugar Act was enacted that placed a tax on three pence per gallon on molasses as well as listed specific goods which could be exported to Britain.  While this tax was half that of the stipulation behind the 1733 Sugar and Molasses Act, the new Sugar Act called for active enforcement and hit the colonies during an economic downturn.  The passage of the Sugar Act led to outcries from colonial leaders, the most famous and vociferously-vocalized being "taxation without representation" since there were no Members of Parliament (MP's) from the American colonies.

The economic situation was further exacerbated a year later when Parliament passed the Currency Act, preventing the colonies from printing paper money.  As many American businesses engaged in credit sales with Britain, they were crippled when several financial crises gripped London in the 1760's and 1770's. These issues forced British merchants to call in their debts.  Unable to generate any form of liquid currency, American businesses were frequently ruined and the colonial economy damaged.  Outraged by these new laws and the new Quartering Act that required colonial citizens to house and feed British troops, the American colonies began to systematically boycott British goods. 

On March 22, 1765, Parliament passed the Stamp Act which called for tax stamps to be placed on all paper goods sold in the colonies.  This represented the first attempt to levy a direct tax on the colonies and was met with fierce opposition and protests.  Let by such vocal orators as James Otis and Patrick Henry, the colonists began a massive boycott of British goods causing colonial imports to fall from £2,250,000 in 1764 to £1,944,000 in 1765.  In several colonies, new protest groups called the "Sons of Liberty" formed.  The most active town for the "Sons of Liberty" was Boston, where the protest group attacked an admiralty court and looted the home of the chief justice.  

That October, delegates from nine colonies gathered in New York for the Stamp Act Congress.  Guided Pennsylvanian John Dickinson, the congress drew up the Declaration of Rights and Grievances, which stated that as the colonies had no representation in Parliament, the tax was unconstitutional and against their rights as Englishmen.  In London, colonial representative Benjamin Franklin argued a similar point and warned that continued taxation could lead to rebellion.  Relenting, Parliament repealed the tax, but passed the Declaratory Act in March 1766 stating that it retained the power to tax the colonies.


BenFranklinDuplessis.jpg

(Above: Picture of Benjamin Franklin. Courtesy of Wikipedia.)

Still seeking a way to generate revenue, Parliament passed the Townshend Acts on June 29, 1767.  An indirect tax, the tax placed import duties on commodities such as lead, paper, paint, glass, and tea.  In addition, they created three new Admiralty courts in the colonies and reaffirmed the legality of the writs of assistance.  Just as with past taxation attempts, the colonies reacted with protests of "taxation without representation."  While colonial leaders organized boycotts of the taxed goods, smuggling increased, and efforts commenced to develop domestically-produced alternatives.

Over the next three years, boycotts and protests continued in the colonies.  These came to a head on March 5, 1770, when angry colonist began throwing snowballs and rocks at British troops guarding the Customs House in Boston.  In the commotion, British troops opened fire on the mob, killing three immediately and later adding two more casualties when those individuals died from their wounds.  The soldiers involved were indicted for murder and their trial scheduled for that fall.  Defended by John Adams, the accused were acquitted of the charges, though two were convicted of manslaughter.  With tensions in the colonies reaching a breaking point, Parliament repealed most of the Townshend Acts April 1770, but left a tax on tea.  

On May 10, 1773, Parliament passed the Tea Act with the goals of assisting the ailing East India Company.  Prior to the passage of the law, the company had been required to sell its tea through London where it was taxed and duties assessed.  Under the new legislation, the company would be able sell tea directly to the colonies without the additional cost.  As a result, tea prices in America would be reduced, with only the Townshend Act duty assessed.  Aware this was an attempt by Parliament to break the colonial boycott of British goods, groups such as the Sons of Liberty spoke out against the act.

Across the colonies, British tea was boycotted and attempts were made to produce tea locally.  In Boston, the situation climaxed in late November 1773, when three ships carrying East India Company tea arrived in the port.  Rallying the populace, the Sons of Liberty dressed as Native Americans and boarded the ship on the night of December 16.  Carefully avoiding damaging other property, the "raiders" tossed 342 chests of tea into Boston Harbor.  A direct affront to British authority, the "Boston Tea Party" forced Parliament to take action against the colonies.

In response to the colonial attack on the tea ships, Parliament passed a series of punitive laws in early 1774 called the Coecive Acts, or better known to colonists as the Intolerable Acts. The first of these, the Boston Port Act, closed Boston to shipping until the East India Company had been repaid for the destroyed tea.  This was followed by the Massachusetts Government Act which allowed the Crown to appoint most positions in the Massachusetts colonial government.  Along with these new laws, a new Quartering Act was enacted which allowed British troops to use unoccupied buildings as quarters within the colonies. 

In Boston, royal authority was asserted with the arrival of Lieutenant General Thomas Gage as the new royal governor on April 2, 1774.  Initially well-received as most colonists were excited to see the hated Governor Thomas Hutchinson depart, Gage did not move to quash the Sons of Liberty for fear of escalating the situation.

Using a variety of committees of correspondence, the colonial leaders began planning a congress to discuss the repercussions of the Coercive/Intolerable Acts.  Meeting at Carpenters Hall in Philadelphia, representatives from twelve colonies (Georgia did not attend) convened on September 5, 1774.  In the discussions that followed, some delegates argued in favor of establishing a new government system, while others lobbied for reconciliation with Britain.

As a result of the Congress, which convened October 26, the colonies agreed to the formation of a new Continental Association.  The compact stipulated that the colonies would boycott all British goods starting on December 1, 1774 and would also boycott the West Indies unless the islands agreed to boycott British goods as well.  As a result, importation of British goods dropped 97% in 1775.  In addition, if the Intolerable Acts were not repealed, the colonies would cease exporting to Britain effective September 10, 1775. Departing Philadelphia, the ensemble decided to meet again in May 1775 for a Second Continental Congress.

In the spring of 1775, Gage began a series of raids with the goal of disarming the colonial militias.  On the evening of April 18, Gage ordered some of his troops to march to Concord to seize munitions and gunpowder.  The next morning, British troops encountered colonial militia in the village of Lexington.  While the forces faced off, a shot rang out.  Though the source of the shot is unknown, it began what would be an eight year war.  (Details of information courtesy of About.com Military History)


A History of Taxation as It Relates to the Economy in America

Colonial America 

It was unusual for the single taxpayer to have much contact with the Federal taxing establishment because the majority of the tax revenue resulted from customs duties, tariffs, and excise taxes.  These were all indirect forms of taxation.  The economy of the colonies was based mostly on the success of agriculture.  Even as the economy expanded throughout the 18th Century, it only inched toward industrialization by 1776, when the Declaration of Independence was signed.  The economy of the thirteen original colonies was actually relatively stable in stark contrast to the 20th and 21st Centuries.  Dynamic economic expansion occurred as a result of growth in population stemming an increased birth rate and the influx of immigrants.  

Post-Revolutionary America 

The first system of laws implemented in the United States were instituted in the form of the Articles of Confederation, which granted the states a lot of political powers.  At this time there was still no tax system in the fledgling nation, and the federal government relied on the States to donate revenues to the national treasury.  As a matter of fact, the Articles of Confederation provided the states the freedom and autonomy to impose their own taxes on their own terms.

In 1789, the federal government was provided the power to raise revenues through taxes by the new Constitution of the United States of America when the Founding Fathers realized a solid government could not function effectively if it relied upon other governments to provide all of its capital.

The very first line of Article 1, Section 8 of the Constitution says:
"The Congress shall have the power, to lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common defense and general Welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States."
Ever wary of the power of the central government to obscure that of the states, the responsibility behind federal tax collection resided with the states.

Thereafter, debts incurred from the American Revolution were paid by revenue collected from excise taxes levied by the Congress on such things as sugar, alcohol, tobacco, carriages, auctioned property, and certain legal documents.

Now that there was a new nation and a proper representation of Americans democratically in the form of a republican government, many citizens were still opposed to -- and even resisted -- taxes that they thought were unfair or unacceptable.

Gilbert Stuart Williamstown Portrait of George Washington.jpg

(Above: President George Washington, the nation's first president.  Served from 1789-1797.)

With the Whiskey Rebellion of 1794 taking place over the collection of taxes on whiskey, President George Washington sent in federal troops to crush the rebellion.  This action set a significant precedent that the federal government from which the federal government would not waver when it came to creating tax revenue and collecting taxes.  The rebellion also established that the struggle against the British over taxation that resulted in the Declaration of Independence (1776) did not go away simply because a new, representative government was formed.

A painted portrait of a man with greying hair, looking left.

(Above: President John Adams, who served from 1797-1801.  He presided over the United States during the "quasi-war" with France in the late 1790's, which resulted in the nation's first direct taxes being passed by Congress and enforced on the American people.)

The first direct taxes on landowners and owners of houses, were imposed by the federal government during the conflict with France.  Because these taxes were paid directly to the government by taxpayers based on the item value, which was the basis for the tax, they were called direct taxes.

Federal taxes that followed evolved based on the critical role of the issue surrounding direct taxes versus indirect taxes.  In 1802,  following Thomas Jefferson's election to the presidency, direct taxes were eliminated.  Other than excise taxes, there were no other forms of internal revenue.  Thus, Jefferson established the concept of a less-intrusive government on the American people following two presidencies that propelled the government's agenda on taxation in the early republic.

    

(Above: Presidents Thomas Jefferson and James Madison.  Jefferson served as president from 1801-1809, while Madison, his successor, served from 1809-1817.)

To pay for the War of 1812, Congress raised some new customs duties, implemented new excise taxes, and also raised revenues by issuing Treasury Notes.  These taxes were repealed in 1817, at the end of the Madison administration.  For 44 years, there would be no internal revenue collected by the federal government.  Most of the government's revenue would come from public land sales and high customs duties.

Civil War-era:

Iconic black and white photograph of Lincoln showing his head and shoulders.

(Above: Picture of President Abraham Lincoln, who served from 1861-1865.)

At the time of taxes during the Civil War, the Revenue Act of 1861 was passed by Congress that resulted in the previous excise taxes being reinstated and the implementation of the United States' first ever personal income tax, whereby incomes of over $800.00 annually would be taxed at a rate of 3%.  As most existing federal taxes had existed in the forms of duties and excises, taxing income took the federal system down a new path.  Congress quickly realized there were some issues with the new income tax and thus did not collect them until a year later.  With the war clearly dragging on, the federal debt was growing by approximately $2 million per day.  By spring of 1862, it was clear the government was going to have to find another source of supplementary revenues.

To deliver these new revenues, Congress passed a whole new set of excise taxes on July 1, 1862 on things like yachts, pool tables, pianos, telegrams, feathers, leather, iron, playing cards, gunpowder, drugs, whiskey, and patent medicines.  They also created and collected new license fees for many trades and professions and taxed many legal documents.  There were central reforms made in the 1862 law that kind of prognosticated the main themes of many of the taxes in place today.

The concept the of the graduated income tax was initiated at this time.  For example, Congress placed a multi-tiered tax rate structure that taxed incomes of $10,000 at 3% -- but made the tax rate 5% for more than $10,000.  They enacted a standard deduction of $600 while also allowing numerous deductions for rental housing, repairs, loses, and other taxes paid.  Also, to make sure taxes were paid on time, taxes were withheld by employers.

When the Civil War ended in 1865, much of the tax revenue was no longer needed and therefore many taxes were rescinded.  By 1868, liquor and tobacco taxes were the federal government's primary sources of revenue.  In 1872, they even did away with the personal income tax. For the next 48 years after 1868, the remaining excise taxes accounted for nearly 90% of the federal government's income.

The Story Behind the 16th Amendment:



(Above: Picture of President Woodrow Wilson, who served from 1913-1921. Courtesy of Wikipedia.)

In the year 10 AD, Emperor Wang Mang of the Xin Dynasty in ancient China instituted an unprecedented tax—the income tax—at the rate of 10 percent of profits, for professionals and skilled labor. (Previously, all taxes were either head tax or property tax.) He was overthrown 13 years later in 23 AD and earlier laissez-faire policies were restored during the Later Han.

A sketch of a man facing to the right

(Above: Painting of Adam Smith, author of The Wealth of Nation. Courtesy of Wikipedia.)

One of the first recorded taxes on income was the Saladin tithe introduced by Henry II in 1188 to raise money for the Third Crusade. The tithe demanded that each layperson in England be taxed a tenth of their personal income and movable property. However, the inception date of the modern income tax is typically accepted as 1799.

Some economists trace the concept of the modern progressive tax to Adam Smith, who wrote this line in his famous publication on economics in 1776 titled The Wealth of Nations:
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
OlderPittThe Younger.jpg

(Above: Painting of former British Prime Minister William Pitt the Younger. Courtesy of Wikipedia.)

The income tax was announced in Britain by Prime Minister William Pitt the Younger in his budget of December 1798 and introduced in 1799, to pay for weapons and equipment in preparation for the Napoleonic wars. Pitt's new graduated income tax began at a levy of 2d in the pound (0.8333%) on annual incomes over £60 and increased up to a maximum of 2s in the pound (10%) on incomes of over £200 (£170,542 in 2007). Pitt hoped that the new income tax would raise £10 million (£8,527,100,000 in 2007), but actual receipts for 1799 totaled just over £6 million.
The tax was repealed in 1816 and opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. Records were publicly burned by the Chancellor of the Exchequer but copies were retained in the basement of the tax court.

Karl Marx 001.jpgEngels.jpg

(Above on the Left: Karl Marx; on the Right: Fredrick Engel, co-authors of The Communist Manifesto. Courtesy of Wikipedia.)

In The Communist Manifesto (1848), Karl Marx wrote ten plancks that base their agenda for the future implementation of communism.  Within the Second Planck is listed in step two the first Western words about an income tax.  It is worded this way:
"2. A heavy progressive or graduated income tax."

(Above: Picture of Frank Chodorov.)

Frank Chodorov, a member of the "Old Right" that consisted of a group of libertarian thinkers, wrote about his opinions on the implementation of the income tax system:
"... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth. ... That which it does not take is a concession."
Plato said in The Republic (Approx. 380 B.C.):
"When there is a income tax, the just man will pay more than the unjust on the same amount of income."
In Poor Richard's Almanac, Benjamin Franklin said:
"It would be a hard government that should tax its people one-tenth part of their income."
The common criticism many Americans have had since the passage of the 16th Amendment is the creation of the welfare state and socialism that resulted from it.  So for, the people have been right.

Plato Silanion Musei Capitolini MC1377.jpg

(Above: Plato, author of The Republic. Courtesy of Wikipedia.)

In 1794 while serving in the U.S. House of Representatives, James Madison said this about taxation's consequence and the constitutionality behind it:
"I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituent." 
The economic effects of an income tax system are that it penalizes work, discourage saving and investing, and hinder the competitiveness of business and economic growth. Income taxes are also not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies cannot be removed when exported to a foreign country.  

Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises," but Article I, Section 8 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States." 

The Constitution specifically limited Congress' ability to impose direct taxes, by requiring Congress to distribute direct taxes in proportion to each state's census population. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."

Alexander Hamilton portrait by John Trumbull 1806.jpg

(Above:  Painting of Alexander Hamilton, first Secretary of State of the United States under President George Washington, serving from 1789-1795. Courtesy of Wikipedia.)

Taxation was also the subject of Federalist No. 33, which was penned secretly by the Federalist Alexander Hamilton under the pseudonym Publius. In it, he asserts that the wording of the "Necessary and Proper Clause should serve as guidelines for the legislation of laws regarding taxation.  The legislative branch is to be the judge, but any abuse of those powers of judging can be overturned by the people, whether as states or as a larger group. 

The courts have generally held that direct taxes are limited to taxes on people (variously called "capitation", "poll tax" or "head tax") and property. All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.

The first income tax suggested in the United States was during the War of 1812. The idea for the tax was based on the British Tax Act of 1798. The British tax law applied progressive rates to income. The British tax rates ranged from 0.833% on income starting at £60 to 10% on income above £200. The tax proposal was developed in 1814. Because the Treaty of Ghent was signed in 1815, ending hostilities and the need for additional revenue, the tax was never imposed in the United States.

As mention above, in order to help pay for its war effort in the American Civil War, Congress imposed its first personal income tax in 1861.  


Pollock v. Farmers' Loan and Trust Co. (1895): The Case that Should Have Prevented 
the 16th Amendment

Melville Weston Fuller Chief Justice 1908.jpg

(Above: Photo of U.S. Chief Justice of the Supreme Court Melville Fuller, who presided over the case Pollock v. Farmers' Loan and Trust Co. Courtesy of Wikipedia.)

In August 1894, the Wilson-Gorman Act, a tax and tariff measure, was signed into law.  It levied a 2% tax on incomes $4,000 or more.  The tax was applied to "gains, profits, and income derived from any kind of property, rents, interests, or salaries from any profession, trade, employment, or vocation."  This also included inheritances and gifts.  The tax was applied to net profits for corporations, companies, and associations.

Shareholders of corporations immediately sued to keep their corporations from paying the tax.  The various cases were consolidated into Pollock v. Farmers' Loan and Trust Co. and accepted by the U.S. Supreme Court in January 1895.  The plaintiffs, represented by William D. Guthrie, George F. Edmunds, and Joseph Choate, claimed that the income tax would induce class warfare that would lead to "communism, anarchy, and then, the ever following despotism."

As for constitutional arguments, the plaintiffs insisted that the income tax was a direct tax -- the law's tax on real property was the equivalent of a property tax, which was a direct tax.  Article I,  Section 8 states that "...all Duties, Imposts, and Excises shall be uniform throughout the United States."  The plaintiffs charged that the vast majority of the affected taxpayers live in the states of New York, New Jersey, Connecticut, and Pennsylvania.  In addition, the tax was not uniform because it was imposed on some kinds of income.

The defense, represented by Richard Olney and James C. Carter, countered with precedent.  They maintained that the income tax was not a direct tax.  They cited a 1796 U.S. Supreme Court decision that upheld a carriage tax, clearly determining that direct taxes referred to only property.  Other taxes upheld by the Supreme Court in the past included taxes on insurance companies and the Civil War income tax.

Another argument posed by the defense took on the plaintiffs' issue of class warfare.  Carter asserted that the best way to preserve private property was to relieve the masses of excessive tax burdens.  The poor had paid more than their fair share through consumption taxes and tariffs and the income tax would serve as a balance.  The income tax would be a safety valve in an era of labor unrest.

The Court decided the case in April of that year, deciding "property was sacrosanct," and that "economic regulation was taboo," according to writer Burt Solomon.  Chief Justice Melville Fuller, writing for the 5-3 majority, declared that income taxes on real estate was a direct tax and therefore unconstitutional.  The majority also discarded the tax on interest from municipal bonds as an infringement on the states.  However, with one justice absent, other issues in the case split 4-4, and thus the case was retried.

In May, with a full compliment of justices, the Court threw out the entire Wilson-Gorman Act by a 5-4 margin.  Fuller, again for the majority, wrote that the unconstitutionality of the income tax on real estate scuttled the whole law, despite the possibility of some new taxes, like wages, being unconstitutional.  Dissenting, John Harlan stated that it was a dangerous precedent in ruling income taxes unconstitutional, citing that it could open society to social unrest.

Both sides in Pollock v. Farmers' Loan and Trust Co. feared that unrest if they did not prevail, and neither could agree on the definition of a direct tax as written in the Constitution.  What became apparent, according to Harlan, was that a constitutional amendment allowing income taxes would be needed.  Thus, in 1912, the 16th Amendment was passed, providing Congress the legal authority to pass an income tax, and the first signs of big government in American government came to fruition, and proved yet another example where a decision and precedent set by the U.S. Supreme Court went ignored much like Worcester v. Georgia, when after Chief Justice John Marshall ruling vacated the conviction of Samuel Worcester and held that the Georgia criminal statute prohibiting non-Indians from being present on Indian lands was unconstitutional, President Andrew Jackson uttered the famous line, "John Marshall has made his decision.  Now let him enforce it!"

For the next 15 years (1896-1910), the primary source of revenue was via high tariffs due to the lack of an  income tax and because there was such opposition to other forms of direct taxation.  In 1899, the Wilson-Gorman Act was passed in order to fund the Spanish-American War.  This raised revenues through bond sales, taxes on recreational facilities used by employees, increased tobacco and beer taxes, and also on chewing gum.  When the Act expired three years later, federal revenues dropped from 1.7% to 1.3% of domestic GDP.

As the result of the 1895 Court ruling on the income tax, the Wilson-Gorman Act resorted to traditional methods of raising revenues, although there were ongoing, vigorous debates on other methods and possible new ways to raise revenues.  According to Easy-Tax Information.com, it became quite clear apparent throughout the country that excise taxes and high tariffs weighed much more heavily on the less prosperous was were thus not economically sensible. Ultimately, the debate over income taxes was between members of Congress in the South and West who represented rural and agricultural areas, and those in the Northeast industrial areas.  In time, there was a agreement to enact a tax on business income that the leaders in Washington called an "excise tax."

More importantly, Congress passed a constitutional amendment allowing the government to tax the lawful income of U.S. citizens regardless of state population.  This amendment, the 16th Amendment, was ratified by 36 states by 1913, and the Democratic Congress enacted a new federal income tax law in October of that year with rates  ranging from 1% all the way to 7% for those Americans earning a salary of more than $500,000.  This was signed into law by President Woodrow Wilson, a Democrat who was a leader in the Progressive movement that championed the cause of an  income tax.  Thus. the Populists and Progressives who infiltrated the federal government during the late 19th and early 20th Centuries got their wish -- the spark that would eventually result in the creation of the welfare state, big government, and the government's constitutional mandate to manipulate the economy through the implementation of taxes.  Also, this would mark the beginning toward the concept of class warfare in American society that would become so prevalent, particularly when Franklin Roosevelt took office in 1933.

Wilson, through the passage of the 16th Amendment, created the prototype behind the Democratic big government politics.  Some of the ways he expanded the size of government were as follows:
  • The creation of the Federal Reserve Back on December 23, 1913 with Congress' passage of the Federal Reserve Act.  Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.
  • The above-mentioned 16th Amendment.
  • The 17th Amendment, which gives the American people the right to vote for U.S. Senators. The amendment supersedes Article I, § 3, Clauses 1 and 2 of the Constitution, under which senators were elected by state legislatures. It also alters the procedure for filling vacancies in the Senate, allowing for state legislatures to permit their governors to make temporary appointments until a special election can be held.
In response to the U.S. participation in World War I and the need to significantly increase revenues to fund the war, in 1916, Congress passed the Revenue Act.  This resulted in increases to the lowest and highest tax rates, with the lowest tax rate going from 1% to 2% and the highest tax rate increased to a whopping 15% for individuals with incomes of more than $1.5 million.  In addition, there would now also be taxes imposed on excessive business profits as well as estates.  So as we see, the federal government was becoming more tyrannical because of the 16th Amendment.

By 1917, the federal budget for that one year was almost the same as all of the budgets for the previous 25 years combined!  The war and all of the newly collected tax revenues were the driving factors in the absurdly expanded federal budget!  The government had become too big, and too oppressive in the views of most of today's conservatives.  It was about this time that income taxes began to get out of control.  A s the government wanted even more tax revenues, Congress passed the 1917 War Revenue Act, which increased tax rats even higher, while reducing exemptions at the same time.  Before this latest Act, a 15% tax rate only kicked in on incomes over $1.5 million.  But now, that income bracket was required to pay 67%, while those earning just $40,000 were slapped with a 16% rate.

Then Congress did it again in 1918 with yet another Act, raising the bottom and top tax rates to 6% and 77% respectively!  These back-to-back annual increases brought 1918 tax revenues to $3.6 billion, up from the 1916 revenues of just $761 million.  According to Easy-Tax Information.com, that is an increase in federal revenue of 475%.  At this point, the tax burden was equal to 25% of GDP and while a full third of the war's cost was being funded by the income tax, still only about 5% paid income taxes at all.  And while the economy was thriving due to the wartime economy, nevertheless the institution of class warfare had accelerated.

By violating the spirit for which the American Revolution and the Constitution were fought, Woodrow Wilson said these words regarding his record as president:
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit... all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world, no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
 At least Wilson was man enough to admit his creating big government politics in the U.S. was a mistake.
"The Roaring '20's": The Economic and Tax Policies of the Harding, Coolidge, and Hoover Administrations
In an article from The Heritage Foundation titled "The Historical Lessons of Lower Tax Rates," the economic and tax policies of the 1920 are described accordingly:
"Under the leadership of Treasury Secretary Andrew Mellon during the Administrations of Presidents Warren Harding and Calvin Coolidge, tax rates were slashed from the confiscatory levels they had reach in World War I.  The Revenue Acts of 1921, 1924, and 1926 reduced the top rate from 73 percent to 25 percent.
Spurred in part by lower tax rates, the economy expanded dramatically.  In real terms, the economy grew 59% between 1921 and 1929, and annual economic growth average more than 6 percent.
Notwithstanding (or perhaps because of) the dramatic reduction in tax rates, personal income tax revenues increased substantially during the 1920s, rising from $719 million in 1921 to $1,160 million in 1928, an increase of more than 61 percent (this was a period of no inflation).4
The share of the tax burden borne by the rich rose dramatically. As seen in Chart 5, taxes paid by the rich (those making $50,000 and up in those days) climbed from 44.2 percent of the total tax burden in 1921 to 78.4 percent in 1928."
This surge in revenue was no surprise to Mellon:
"'The History of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.'"
Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent (this was a period of virtually no inflation).

In an article on Fee.org, the concept of the income tax according to the article's author Dr. Gene Smiley. professor at Marquette University, was to redistribute wealth and income.  However, with the 1920's tax and economic policies, some of those trends were bucked, and the economy prospered
"Recent political debates have raised the issue of adopting a flat marginal rate federal income tax. Though the marginal rate would be flat, the addition of a generous personal exemption would make the average personal income tax rate rise as it approached the fixed marginal rate of, say, 17 or 20 percent. This issue has generated considerable controversy in political debates and in the press. Among the criticisms leveled at a flat marginal rate tax system are that, contrary to proponents’ claims, a flat marginal tax rate will provide a windfall of after-tax income for the already wealthy, worsen the distribution of income, and exacerbate the already swollen federal government deficits. Supporters have usually concentrated on extolling the virtues of reducing the distortions caused by rising marginal tax rates and of encouraging greater entrepreneurial activity.
Ideally, there would be no personal income tax. The history of the debates over an income tax in the 1890-1911 era makes it clear that an income tax was viewed by its advocates as a means to redistribute income and wealth. It has remained this way as indicated by the vestiges of the progressive marginal rate structure which remain in the code. Such a system leads to an emphasis on obtaining more through political redistribution rather than the expansion of economic activity. And by separating the perceived benefits of a governmental activity from any taxes dedicated to supporting that activity, the income tax made it easier to expand government and increase taxes. The creation of a federal income tax system aimed at the redistribution of income as much as creating a new source of federal tax revenues was one of the worst mistakes in American history.
The Tax Cuts of the 1920s
There are three periods where there were significant tax rate cuts which moved toward a flatter tax rate structure: the 1920s, the 1960s, and the 1980s. All exhibit some of the same characteristics, but the tax cuts of the 1960s were smaller than those of the 1920s, and in the 1980s the sharp increases in tax rates for the Social Security system partially offset the cuts in the federal income tax rates.
The first permanent federal income tax was enacted in 1913, and during the First World War there were dramatic increases in the rates in an attempt to generate increased tax revenues. At $4,000 net income, the marginal rates rose from 1 percent in 1915 to 6 percent in 1918; at $25,000 net income from 2 percent to 23 percent; at $100,000 net income from 5 percent to 60 percent; and, at $750,000 net income from 7 percent to 76 percent. The rates were reduced in 1922, 1924, and 1925. By 1925 the highest marginal rate was 25 percent for $100,000 and more net income. By the late 1920s only about the top 7 to 8 percent of Americans were subject to federal personal income taxes. Though the marginal rate was not constant, the changes were close enough to that which would occur with a flat rate tax that the results of the tax cuts of the 1920s can suggest what would happen with the adoption of a flat rate federal income tax.
Tax Cuts for the Wealthy?
A common criticism of the proposal for a flat marginal rate tax is that it would generate a windfall for the wealthy and create greater inequalities in income distribution. Such charges were also made in the 1920s, 1960s, and 1980s. In the 1920s, tax rates were reduced much more for the higher-income taxpayers because, obviously, they had much higher marginal tax rates in 1918. For example, the marginal income tax rate was reduced 51 percentage points (76 percent to 25 percent) between 1918 and 1925 for taxpayers with at least $750,000 of net income, while the reduction for a taxpayer with $6,000 net income over that period was only 10 percentage points (13 percent to 3 percent). However, the relative reduction (decrease as a percent of the 1918 marginal tax rate) was somewhat larger for the lower-income taxpayers than for the higher-income taxpayers.
More importantly, the reduction in tax rates shifted the effective burden of taxation. When rates had been increased between 1915 and 1918 the higher-income taxpayers had found various ways to shelter their income from taxes. At the same time as the number of returns in the lower net-income brackets rose as exemptions were reduced, the number of returns in the higher-income brackets fell. As examples, for the $500,000 to $1,000,000 net income class, the number of returns fell from 376 in 1916 to 178 in 1918, and for the $250,000 to $500,000 net-income class the number of returns fell from 1,141 to 629 over the same period. The result was that the share of income taxes paid by the higher net income tax classes fell as tax rates were raised. With the reduction in rates in the twenties, higher-income taxpayers reduced their sheltering of income and the number of returns and share of income taxes paid by higher-income taxpayers rose. For example, the share of total personal income taxes paid by taxpayers with net incomes of $1,000,000 or more rose from 5.75 percent in 1923 to 15.9 percent in 1927. For taxpayers with net incomes of $250,000 to $500,000 their share of total personal income taxes rose from 6.82 percent in 1923 to 12.40 percent in 1927. The share for taxpayers with net incomes of $100,000 to $250,000 rose from 15.7 percent in 1923 to 21.91 percent in 1927. However, taxpayers with net incomes of $25,000 or less paid 36.22 percent of all personal income taxes in 1923 but only 12.83 percent in 1927. Thus, cutting tax rates effectively shifted the tax burden from the lower-income taxpayers toward the higher income taxpayers.
The assertion that the tax cuts would primarily benefit higher-income taxpayers was tied to the contention that this would create more income inequality. It has always seemed contradictory to me to argue that allowing a person to retain more of the income he or she generated would create more income inequality, but that has been the common contention. The conventional measures did show significant increases in income inequality during the twenties but there were problems with these measures. They were developed from the income reported on income tax returns and separate estimates of total income in the economy. However, as tax rates fell during the twenties, higher-income individuals began shifting wealth so that less of their income was sheltered from taxes. A portion of the greater income gains of the higher-income individuals represented not additional income but income from wealth which was shifted from tax shelters to assets subject to taxation. Correcting for this significantly reduces the rise in income inequality during the twenties.
What of the rise in income inequality that did occur? Individuals receive earnings from the productivity of their capital investments and land as well as their labor. They also receive income in the form of the realized gains in the values of their assets. The values of financial assets, particularly stocks, began to rise by the mid-twenties and this culminated in the great stock market boom of the late twenties. To see what effect this had, I calculated income shares which excluded realized capital gains, and when this was done, essentially all of the rise in income inequality in the twenties disappeared.
Thus, this evidence suggests that the dramatic tax cuts associated with moving toward a flatter rate tax structure would not provide windfalls of income for the wealthier taxpayers. It would encourage them to shift wealth from tax-sheltering investments to taxable investments to receive larger after-tax returns. The movement of economic activity out of lower return tax sheltering into higher return taxable assets will create more efficiency and make people in the society better off.
Larger Government Budget Deficits?
Another argument frequently thrown at the supporters of a flat marginal rate income tax is that it would worsen the annual deficits of the federal government. This would occur because expenditures would continue at the same level while revenues would decline. Once more we can examine evidence from the twenties which is related to this. With the end of the First World War the federal government’s expenditures dropped sharply, though not to the prewar levels, and budget surpluses were created. There were calls to reduce the income tax rates to direct investment into more appropriate channels rather than into activities which were primarily directed to tax avoidance, and to reduce the widespread legal tax avoidance by the upper-income taxpayers. For example, Andrew Mellon, Secretary of the Treasury, reported that when William Rockefeller (John D.’s brother) died in 1922 he held less than $7,000,000 in Standard Oil bonds but over $44,000,000 of wholly tax-exempt securities. The inability of Congress to find legislation to effectively reduce this tax avoidance was one force leading to the twenties’ tax cuts.
The first of the major tax cuts was passed in November of 1921. On average it reduced marginal personal income tax rates by 13.8 percent, and this led to a decline in real total federal personal income tax revenues of 4.3 percent. The second major tax cut was approved in June of 1924 and it reduced marginal income tax rates by an average of 7.5 percent. This tax cut lead to an increase in real total federal personal income tax revenues of 5.9 percent. The final major tax cut was introduced in December 1925 and enacted in February 1926. It applied retroactively to 1925. On average marginal personal income tax rates were reduced 33.6 percent by these changes. Rather than falling, real federal personal income tax revenues increased by 0.5 percent with this large tax cut.
The evidence clearly indicates that, in general, tax revenues rose with the tax cuts of the twenties. The federal government’s budget surpluses were not reduced with the final two tax cuts and, over the course of the twenties, these budget surpluses allowed the federal debt to be reduced by 25 percent.
Conclusions 
The flat marginal rate income tax may never be enacted. Many people, and this certainly includes many politicians, believe that it is only fair that higher-income individuals face higher marginal rates of income taxation. The tenacity with which supporters of progressive tax rates cling to this idea is indicative of their redistributionist philosophy. It also indicates their refusal to face reality. The tax cuts of the twenties as well as every major income tax cut has resulted in an effective shift of the tax burden from lower- to higher-income taxpayers. As the twenties show, it does not have to worsen the government’s deficit. Economic growth in the twenties surged with the tax cuts, and prices were nearly stable while unemployment rates averaged around 4 percent.[4] The government ran surpluses which allowed it to reduce the federal debt by 25 percent. The decreases in marginal tax rates led individuals to pull their investments out of ones designed to avoid taxes—investments such as tax-exempt municipal bonds, personal service corporations, and other avenues to avoid distributing corporate profits. The result was a rising tide of investment in new, growing, and sometimes risky businesses and industries such as radio, consumer household electric appliances, electric utilities, airplane manufacturers, rubber tire manufacturers, supermarket chains, and so forth. The 1920s were a vibrant, growing decade, and the tax cuts of the 1920s certainly were an important part of what brought this about."
So during the 1920's, the economy boomed.  New York became the financial capital of the world.  The Federal Reserve assumed a more dominant role as a result. Congress was able to reduce the top and bottom percentages back to 25% and 1%, respectively, and tax revenues were back down to 13%. Interestingly, the economy became even stronger with these reductions in tax rates and tax revenues.


Jgftyr.jpg

(Above: Picture of President Warren G. Harding, who served from 1921-1923)


President Warren G. Harding cut federal spending, lowered taxes, and began paying off the wartime national debt. He restored prosperity by 1921, opening a decade of rapid growth known as the Roaring 20s.
Harding created the Bureau of the Budget to allow the White House to monitor all federal spending. Shortly after taking office, Harding also successfully passed promotion of US Agriculture, repeal of the wartime "excess profits" tax and reduction of rail rates.

Labor unions were very weak in the Harding years. Under Andrew Mellon the Treasury systematically reduced federal income taxes, which had soared during the war, and simultaneously paid off most of the wartime debt. Harding today has come under criticism by both liberal economists and free trade advocates for protectionist policies—high tariffs. Rader (1971) challenges the view that the tax policies of Harding's Treasury Secretary Andrew Mellon reversed the progressive policies of the Wilson years and allowed the wealthy to become wealthier. A congressional coalition of Democrats and insurgent Republicans shared responsibilities with Mellon for the tax legislation of that period, which was written by civil servants in the Treasury. The new rates were very low for most people, and yet were high enough to retire the war debt and generate a budget surplus. The net effect of this legislation, Rader argues, was to "impose more progressivity on the federal income tax structure than has existed in any other peace-time period of American history."

Winters (1990) examines Harding's farm policies and those of Henry Cantwell Wallace, the Secretary of Agriculture (1921-24). Wallace's handling of the postwar collapse of land values and the weakening of the farm economy was inconsistent and largely ineffective because of conflicting views of the value of agriculture in society. On one hand, he saw farming as a business that needed to improve its efficiency; on the other hand, he saw farmers as "yeoman," a special group, embodying republican virtues of independence, which deserved to be subsidized. Programs based on one view often negated those based on the other. Hoover meanwhile argued that the long-term solution lay in modernizing agricultural machinery, seeds, animal breeding and, especially, business practices. (Courtesy of Conservapedia)

Calvin Coolidge-Garo.jpg

(Above: Picture of President Calvin Coolidge, who served from 1923-1929)

Harding's successor, Calvin Coolidge famously said, "The business of America is business."  He presided over a period of economic prosperity 
The Coolidge policy was a simple one, made easier by the continuous prosperity and the weakness of the liberal opposition. He believed in government economy, reduced taxation, and gave aid to private business without accompanying restrictive regulation. In 1927 he vetoed the soldiers' bonus bill. Coolidge opposed any government control in interstate electrical power and was against the proposal for government operation of the Wilson Dam at Muscle Shoals on the Tennessee River; in 1933 it became part of the New Deal's TVA.
Throughout the farming regions of the traditionally Republican Middle West loud complaints were heard about the farm crisis. It was characterized by low prices for crops and the overhang of the land bubble that burst in 1920, leaving many farmers deeply in debt for new lands they purchased at high price during the war. The farmers wanted the federal government to intervene in the market, by buying crops at high prices and dumping them abroad cheaply. Congress passed the legislation, known as the and the McNary-Haugen Bill, a farm relief bill, but Coolidge vetoed it. He supported the alternative program of Hoover and Jardine to modernize farming, by bringing in more electricity, more efficient equipment, better seeds and breeds, and better business practices.
In the short view, the Coolidge administration was a preeminently successful one. Income taxes and corporate taxes were greatly reduced, a major part of the national debt was retired, and the nation experienced some of the most prosperous years in its history. The Coolidge policies were in part responsible for these benefits, but some hostile liberal historians falsely claim they were probably responsible, in part, for the great depression that followed.
Coolidge's image was to a degree shaped by Madison Avenue. Buckley (2003) reveals the role of advertising giant Bruce Barton in the remaking of the public persona or image of Coolidge during 1919-26 and, in so doing, guiding a dramatic shift in politics and the wide acceptance of consumer culture. The dominance of the political party bosses, who selected Harding in 1920, ended when the business elite wrested control from the party, using their ability to raise money for advertising and ultimately commodifying the political process. Members of this elite suggested that Barton refashion Coolidge from an aloof man driven by the advancement of his career into a voice of the masses, the "silent majority," which Barton accomplished with press coverage, exploiting the new technology of radio for political speeches, newsreels, an exclusive "spontaneous" interview with Coolidge, and by arranging events that would be covered free, as news. Coolidge's election to the presidency in 1924 was the first campaign of personality, in which style was promoted over substance, tapping into "intense private longings" of a public uncertain of its moorings in a rapidly modernizing society. Gilbert (2003) and Gilbert (2005) argues that Coolidge suffered from clinical depression throughout his life. Gilbert discusses the major symptoms of the disorder as evidenced in Coolidge's personal and political behavior. He exhibited symptoms from a very early age, beginning with his grandfather's death when he was six and again with the deaths of his mother and sister during his adolescence. Ascending to the presidency in 1923, Coolidge at first was diligent, effective, and respectful of others. After the death of his teenage son in 1924, however, his demeanor and degree of political engagement changed drastically. He developed hypersomnia, sleeping as much as 15 hours per day, and he began to treat White House staffers and his wife rudely, often publicly humiliating them. Moreover, he became far less effective as a decision-maker and grew increasingly detached from political issues. (Courtesy of Conservapedia)

Herbert Hoover.jpg

(Picture of President Herbert Hoover, serving from 1929-1933.  Courtesy of Wikipedia.)
Herbert Hoover, building a world reputation as a humanitarian for his successful efforts to prevent starvation in Europe in the wake of World War I, and his remarkable leadership of the business community as Secretary of Commerce (1921-28), was a major political leader of the Progressive Era in the 1920s.  He was known as a "big government" Republican, and his economic policies led the U.S. economy into the Great Depression.  His name was a byword for devotion to duty, efficiency, and humanitarian public service. His reputation fell when he was unable to reverse the Great Depression, and he became the object of attacks by Democrats for the next four decades. He was a hero to most conservatives, including senators Robert Taft and Barry Goldwater.
Hoover turned the 1929 stock market crash into an international economic disaster.
"... the Hoover interventions include: expanded public works, greater government control over agriculture, the Smoot-Hawley tariff, a virtual end to immigration, government loans for construction and other businesses ... Most important was Hoover’s pressuring businesses to not cut wages even as the prices of their output fell. The result was higher real wages, which were responsible for the unemployment rate topping out at 25 percent, causing the greatest human toll of the Great Depression."
Hoover, much like FDR, was skeptical about free markets. 

The most successful Hoover program--one that continued under FDR--was the Reconstruction Finance Corporation, proposed by Hoover and created by Congress in early 1932. The collapse in the value of assets combined with demands from panicky depositors to get their money out meant that many banks that were otherwise solvent, hoarded their money and refused to make loans. It was much like the Financial Crisis of 2008. The RFC could make loans to banks, insurance companies and railroads. The Emergency Relief and Construction Act of July 21, 1932, enlarged its power to allow for loans to state government and to farm agencies. The immediate aim was to restore confidence in financial institutions generally and encourage them to start lending again, prevent ruinous bankruptcies that would further destabilize the shaky economy, and--hopefully-- revive the economy through the restoration of credit. The RFC was capitalized at $500 million (comparable in size to $130 billion in 2009), provided by the federal government, and it was empowered to sell $3.3 billion (comparable to $850 billion in 2009) of debentures. Through the end of the Hoover administration $2.2 billion was actually loaned to authorized borrowers (comparable to $590 billion). The RFC saved many railroads, banks, and insurance companies. Democrats limited its effectiveness by overly stringent security requirements for loans and by the decision of Congress to require public disclosure of borrowers, which virtually forced a bank to admit publicly it was in trouble.

Hoover in late 1930 created The President's Emergency Committee on Employment (PECE), as unemployment reached 11%. PECE tried to mobilize private charity and encouraged states, cities and Congress to increase public works spending as a stimulus. They did so, and soon the states and cities were nearly bankrupt on their own. In August 1931, finally realizing this was not a normal cycle, Hoover replaced PECE with the President's Organization on Unemployment Relief (POUR), headed by Walter S. Gifford, president of American Telephone and Telegraph, the nation's largest private company. POUR expanded, coordinated, and improved local and state relief efforts; but the economy relentlessly went lower.

In early 1931 Hoover signed the Wagner-Graham Stabilization Act, which set up the Federal Stabilization Board to initiate public works such as dams and highways. Public works did increase throughout the decade after 1929, but not enough to cover the downturn in private construction, let alone all the other negative sectors. In 1931 the mood in Congress --equally divided after the GOP lost seats in 1930--remained strongly opposed to federal relief; even the National Council of Social Workers refused to endorse relief as a principle at their convention in May. New urban slums--shantytowns derisively called "Hoovervilles" by the Democrats--were rising in the nation's largest cities.

Hoover had played a major role in creating the long-term (20-year) mortgage in the 1920s. In times of prosperity mortgages accelerated national growth, as houses were built and lived in before people had saved enough to pay cash for one. But in a downturn mortgages debt hurt the economy. people sacrificed current consumption to pay the mortgage so they would not lose the house and all the money they put in it. To pay the mortgage they gave up luxuries (like a telephone or new car), made do with old clothes, canceled vacations. The foreclosure rate pushed up and construction of new houses ceased. It was much like 2008-09. Like President Obama, Hoover moved to resolve the mortgage crisis. He called for the Federal Home Loan Bank Act (passed in July 1932), that created a system of federal home loan banks to discount home mortgages. The Federal Home Loan Banks received $125 million in capital (comparable to $32 billion in 2009) to fund the home mortgages held by financial concerns. Hoover believed that the ability of private lending institutions to secure new sources of capital would encourage them to make more construction loans and revive the industry. But it had little effect.  In 1932, Hoover lost in a landslide to Franklin Roosevelt, ushering in the New Deal and a decisive political realignment known as the Fifth Party System.

The Great Depression and World War II : The Birth of Socialism and the Welfare State as Advocated by Keynesian Economics

FDR in 1933.jpg


(Above: Pictures of Franklin Delano Roosevelt, President of the United States from 1933-1945. Courtesy of Wikipedia.)

Franklin Delano Roosevelt took the oath of office as President in 1933.  He began to create what would become known to conservatives in the future as "the welfare state."  He is wide considered to be the first of what would become the line of modern liberal Democratic politicians.

In the first 99 days of his presidency, Roosevelt proposed, and the Democratic-controlled Congress quickly passed and enacted, an ambitious "New Deal" to deliver relief to the unemployed and those in danger of losing farms and homes, recovery to agriculture and business, and reform, notably through the vast inception of the Tennessee Valley Authority (TVA).  The New Deal would take time, as some 13 million Americans were out of work, and nearly every bank was shuttered.

The nation enjoyed measurable success by 1935, but businessmen and bankers still opposed the New Deal. The President's experiments alarmed them.  They were dismayed at his toleration of budget deficits and his removal of the nation from the gold standard, and disgusted by legislation favorable to labor.

Nevertheless, Roosevelt and Congress forged ahead with a new plan for reform, often referred to as the Second New Deal.  In 1935, the President signed into law the Social Security Act.  It was passed basically as the result of difficult economic times during the Great Depression.  Under the new law, workers who lost their jobs received payments called "unemployment compensation."  There were other parts of the Act that provided the elderly, those in need, certain minors, and those who were disabled with public aid.  Initially, the Social Security Tax was levied on the first $3,000.00 an individual earned at a rate of about 2%, but then 50% was taken directly out of a person's paycheck, and the other 50% was paid for by the employer.  Interestingly, while the Easy-Tax Information.com website said that while some believe that the Social Security well will go broke while it still seems to be paying out today, it also goes on to say:
"As we're seeing today, the problem with this kind of entitlement plan is because of the 'public aid' you see in bold above, over time -- a ton more money is drawn out than is paid in and the kitty ends up broke!"
YearUnited States [9]Great Britain [10]
1927$3,201,000,000$710,509,000
19283,062,000,000983,033,000
19293,668,000,000759,174,000
19303,039,000,000394,186,500
19311,006,000,000155,728,000
1932321,000,000248,191,500
1933177,000,000296,856,500
1934356,000,000350,388,000
1935348,000,000666,710,500

(New capital made available for investment amounted to $348,000,000 in 1935. This was less than 1/10th of the amount available in 1929. By contrast, the British economy had nearly recovered to its 1929 levels by 1935, and the amount available for investment was almost twice as much as the United States. Courtesy of Conservapedia.)

And thus, you see why the policy of socialism does not work.

Here, not only did FDR initiate the American welfare state by providing unemployment benefits and for the others as mentioned above, he perpetuated the myth of class welfare by beginning the campaign for the poor and disadvantaged.  Also in 1935, Roosevelt signed into law legislation that would give the federal government the power to regulate banks and public utilities, an immense work program called the Works Progress Administration (WPA), which made the federal government by far the largest employer in the U.S., and higher taxes on the rich to help pay for it all.  Thus, President Roosevelt was not interested in promoting economic growth in the private sector, he was interested in growing the public's dependency on the federal government for everything in their lives.  Part of the plan, too, included the Wagner Act of 1938 to promote labor unions, the United States Housing Authority and Farm Security Administration in 1937, and finally the Fair Labor Standards Act of 1938, which set maximum hours and minimum wages for most categories of workers. Conservative Republicans and Democrats in the informal Conservative Coalition.  By 1942-43, they shut down relief programs such as the WPA and CCC, and blocked major liberal proposals.

Roosevelt was reelected by a wide margin in 1936, but the U.S. Supreme Court had also been nullifying crucial New Deal legislation.  Persuaded he had popular backing, Roosevelt introduced legislation to expand the federal courts, ostensibly as a straightforward organization reform, but in actuality to "pack" the courts with justices sympathetic to his proposals.  Thus, we see Roosevelt was a man who saw himself as a dictator.  He was unsuccessful, but constitutional law would eventually change to allow the federal government to regulate the national economy.

The major economic downturn of 1937-8 and the bitter split between the AFL and CIO labor unions led to significant Republican gains in Congress in 1938.  By the spring of 1937, production, profits, and wages had regained their 1929 levels. Unemployment remained high, but it was slightly lower than the 25% rate seen in 1933. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster.Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors, hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, thereby leading to further cutbacks in production. Although the American economy recovered in mid-1938, employment did not regain the 1937 level until the United States entered World War II in late 1941. Personal income in 1939 was almost at 1919 levels in aggregate, but not per capita. The farm population had fallen 5%, but farm output was up 19% in 1939. Employment in private sector factories regained the levels reached in 1929 and 1937, but did not exceed them until the onset of World War II. Productivity steadily increased, and output in 1942 was well above the levels of both 1929 and 1937.

File:Flatgrowth.JPG

(Above: Real Output and Growth remained stagnant throughout the New Deal due to government involvement.  The Depression came back with a vengeance in 1937-38.  Courtesy of Conservapedia.)

Before even entering World War II, in order to support opponents of Axis aggression, in 1940 Congress passed two more tax laws that raised both corporate and individual taxes.  Keep in mind that the Depression was very much still going on.  Following that, in 1941, Congress would pass yet another tax increase.

By the time the war was over, the basic nature of the income tax had changed: exemption levels were now reduced such that the highest income tax bracket paid 94% with taxable incomes over $1 million and the lowest tax rate was 23% for those with taxable incomes of $500! Clearly, these levels are too much, for this stifles the wealthiest Americans' abilities to create economic wealth while it takes away much needed monies from the poorest Americans.

The wartime economy for World War II proved to be significant to the number of Americans working. The rate of unemployment hit its lowest percentage ever at 1.2%.  In 1939, there were but 4 million taxpayers who paid into the federal government.  By 1945, there were 45 million.  One other significant change would be that just like during the Civil War, the income tax would be withheld.  This made it a lot easier on the Bureau of Internal Revenue as well as the taxpayer.  However, what the American people did not realize was that this would make it much easier for the federal government to raise future taxes because the taxpayers of this country did not notice the taxes being collected as much now as before.  Hence, this reinforces the old cliche, "Ignorance is bliss."

One interesting proposal Roosevelt had was called the Economic Bill of Rights. An excerpt from FDR's address before Congress in his State of the Union address on January 11, 1944 follows:
"It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known. We cannot be content, no matter how high that general standard of living may be, if some fraction of our people — whether it be one-third or one-fifth or one-tenth — is ill-fed, ill-clothed, ill-housed, and insecure.
This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights — among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.
As our nation has grown in size and stature, however — as our industrial economy expanded — these political rights proved inadequate to assure us equality in the pursuit of happiness.
We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. 'Necessitous men are not free men.' People who are hungry and out of a job are the stuff of which dictatorships are made.
In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all — regardless of station, race, or creed.
Among these are:
  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
  • The right to earn enough to provide adequate food and clothing and recreation;
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
  • The right of every family to a decent home;
  • The right to adequate medical care and the opportunity to achieve and enjoy good health;
  • The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
  • The right to a good education.
All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.
America's own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens."
(And thus, Roosevelt's concept of a right to economic security and independence must have been a foresight, for all of his socialist policies that had been enacted in the 1930's in terms of employing the unemployed involved increasing the size of government by creating more government institutions like the WPA that put to work citizens without the intention of earning a profits.  This is not truth economic welfare, this is social welfare, and it is tantamount to what Jean Jacques Rousseau referred to the right of the "general will" to impose its will upon those who would deviate from it by forcing them to be free.)
The nation changed forever during Roosevelt's presidency due to the New Deal policy.  These laws lasted for many years after his death in 1945.  Such programs as Social Security and the Food and Drug Administration (FDA) are part of the national safety net.  A great transformation of the president's power came to pass during the FDR administration.  His forceful leadership and many years in office inspired a popular term, "the imperial president," that would be applied to subsequent presidents with similar leadership styles. As the first Republican voted president after FDR, Dwight D. Eisenhower left the New Deal largely intact, even expanding on it in some areas.  In the 1960's, Lyndon B. Johnson's Great Society used the New Deal as inspiration for a dramatic expansion of liberal programs, which Richard M. Nixon generally retained during his presidency.

In an August 10, 2004 article from UCLA Newsroom titled "FDR's Policies Prolonged Depression by 7 Years, UCLA Economists Calculate," Meg Sullivan reports the researchers' findings:
"Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
'Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,' said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."
In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.
'President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,' said Cole, also a UCLA professor of economics. 'So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.'
Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.
Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.
'High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,' Ohanian said. 'As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces.'
The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.
Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.
Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.
'This is exciting and valuable research,' said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. 'The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?'
NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.
'Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding,' Ohanian said. "We show that they really did artificially inflate wages and prices.' Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted --albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.
The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.
NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.
Recovery came only after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
'The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,' Cole said. 'Ironically, our work shows that the recovery would have been very rapid had the government not intervened.'"
Once again, I will repeat, socialism doe not work at creating a healthy economy.  It only succeeds in creating more bureaucracy and greater dependency by the people.  Rather than creating wealth, socialism attempts to bridge the gap between the incomes of the richest and poorest citizens in society. There is no such thing as public money.  The revenue the government uses to pay for its welfare and socialist entitlement programs comes from the American taxpayer.

Post War Taxation and Economics

After World War II and a number of tax cuts, the federal tax burden went from a high of 20.9% in 1944 to 14.4% in 1950.  However, with the Korean War and the need for more revenue to operate Social Security, the rate increased to 19.9%.  A year later, the Internal Revenue Service  (IRS) was born after it changed the name of the Bureau of Internal Revenue due to reorganization.  The name stressed a service aspect of its function.  Within six years, the IRS had become the biggest accounting, form procession, and collection organization in the world.

As a means of identification, Congress enacted a law requiring the American people to use their Social Security numbers on the tax forms.  By 1967, all tax returns were processed by computers, and before the end of the decade, there were computerized methods to certain select tax returns for examination.  With a computerized method now in place to make audits more fair to taxpayers, the IRS could now focus its resources more appropriately.

More and more throughout the 1950's, not only was tax policy was looked at as a means to change incentives in the economy and raise revenues, it was also seen as an instrument to calm macroeconomic movement.  Over the years, there were a number of boom and bust cycles in the economy, and many in Congress used the ability to raise or lower taxes and spending "to fiddle with cumulative demand and level the business cycle."

A middle-aged Caucasian male wearing a dark business suit and wireframe glasses is depicted smiling pensively at the camera in a black-and-white photo.


(Above: President Harry S. Truman, served from 1945-1953. Courtesy of Wikipedia.)

Harry S. Truman succeeded Franklin Roosevelt in 1945 upon his predecessor's death.  He is credited for leading America from a wartime to a peacetime economic system.  However, in doing so, he pursued further expansion of government into the lives of the American people through more socialist initiatives and additions to what had already become a welfare state under Roosevelt.  His desk bore a firm motto of executive decision: "The Buck Stops Here!"  It should be noted, too, that it is during the Truman administration more so than the FDR administration that the U.S. economic policy began to follow trends espoused by British economist, John Maynard Keynes.

As part of his initiatives to transfer the economy back into a peacetime operation, Truman terminated wartime agencies and resumed production of peacetime goods.  At this point, the President was brought face-to-face with inflation, a steep rise in the cost of living, and a new militancy on the part of labor unions, which had conformed to wartime pledges against strikes.  As a result, Truman declared wage increases essential to cushion the blows from changes in the economy, sternly opposed restrictive measures against labor, and acted to maintain union rights as set forth in the Wagner Act of 1938.  When a new Congress, controlled by Republicans, passed the Taft-Hartley Bill which limited labor actions, he vetoed it, claiming it was bad for industry and workers alike.  After Congress re-passed over his veto, he continued denouncing it as a "slave-labor bill," thus keeping it a subject of popular and congressional contention.

Truman also supported the Fair Employment Act, designed to prevent discrimination against blacks, Jews, and other minority groups.  He also advocated a broad proposal of social welfare, harmonizing the New Deal policies of his predecessor.  Although sharp friction between the Truman administration and the conservative element within Congress, he carried the passage of measures for slum clearance, construction of low-cost housing, the beginnings of a health insurance program, and the establishment of the Council of Economic Advisers to help attain full employment.  Though hampered by lack of experience and little education, and bitterly denounced by cultivated and affluent groups, he gained wide support among the masses, the "collective" of Marxist lore, as an effective example of an average man. (Courtesy of Your Dictionary Biography)

Truman's domestic policies to much less time to implement and were a lot less successful.  On January 5, 1949, he proposed the Fair Deal in his State of the Union address.  The Fair Deal was a term used to describe the domestic reform agenda of the President's that lasted from 1945-1953.  In his speech, he puts forth a long list of domestic policy goals and states that "every segment of our population and every individual has a right to expect from our Government a fair deal." It marked a new stage in the history of modern liberalism in the U.S., but with the Conservative Coalition dominant in Congress at the time, the initiatives did not become law until they had GOP support.  During the Truman administration, the U.S. experienced its highest marginal tax rate for individuals for federal income tax purposes for tax years 1952 and 1953 was 92%.  In 1945, the rate was at its all-time record high of 94% as it applied to incomes of $200,000 or above. Truman is best described as a "liberal Democrat of the Midwestern Populist" tradition, who was determined both the legacy of the New Deal and make the Franklin Roosevelt's Economic Bill of Rights a reality while making his own mark in social policy.

The Fair Deal reflected the "vital center" approach to liberalism which rejected totalitarianism, was suspicious of excessive concentrations of government power, and honored the New Deal as an effort to create a democratic socialist society. Solidly based upon the New Deal in its advocacy of wide-ranging social legislation, the Fair Deal differed enough to claim a separate identity.  The Depression did not return after the war, thus the program had to deal with prosperity and an optimistic future.  The Fair Deal benefits of an agricultural abundance rather than the Depression scarcity and to encourage the development of an urban-rural Democratic coalition.  However, the Brannan Plan was defeated by strong conservative opposition in Congress and by his unrealistic confidence in the possibility of uniting farm workers and union labor who distrusted rural insurgency.  The Korean War made military spending the nation's priority and killed almost the whole Fair Deal, but did encourage the pursuit of economic growth.

Dwight D. Eisenhower, official photo portrait, May 29, 1959.jpg

(Above: Picture of President Dwight D. Eisenhower, served from 1953-1961. Courtesy of Wikipedia.)

During the campaign of 1952, Dwight D. Eisenhower criticized the statist or big government programs of Truman's Fair Deal, yet he did not share the extreme views of some Republican conservatives. These "Old Guard" Republicans talked about eliminating not just Fair Deal but also New Deal programs and rolling back government regulation of the economy. Eisenhower favored a more moderate course, one that he called Modern Republicanism, which preserved individual freedom and the market economy yet insured that government would provide necessary assistance to workers who had lost their jobs or to senior citizens. He intended to lead the country "down the middle of the road between the unfettered power of concentrated wealth . . . and the unbridled power of statism or partisan interests."

As President, Eisenhower thought that government should provide some additional benefits to the American people. He signed legislation that expanded Social Security, increased the minimum wage, and created the Department of Health, Education and Welfare. He also supported government construction of low-income housing but favored more limited spending than had Truman.

Eisenhower secured congressional approval of some important new programs that improved the nation's infrastructure. In partnership with Canada, the United States built the St. Lawrence Seaway. His most ambitious domestic project, the Interstate Highway program, created a 41,000-mile road system. This highway project, which, as the President said, involved enough concrete to build "six sidewalks to the moon," stimulated the economy and made driving long distances faster and safer. Yet the new super highways also had adverse effects, as they encouraged the deterioration of central cities, with residents and businesses moving to outlying locations.  

Eisenhower often got his way with Congress, especially during his first term. But in his last years as President, with Democrats in control of both the House and the Senate, Congress spent more for domestic programs than Eisenhower would have preferred. Although the President used his veto to block expensive programs, domestic spending still rose substantially, increasing from 31 percent of the budget in 1953 to 49 percent in 1961.

Although mild recessions slowed growth in 1953-1954, 1957-1958, and again in 1960, the economy expanded robustly during most of the 1950s. Unemployment was generally low, and inflation usually was 2 percent or less. Although Old Guard conservatives pressed Eisenhower to cut taxes, the President gave a higher priority to balancing the budget. Eisenhower had moderate success -- three of his eight budgets were in the black. Wage earners enjoyed a prosperous decade: During the Eisenhower presidency, personal income increased by 45 percent. Many families used their purchasing power to buy new houses, frequently in suburban developments. Consumers also used their income to acquire many new household items, including television sets and high-fidelity equipment. A few families even made their purchases by using the first charge cards from Diners Club and American Express.

Yet many Americans did not share in the prosperity of the 1950s. About one in every five Americans lived in poverty by the end of the decade. The poverty rate declined during Eisenhower's presidency, but still forty million Americans were poor when Eisenhower left office. The South had almost half of the country's poor families. Yet during the 1950s, poverty increased in northern cities, especially because of the migration of African Americans who left the South for cities like Detroit, Chicago, and Cleveland because new farm machines had taken away job opportunities. Children and the elderly were much more likely to experience poverty than adults from ages eighteen through sixty-five. Yet even though poverty was widespread, poor people got little attention during the 1950s. It was easier to celebrate the abundance of a booming consumer economy. People who had lived through the Great Depression of the 1930s emphasized the economic security of the 1950s. It was not until the 1960s that affluent Americans rediscovered the poverty amid the prosperity.  It is important to note that until 1957, some four years after the recession of 1953 began, Eisenhower did not one time act to address the issue. (Courtesy of The Miller Center, University of Virginia , American President: Dwight D. Eisenhower)  In 1957, however, he signed the Federal Aid Highway Act into law, which authorized the construction of the interstate system.

This can be largely explained through his tax policy.  In a speech Eisenhower delivered in the late 1950's, he said the following:
"[In some countries], a few families are fabulously wealthy, contribute far less than they should in taxes, and are indifferent to the poverty of the great masses of the people.  A country in this situation is fraught with continual instability."
"Ike" was in favor of spreading the wealth, and the highest tax rate indicates, according to U.S. tax code, that those who earned $400,000 a year (more than $3 million by 2008 money according to this article in Sodahead.com, paid Uncle Sam 91% of their income.  But as the article confirms, this was no controversial issue back in the late 1950's/early 1960's.  Americans overwhelmingly shared his "spread-the-wealth" convictions.  Societies that discourage vast accumulations of private wealth, the people back then believed, simply worked better.  This website, of course, supports Eisenhower's assertion that this sort of absurd practice of taxation actually made the lives of the common man and the poor better.  In truth, the Reagan Tax Cuts would make the incomes of all Americans better, as well as their economic standing, despite the wealthiest Americans gaining more in wealth.  The website, by writing this article, is doing nothing more than to perpetuate the concept of class warfare in America by essentially saying that in order to create more social accord among the American people, it is better that the poor were poorer.  This, according to these same members of the American Left, is more important than creating wealth.  As stated above, Eisenhower's policies involved adhering to the laws of the New Deal, and in some cases, expanding them.  His policies would go a long way toward influencing his vice president and disciple, Richard M. Nixon.

President John F. Kennedy's Record on Taxation and the Economy
JohnFK.png
(Above: Picture of President John F. Kennedy. Courtesy of Wikipedia.

President John F. Kennedy said the following about the levels of taxation in America (Courtesy of WND Commentary):
“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”
– John F. Kennedy, Nov. 20, 1962, president’s news conference
“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”
– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”
– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.
“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”
– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill
With the bad press behind him, Kennedy decided to focus on the domestic economy. On May 28, the stock market collapsed. Early in 1962, Kennedy had made a goal to lower the unemployment rate, and with the latest glitch in the economy, he set out to find a way to promote economic growth. He determined a tax cut was the best way to address the issue. He proposed to Congress that corporations receive a 40 percent tax cut and that individuals with taxable income in the mid-$30,000 range receive a 50 percent reduction. Today, $30,000 is equivalent to nearly $200,000.

Kennedy's proposed plan found little support from economists or the public, who were staunchly opposed to a national debt. Only 19 percent agreed with Kennedy's plan, while 72 percent overwhelmingly believed it was a dreadful proposal, but Kennedy defended his position. At a Yale University commencement ceremony, he proclaimed that Americans were held back by an old myth that deficits create inflation. The president argued that debt could create economic growth. Kennedy's arguments did little to persuade Congress to pass his tax cuts. When they adjourned for the summer break, opposition to it was strong. 
Kennedy appealed to Wilbur Mills of the House Ways and Means Committee, but to no avail. Mills told the president it would take a recession to bring Congress around. Kennedy also sought support from business leaders. During various receptions he inundated them with information about his tax cut plan and its benefit over the current outdated economic plan. The audience was much more receptive than Mills had been.
Although Kennedy realized that he had little hope of his tax cut passing until 1963, his Trade Expansion bill was a promising resolution to the potential devaluation of the dollar from the gold drain. The bill would give him the power to negotiate lower tariffs with European countries that were part of the Common Market and it would potentially increase U.S. exports. Kennedy believed this bill would help the economy by decreasing unemployment and by helping the national economy overall. Congress agreed and passed the bill in October. (Courtesy of Net Places.com - John F. Kennedy)

The Tax and Economic Policies of Lyndon B. Johnson and the Road Toward Stagflation

37 Lyndon Johnson 3x4.jpg

(Above: Picture of Lyndon B. Johnson. Courtesy of Wikipedia.)

President Lyndon B. Johnson, who succeeded President Kennedy in the Oval Office after his assassination on November 22, 1963, created the Great Society program, which was named after a speech he once delivered.  It became his agenda for the Democratic-controlled Congress in 1965.  The initiative would provide aid to education, attack on disease, Medicare, Medicaid, urban renewal, beautification, conservation, development of depressed regions, a wide-scale fight against poverty, control and prevention of crime, and the removal to obstacles to the right to vote.  Congress, at times augmenting or amending, enacted most of Johnson's recommendations.  In a June 28, 1968 statement supporting his decision to increase taxes, President Johnson had this to say (Courtesy of The American President Project):
Four and a half years ago--just a few months after becoming President--I signed the biggest tax cut in the Nation's history. Then, the economy was dragging. Five and a half percent of the labor force was out of work. We were underachievers--falling almost $30 billion short of our productive capacity.
We had to put our foot on the accelerator then. The income tax reduction and the later excise tax cuts brought new vigor and health to America's economy. They helped us to roll up an unparalleled and impressive record: 88 months of sustained prosperity.
This has meant higher paychecks to the worker and higher profits to the businessman. The unemployment rate has dropped all the way down to 3.5 percent, the lowest in 15 years. Never before have so many of our citizens shared in so much of the Nation's prosperity.
The same principles of good fiscal management summon us here today for a tax increase. The special costs of supporting our fighting men in Vietnam and the costs of launching and supporting comprehensive education, health, city, job, and conservation programs in our society have added many billions to our budget. The Nation's economy is moving too fast because of an unacceptable budgetary deficit. We must now apply the fiscal brakes.
With the measure I sign today, we will cut $20 billion from the deficit in fiscal year 1969. This marks the largest shift of the budget toward restraint in the past two decades.
Now we can attack decisively--at the roots--the threats to our prosperity: accelerating inflation, soaring interest rates, deteriorating world trade performance.
Now we can mobilize the defense of our dollar at home and abroad and fulfill our obligations to world monetary stability.
Now we are assured that we can continue to rely on free markets, unfettered by damaging Government controls.
This temporary surcharge will return to the Treasury about half the tax cuts I signed into law in 1964 and 1965. For the average taxpayer it will mean an additional penny on the dollar of income in the coming year. It honors the democratic principle that taxes should be based on ability to pay.
Here is how the surcharge will affect the American family:


--For a family of 4 with a yearly income of up to $5,000 it will not increase taxes at all.

--For a $10,000 income family, it will amount to slightly over $2 a week. This leaves them nearly $3 a week ahead of the tax rates prevailing when I became President.
--For an affluent family with $30,000 a year, it will amount to 2 cents on the dollar.
For every American family--rich or poor--the tax bill is the very best insurance policy we can buy to protect our prosperity....
... With the enactment of the tax bill, our democracy passed a critical test. Raising taxes is never a pleasant task, least of all in a national election year. But in finally acting Congress has fulfilled an important responsibility.
In the December 5, 2005 article titled "Historical Perspective: Sacrifice and Surcharge," author Joseph J. Thorndike discusses the Johnson tax hikes and their effect on the economy:
Johnson's income tax increase law that he signed into law on June 28, 1968, titled the Revenue and Expenditure Control Act of 1968, imposed a 10 percent surcharge on individual and corporate income taxes.  Low-income taxpayers were entirely exempt.  As Johnson pointed out while signing the bill in his statement, a family of four earning less than $4,000 (about $28,000 in 2005 dollars) would pay nothing additional.  A family making $10,000 (about $57,000 in 2005 dollars) would pay just $2 extra per week (about $11.50 in 2005 dollars).
Individual income taxpayers completed their returns as usual, but a new line appeared on Form 1040.  After entering tax due on line 12a, an individual taxpayer was prompted by line 12b to consult a special surcharge table and add the appropriate amount to his or her regular tax liability.  For tax year 1968, the surcharge amounted to 7.5 percent of a taxpayer's regular tax liability.  (The 10 percent levy was prorated since it was in place for only nine months of the calendar year.)  For corporations, the process was similar: A new line on Schedule J of Form 1120 required companies to add 10 percent to their regular tax bills (or a prorated amount, depending on the company's tax year).
In 1969, Congress renewed the surcharge through the middle of 1970 but reduced it to 5%.  Still, the tax raised substantial revenue -- some $55 billion in constant 1992 dollars, according to a 2003 Treasury Department estimate.  As legal scholar Kirk Stark pointed out in a paper examining Vietnam War tax policy, "The importance of the 1968 legislation to the U.S. budget situation in the late 1960's should not be underestimated."
However, skeptics at the time predicted that the surcharge would fail to stem consumer spending -- and not simply because it took so long to enact.  In a critical article in 1971, economist Robert Eisner said temporary taxes were ineffective curbs on consumer spending.  And according to Charles Steindel of the Federal Reserve Bank of New York, who has written on the effect of tax changes on consumer behavior, subsequent analysis has borne that prediction out.  Inflation continued through 1968, 1969, and the early 1970's.
Furthermore, in an April 23, 1982 article in The Heritage Foundation, the following was also revealed (Due to the age of the article, the sentences are slightly disorganized and may even be a little jumbled.  Please bear with me as I present this very important analysis to you regarding the consequences of Johnson's tax and economy policy:
Arthur Okun, then a member of Lyndon Johnson's Council of Economic Advisers, justified the tax surcharge as a means to reduce inflation and the high level of aggregate demand passed the surcharge in June 1968 to reduce the budget deficit then climbing to over $10 billion surcharge are instructive for policymakers today considering a similar policy, not this time to reduce consumption expenditures and inflation but rather to lower interest rates by reducing the budget deficit Congress. The results of that... tax revenues increased $11 billion between the second quarter and third quarter of 1968 in response to the tax increase. And by FY 1969, the federal budget enjoyed a $5.2 billion surplus, up sharply from the $12.3 billion budget deficit the previous year tax surcharges can reduce deficits, and, if large enough and applied to a sufficiently large number of income tax brackets may even raise enough revenues to eliminate sizable budget deficits.
But over this same period, personal savings sharply declined by $9 billion, offsetting almost 80 percent of the revenues raised by the tax surcharge. The personal savings rate declined by 7.6 percent of personal income in the second quarter of 1968 to a low of 5.3 percent in the second quarter of 1969. Hence Lesson Two for policymakers considering a tax surcharge: A tax surcharge may help balance the federal budget, but only at the cost of a substantial reduction in savings. In short, a tax surcharge may reduce the federal demand for credit to finance the deficit, but only at the expense of the pool of savings. From the lessons of 1968, it seems certain that an income tax hike will not reduce interest rates or relieve pressure on the capital markets....
According to Current Issues in Economics and Finance, author Charles Steindel, who was mentioned above, says that initially, the surcharge had no expiration date, but the close association with financing of the Vietnam War meant that the public would have regarded it as a temporary war tax. When the surcharge was reduced in 1969, it was given an explicit 1971 expiration date.

The behavior on the personal saving rate after the surcharge took effect in mid-1968 suggests that Robert Eisner was correct in his assertion that the law would have little effect on consumer spending.  The rate fell sharply in the second half of the year, a sign that the surcharge was placing, at most, a modest restraint on consumer spending.  Indeed, while a $1 change in permanent income is thought to change spending by about $0.70, several studies have indicated that the effect of the surcharge was perhaps one-half that of the permanent 10% increase -- in other words, a drop in spending of $0.35 for each dollar of revenue the government gained.

The saving rate decline in the second half of 1968 supports the life cycle-permanent income theory's prediction that temporary tax changes will prompt few changes in consumer spending patterns.  However, the fact that the decline did not begin until after the effective date of the surcharge contradicts the notion, also implicit in the theory, that households act in anticipation of tax changes.  Although the surcharge was put into law some months before it affect tax payments and had been widely discussed before then, households did not alter their spending behavior in advance.

The excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause of what would become known as stagflation.  As a result of the Johnson tax hikes and the Arab oil embargo starting in the 1970's and lasting all the way through the mid-1980's, inflation rates domestically had persistently risen to the point by 1979 during the Carter administration, the rate was 13.3%.

President Richard M. Nixon's Record on Taxation and the Economy

Richard Nixon.jpg

(Above: President Richard M. Nixon, 1969-1974.  He was the first president to preside over the era of stagflation in the U.S. Courtesy of Wikipedia.)

Unfortunately, history chooses to remember the successor to President Johnson as being the administration that marked the end of the long period of economic prosperity in America. (Miller Center, University of Virginia, American President: A Reference Source)  Unemployment was unusually low (3.3%), but inflation was rising.  Nixon adopted a plan of monetary restraint to cool what his advisers saw as an overheating economy.  This policy became known to the public as "gradualism," which placed its hopes in restricting the growth of the money supply to rein in the economic boom that during Lyndon Johnson's last year in office.  However, gradualism did not quickly provide results for the president or the nation's ailing economy, for as the 1970 congressional election year began, the president, according to asked the chairman of the Council of Economic Advisors to explain why they had not found the solution to the inflation yet.  Nixon also said that he had never heard of losing elections due to inflation, but that lots were lost due to unemployment or recession.

Nixon's fears proved to be well-founded.  By 1970, unemployment rose to the politically-damaging level of 6%.  In that year, the president appointed his chief financial adviser, Arthur Burns, chairman of the Federal Reserve.  Burns quickly asserted his independence by giving Nixon an ultimatum: if the President failed to hold federal spending down below $200 billion, Burns would continue to keep the money supply tight to fight inflation.  Nixon agreed to Burns' demands.  To save money, he delayed pay raises to federal employees by six months.  One result was a strike by the nation's postal workers.  Although the President used the U.S. Army to keep the postal service flowing, he ultimately yielded to the postal workers' wage demands, undoing some of the budget balancing that Burns demanded.

The economy continued to deteriorate.  By the middle of 1971, the unemployment rate reached 6.2% while inflation raged unchecked.  Nixon appointed Secretary of the Treasury John Connally as the mouthpiece on all matters economic.  Connally made sweeping statements about the President's intentions:
"Number one, he is not going to initiate a wage-price board.  Number two, he is not going to impose  price and wage controls.  Number three, he is not going to ask Congress for any tax relief.  And number four, he is not going to increase federal spending."
Within a matter of weeks, the Connally and the President would go against their pledge.  In August 1971, Nixon gathered all of his economic advisers at Camp David for a meeting.  They emerged from the meeting the New Economic Policy that stood the old one on its head.  The NEP violated most of Nixon's long-held economic principles, but he was never one to allow principle to stand in the way of politics, and his dramatic turnaround on economic policies was immediately and enormously popular.  One participant at the Camp David meetings, Herb Stein, thought the assemblage of economic advisers "acquired the attitude of scriptwriters preparing a TV special to be broadcast on Sunday evening."  The announcement had to be as dramatic as possible.  "After the special," as Stein put it, "regular programming would resume."

The result was a major hit for Nixon.  He announced a wage-and-price freeze, tax cuts, and a temporary closure of the "gold window," preventing other nations from demanding American gold in exchange for American dollars.  To improve the nation's balance of trade, Nixon called for a 10% import tax.  Public approval was overwhelming.

The downturn resumed, however, in 1973.  Expansive fiscal and monetary policies combined with a shortage of food (aggravated by massive Soviet purchases of American wheat) fueled further inflation.  Then came the oil shock.  Oil prices were rising even before the Arab embargo in October 1973.  Ultimately, inflation would climb to 12.1% in 1974 and help push the economy into a recession.  When Nixon was forced from office in 1974 due to the Watergate scandal, the economy was in the tank, with rising unemployment and inflation, lengthening gas lines, and a crashing stock market.

One initiative Nixon undertook to improve the economy was by aiding the Department of Labor in creating new jobs and providing training for minorities within federally funded construction projects.  The President also used racial classification in desegregating programs, which is often looked upon as the first example of Affirmative Action.  (Courtesy of Richard Milhous Nixon Blog)

President Gerald R. Ford's Record on Taxation and the Economy:  

President Gerald Ford, arms folded, in front of a United States Flag and the Presidential seal.

(Above: Picture of President Gerald R. Ford, who served from 1874-1977.  He inherited the legacy of Richard Nixon's failed economic endeavors and continued that legacy, which ultimately led him to being voted out of office in the Election of 1976. Courtesy of Wikipedia.)

The presidency of Gerald R. Ford was marked almost as much by the economic forces of inflation as it was by the political fortunes of the time.  He was sworn in on August 9, 1974, after the resignation of Richard Nixon as a result of the Watergate scandal.  The new president was faced with inflation that had reached a 10.9% annual rate that month, which was exacerbated by the OPEC oil embargo of 1974 and the elimination of wage-price controls instituted by the Nixon administration.

As energy constituted most of the nation's GDP in the early 1970's, soaring gas prices had an even more profound impact on the U.S. economy than the recent gas price hikes had.  Rising energy prices also contributed to higher unemployment by slowing consumer demand for companies' prices, according to Mark Ratkus, economics professor at La Salle University in Philadelphia, PA.

One of Ford's most memorable attempts to restrain inflation at the time was an initiative called Whip Inflation Now.  In a televised speech delivered October 8, 1974, the President described the plan that was to enable Americans to personally remedy rising costs:
"Here is what we must do, what each and every one of you can do: To help increase food and lower prices, grow more and waste less; to help save scarce fuel in the energy crisis, drive less, heat less.
"Every housewife knows almost exactly how much she spent for food last week.  If you cannot spare a penny from your food budget -- and I know there are many -- surely you can cut the food that you waste by 5%."
Buttons with the initials "WIN" were distributed, and people were encouraged to wear them in order to increase the public's awareness of the effort.  The idea was for inflation to be combated and contained on the individual level.

WIN proved to be an ineffective step, "both from the public relations aspect and an economic one," said Daniel Mitchell, professor of public policy and management at UCLA.  "Buttons on lapels weren't going to deal with this sort of thing."

"Up until that time, we'd never had inflation and higher unemployment," Ratkus explained. "It created a stagnant economy and a term that has since entered into textbooks: 'stagflation.'"

President Ford, who inherited many of the nation's economic problems from the previous administration that were by-products of the Lyndon Johnson tax hike or surcharges from 1968, was defeated in the following presidential election.  Jimmy Carter was sworn in as president in 1977. Inflation remained a problem throughout the 1970's.

JimmyCarterPortrait2.jpg


(Above: Picture of President Jimmy Carter, who served from 1977-1981.  He presided over the worst economic downturn since the Great Depression when the economy became even more inflated and unemployment exploded during his term.  It is his term as president that the term stagflation is generally associated with. Courtesy of Wikipedia.)

In W. Carl Biven's biography, Jimmy Carter's Economy: Policy in an Age of Limits, he states that Carter said there were three main reasons behind his defeat in the 1980 presidential election.  The third reason is as follows:
"The third reason for defeat given by Carter is the condition of the economy at the time of the election.... There is compelling evidence that, in the end, people vote their pocketbooks."
Herb Stein, chief economic officer during the Nixon years, has written that when Ronald Reagan asked Americans during the 1980 campaign if they were better off than they had been four years ago, he could count on a negative response.  But, Stein writes:
"...despite the inflation, and despite the slowdown in productivity growth, real per capita income after tax, probably the best measure of economic welfare, increased between 1976 and 1980. Indeed it increased just about as much during that four year period as in the four preceding years." 
It could also be argued that the number of civilian jobs created was greater during the Carter administration than for other presidents immediately before or after.  But despite these positive outcomes, the Carter years were plagued with continuing economic crises, the worst of them concentrated in the final year of his administration. (Courtesy of UNC Press's page on the biography Jimmy Carter's Economy)

Upon taking office in 1977, Carter proposed radical energy reforms, redistributive tax reform, public campaign financing, a consumer protection agency (that Ralph Nader had long championed), labor law reform, and enactment of the Equal Rights Amendment.  He fought with fellow Democrats in Congress, and achieved or nothing toward his goals.  Meanwhile, stagflation hit the economy hard, as energy shortages, slow growth, escalating inflation, and very high interest sagged the economy.

To address the national energy crisis, Carter proposed a national energy program to conserve oil and promote the use of coal and renewable energy sources.  He also persuaded Congress to create the Department of Energy, thus growing government more, and asked Americans to personally reduce their energy consumption.  Although oil companies were insisting on deregulation of the energy industry, Carter advocated a "windfall profits tax" to prevent oil companies from overcharging consumers.  His plan, however, did not solve the nation's energy crisis.  In the summer of 1979, a major oil shortage in the United States took place because of instability in the Middle East.  After increasing pressure to act, Carter gave several TV addresses where he complained there was a "crisis of confidence that had struck at the very heart and soul of our national will."  Although Carter meant the speech to be a timely warning, many Americans interpreted it as the President's blaming the country for his failures.  Critics dubbed it Carter's "malaise speech."

Carter inherited the economy's condition of stagflation upon taking the oath of office.  First, he tried to lower unemployment by both increasing government spending and cutting taxes.  However, when inflation skyrocketed in 1978, he changed his mind.  Carter delayed the tax cuts and vetoed the spending programs that he himself had proposed to Congress.  Carter then tried ease inflation by reducing money supply and increasing interest rates.  All of his efforts proved to be unsuccessful.  Inflation and interest rates soon hit their highest levels since World War II.

The rapid change in interest rates led to disintermediation of bank deposits, which sowed the seeds of the Savings and Loan Crisis.  Investments in fixed income were becoming less valuable.  Holders of bonds, and pensions being paid to retired people had their life savings wiped out.  The stagnant growth of the economy, which caused high unemployment, in combination with a high inflation, which is the definition behind the economic phenomenon stagflation, an unprecedented situation in American economics.  By 1979, public opinion polls had Carter's popularity lower than Richard M. Nixon's during Watergate, partly because of his inexperience and difficulties working with Congress.  By 1980, inflation reached a high of 13.5%.  This, coupled with the unemployment rate being at 7.1%, led to Carter's losing the Election of 1980 to Ronald Reagan.  Reagan won convincingly, landing a total of 43.9 million votes to Carters 35.5 million.  The Democrats managed to maintain their majority in the House of Representatives, but by a narrow margin.  Meanwhile, the U.S. Senate was captured by Republicans. (Courtesy of Conservapedia.com)

CNN.com, a liberal news outlet, credited the Federal Reserve, led by Carter-appointed chairman Paul Volcker with his "tough monetary policy," for that.  However, the real reason behind the reining in of inflation in the early 1980's was the series of tax policies of Ronald Reagan, Carter's successor, that stimulated the economy, as the record will show below. Thus, with the end of the Carter administration in 1981, so, too, was the widespread practice of the failed moderate Republican and liberal Democrat Keynesian economic policies until President Obama won the 2008 election.

The Era of Ronald Reagan: 1981-1989

Official Portrait of President Reagan 1981.jpg

(Above: Yet another picture of President Ronald Reagan. Courtesy of Wikipedia.)

In 1980, Ronald Reagan won the presidency in a landslide over incumbent Jimmy Carter in part on the poor performance of the economy during his administration.  With the election of the nation's 40th president, an new era was ushered in in American politics, as Reagan is credited for being the first modern conservative to be elected President.  His economic policy became known as "Reaganomics."  This philosophy of economics is often referred to as well as "supply-side economics."  Economist Milton Friedman served as an economic adviser to Reagan on the economy.


(Above: Economist Milton Friedman, whose advocacy of less government intervention in economic policy replaced the prevailing wisdom previous espoused by John Maynard Keynes.)

With the beginning of the Reagan administration came a basic change in federal income tax policy.  In 1981, Reagan rammed through Congress the Economic Recovery Tax Act of 1981, which was signed into law and had strong bipartisan Congressional support.  Conservatives thought if anyone knew how to make a federal tax cut work, certainly it was President Reagan.  

Driven for years before then by Republican Senator Bill Roth and Congressman Jack Kemp, the Reagan tax cuts reduced the top tax bracket to just 50% by phasing in -- over three years -- a 25% cut to individual tax brackets, which were then indexed for inflation after that.  

A famous quote from Ronald Reagan was this:
"The government's view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it.  And if it stops moving, subsidize it."
The new law also significantly changed the rules for tax depreciation and capital costs on business expenses
for equipment.  Before then, capital cost recovery basically followed an idea called economic depreciation, which referred to the reduction in market value of a producing asset over a precise period.  The Act replaced that concept with the Accelerated Cost Recovery System, which excited many previous discouraged business investors and eventually led to an explosion of capital creation.  As well as accelerated cost recovery, to spur even more capital creation, the Economic Recovery Act of 1981 also included a 10% Investment Tax Credit.

Although it was a simply a return to a perspective of previous generations, the new tax cut signified a new approach at looking at tax policy.  The basic idea was that taxes needed to have their most important economic enticements in front of business and individuals.  Therefore, the tax rate on the first dollar is not as important as the tax rate on the last dollar earned or the marginal dollar.  It was also thought by a great  many pundits that if marginal rates were lowered, the normal energies behind economic development would not be so restrained.  The thinking was that those who were most industrious would spend less time on leisure and more time of their forces to industrious activities so there would be a lot more moneymaking activities for businesses to cash in on.

The Reagan Tax Cuts seemed to signify two moves away from earlier tax policy thinking, with one deliberate and the other implied.  The first was how incentives and marginal tax rates were a central theme behind how taxes affect economic activity.  The other was really a move away from taxing income to taxing consumption.  While businesses could now move away from accelerated cost recovery, the ratification of new tax provisions resulted in a reduction on taxes on personal savings.  An example of this is that in 1981, the Individual Retirement Account (IRA) was born.

At the same time the Reagan Tax Cuts were being enacted, to try and reign in inflation, the Federal Reserve made changes to monetary policy with the complete backing of the Reagan administration.  However, the Fed miscalculated, and their actions forced inflation to decline quicker than they thought.  Within just one year (1982), the economy spiraled into a significant recession, and now federal spending, which because it was calculated at this point based on higher inflation, spending levels were actually much higher than anticipated, adjusted for actual inflation.  Thus, with the combination of a sudden increase in inflation-adjusted federal spending as well as a recession  -- and the Reagan Tax Cuts, budget deficits leaped even higher than in the past, paving the way for a tax increase in 1984.  Several of  the 1981 tax cuts were trimmed back as a result.

As the Reagan Tax Cuts went into effect to a greater extent, the economy began to see strong and continued growth.  While delayed and concealed by the agonizing process of forced deflation, the advantage of marginal tax cuts and incentives to invest did eventually materialize as previously predicted.

Even after the monumental changes to federal tax laws in the early 1980's under the Reagan Tax Cuts, many people still believed that the income tax code still needed to be revamped.  Numerous leaders in both the Republican and Democratic parties became swayed by the post-recession boom that occurred after 1982 that indeed lowering marginal tax rates indeed did result in returning strength to the U.S. economy.  At the same time, all of the tax law changes made those leaders realize just how complex the U.S. tax system really was.  Also, significant attention on taxes and the oddities of the tax base during this time helped many better comprehend how the income tax was adversely affecting jobs, wages, and the overall economy.

One of President Reagan's most famous lines regarding the American taxpayer was the following:
"The American taxpayer -- that's someone who works for the federal government but doesn't have to take the civil service examination."
Thus, there was sudden broaden appeal that by lowering taxes even more and that by repealing particular provisions of the tax code that they could improve the income tax even more.  Therefore, the Tax Reform Act of 1986 was passed by Congress and signed into law by President Reagan.

The new Tax Reform Act of 1986 had both positive and negative effects.  Personal and corporate tax rates were reduced from 50% to 28% and then 50% to 35%, respectively.  There would now be fewer tax brackets along with increases in standard deduction and personal exemption that were indexed for inflation, which resulted in the total elimination of the federal income tax for millions of American taxpayers.  On the flip side, the Tax Reform Act created complex alternative minimum taxes that some say caused unnecessary  destructive economic issues.  Most of these critics were members of the Democratic party.

The 1986 Tax Reform Act was not really intended to either reduce or increase tax revenues.  However, it did transfer portions of the tax burden from individuals to businesses, largely by increasing the tax on business capital structure.  Individual taxpayers were now able to enjoy new deductions like state and local sales taxes and various interest deductions, and could even now eliminate income averaging.  However, many thought the Act made business taxes significantly more complex, especially in the international arena.

Because a number of provisions of the tax revisions went too far, the real estate market took a turn for the worse, which was not insignificant regarding the fall of savings and loan institutions.  However, between 1964 and 1986, the top tax rates for individuals was reduced by 63%.  The richest Americans in 1964 paid in 91% of their income to Uncle Sam.  By 1986, that total had dropped to 28%.  More broadly, the Tax Reform Act of 1986 was seen as one of the last great chapters of astonishing reductions to tax rates during this period.  Interestingly, tax revenues increased during this period despite the tax rate reductions because of the increase in taxpayers and because more high income taxpayers chose to receive taxable income.

While referred to as an income tax, for decades on federal income tax system was really a mix of consumption and income taxes and each of the major tax acts would move the balance one way or the other.  However, the 1986 Tax Act weighed much heavier toward the income tax due to the constraints on IRA's and mechanisms available for how businesses could use economic depreciation to reduce their tax burden based on capital investments.

Reagan entered office in 1981 with promises to cut spending on federal programs and to promote deregulation.  The following is a list of the Reagan record (Courtesy of American Enterprise Institute):
Everyone talks about the Reagan tax cuts, yet there is more to President Reagan’s legacy than tax cuts. There is also his courageous and largely unappreciated willingness to fight for reductions in domestic spending.
Ronald Reagan sought--and won--more spending cuts than any other modern president. He is the only president in the last forty years to cut inflation-adjusted nondefense outlays, which fell by 9.7 percent during his first term (see table 1). Sadly, during his second term, President Reagan did not manage to cut nondefense discretionary spending, and it grew by 0.2 percent. But his record is still quite remarkable if compared to other administrations. Every other president since Lyndon Johnson serving a full four-year term did not even do as well as Reagan in his less-impressive second term.
President Reagan understood economics, and he knew an unjustified economic subsidy when he saw one. He believed that the federal government had usurped private, state, and local responsibilities, and consequently he thought that most department's budgets should be cut. Table 2 shows how many agencies’ budgets were cut (in real terms) during each presidential term going back to the one full term President Johnson served. These interesting facts are revealing of the president’s philosophy.
  • President Reagan cut the budget of eight agencies out of fifteen during his first term, and ten out of fifteen during his second term.
  • President Clinton cut the budget of nine out of fifteen agencies during his first term but cut none during his second term.
  • President George W. Bush has cut none of the agencies’ budgets during his first term.
It is also interesting to see which president cut what and how much. Table 3 shows the change in real spending for each agency during each full presidential term served since President Johnson.  
Here are some other interesting facts about President Reagan:
  • President Reagan is the only president to have cut the budget of the Department of Housing and Urban Development in one of his terms (a total of 40.1 percent during his second term).
  • President Reagan is the only president to have cut the budget of the Department of Transportation. He cut it by 10.5 percent during his first term and by 7.5 percent during his second term.
  • During his first term in office, President Reagan cut the real budget of the Department of Education by 18.6 percent, while President Nixon increased it (that is the education part of what was then the Department of Health, Education, and Welfare) by 19.1 percent. That budget increased by 22.2 percent under Bush 41 and by 38.5 percent under Carter. Our current president has increased it by a whooping 67.6 percent.
  • Reagan managed to cut the budget of the Department of Commerce by 29 percent in constant dollars during his first term and by 3 percent during his second one. President Clinton by contrast increased the department’s budget by 24 percent in his first term and then by 96.7 percent in his second term.
  • President Reagan cut the real budget of the Department of Agriculture by 24 percent during his second term in office.
  • President Reagan never cut the budgets of the departments of Defense, Health and Human Services, Justice, or State.
 Table 1: Change in Real Spending for Each Presidential Term since LBJ
SOURCE: Author's calculations based on the Budget of the United States FY2005, the Budget Historical Tables, and the CBO outlook and review January 2004.

NOTE: Partial terms of Johnson, Nixon, and Ford are not included. Figures for Bush 43 are estimates. These qualifications apply to tables 2 and 3 as well.

Table 2: How Many Departments' and Agencies' Budgets Have They Cut?
SOURCE: Author's calculations based on the Budget of the United States FY2005 and the Budget Historical Tables.

NOTE: The fifteen departments and agencies are those listed in table 3.

Table 3: Change in Real Spending for Selected Departments and Agencies in Each Presidential Term since LBJ
SOURCE: Author's calculations based on the Budget of the United States FY2005 and the Budget Historical Tables.

* Department of Education or education portion of the old Department of Health, Education, and Welfare (HEW)

** Health and Human Services (and noneducation portion of HEW)

*** Housing and Urban Development

**** Environmental Protection Agency
***** International assistance programs

In an October 22, 1996 article in The Heritage Foundation, the record behind Reagan's supply-side tax cuts and the truth behind his economic record are revealed as the THF compares "Reaganomics" to the tax cut policies of George W. Bush:
"After President George W. Bush sent Congress an outline of his tax reform plan on February 8, some critics immediately began to attack it as a return to what they portray as the fiscally irresponsible policies of the Reagan Administration. According to these commentators, Congress should scale back--if not outright reject--President Bush's tax reform proposals because they are based on a period when the wealthy received excessive tax cuts and revenue was wasted on defense even though most Americans struggled in poverty. This is a revisionist view of recent history that ignores reality and denies the fact that President Reagan's sound policies and determination deserve much of the credit for the current economic picture. Congress should embrace President Bush's tax reform plan as a responsible return to the most successful economic policy of the 20th century."
Reagan's record includes sweeping economic reforms and deep across-the-board tax cuts, market deregulation, and sound monetary policies to contain inflation.  His policies resulted in the largest peacetime economic boom in American history and the creation of nearly 35 million new jobs.  As the Joint Economic Committee reported in April 2000:
  • In 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run. He proposed, and Congress passed, sharp cuts in marginal tax rates. The cuts increased incentives to work and stimulated growth. These were funda-mental policy changes that provided the foundation for the Great Expansion that began in December 1982.
  • As Exhibit 1 shows, the economic record of the last 17 years is remarkable, particularly when viewed against the backdrop of the 1970s. The United States has experienced two of the longest and strongest expansions in our history back to back. They have been interrupted only by a shallow eight-month downturn in 1990-91.
"'Reaganomics' gave money away to the rich, at the expense of the poor," many critics claim.  The table below proves to the contrary:  
Percentage of paid income tax
IncomePercentage of taxes paid

198419861987
$0 - $15,0005.8%4.0%2.8%
$15,000 - $30,00021.1%16.8%14.7%
$30,000 - $50,00029.0%25.9%23.0%
$50,000 - $100,00022.0%24.3%27.7%
$100,000 - $200,0008.6%10.2%11.9%
+ $200,00013.4%18.9%19.8%

100.0%100.0%100.0%
Source: IRS
At the end of the Reagan presidency, the rich paid comparatively more in taxes than before.   As for the poor, their share in total tax revenues decreased.  There was a simple reason for this: the lower tax rats were an important incentive for the rich to expand their economic activity.  The tax base had become broader, and the lower rate on the broader tax base resulted in higher tax revenues.

In the table below we can see that the poor benefited most from the economic growth.  Not only did they pay less taxes, but the 20% poorest people enjoyed an increase in income of 77% in 9 years.
Incomes and Social Mobility
(1991 dollars)
Average Family Income of 1977 Quintile Members in
1977 Quintile19771986% Change
Bottom 20%$15,853$27,99877%
Second 20%$31,349$43,04137%
Third 20%$43,297$51,79620%
Fourth 20%$57,486$63,31410%
Top 20%$92,531$97,1405%
All$48,101$56,65818%
Source: Urban Institute
Critics claim that the growth in employment was realized mainly through the creation of crappy "hamburger jobs."  Willy De Wit: "This is not correct.  Universities could not follow to deliver enough high qualified graduates.  As you can see in the following table, job growth was mainly in managerial functions.  Low paid jobs increased very little and in farming, employment decreased."

Job Creation in the Eighties
Jobs Created, Jan. 1982 – Dec. 1989
Job CategoryNumber (Mils.)Percentage Increase1989 Median Earnings
Managerial/Professional7.60033.10%$32,873
Production2.19419.00%$25,831
Technical6.63021.80%$20,905
Operators1.3748.20%$19,886
Services2.21016.80%$14,858
Farming-0.116-3.70%$13,539
Total19.89220.30%$23,333
Source: Bureau of Labour Statistics (employment), Census Bureau (earnings)

It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years.  But between 1981 and 1989 the budget deficit only increased slightly, from 2.6% to 2.9%.  The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money).  During the same years the Belgian deficit varied between 7% and 13% of GDP.  The average budget deficit for the G-7 was only slightly lower than that of the U.S.

Net Public Debt as a percentage of GDP

198319841985198619871988
USA24.1%25.2%27.3%29.6%30.9%31.2%
G728.4%29.8%31.4%32.9%32.7%31.8%
Belgium103.2%108.2%112.3%116.7%121.4%123.1%




While the federal tax burden increased by .5% between 1986 and 1990, so, too, did the federal deficit as a result of increased federal spending on the military.  This resulted in pressure from Democrats in Congress to increase federal income taxes.  In 1990, President George H.W. Bush signed into law a tax increase that raised the percentage for the wealthiest Americans from 28% to 31%.   The following year, the economy endured a recession.  And once President Bill Clinton was in office, he lobbied for yet another major tax increase to fight the federal deficit.  In 1993, Congress raised taxes up to 39.6%.  The increase actually raised the top tax rate from 31% to 36%, but then there was a 10% surcharge tacked onto that amount.

It seems strange that these figures and these facts are not better known, says Willy De Wit. But probably it is not surprising, when we consider that a right wing ("conservative") president discredited the left wing ("liberal") economic policy. Increasing social outlays does not make sense when you have previously created unemployment and poverty with a wrong economic policy. Reagan has shown that the redistribution of wealth with high tax rates brings no solution. Instead of redistributing wealth, it distributes poverty. The main reason for the opposition to Reagan’s economic policy, however, was that this policy was completely misunderstood at that time, mainly by the economic establishment. They did not see the fundamental difference between Keynesian thinking to stimulate demand, and the new supply-side approach by Ronald Reagan. 

Keynesian thinking explained the economic achievement in terms of the level of spending. Deficit spending will keep employment high and will stimulate the economy. Cutting the deficit (for the Keynesians) would reduce spending and throw people out of work, raising the unemployment rate, reduce national income and hence produce less tax revenues. Reagan on the contrary brought a totally new perspective to economic policy. Instead of putting the emphasis on spending, supply-side economists showed that tax rates directly affect the supply of goods and services. Lowering tax rates mean better incentives to produce, to save, to invest and to take risks. In other words lower tax rates stimulate supply and not demand. The broader tax base will compensate at least partially for the lost revenue caused by the tax cut. Higher savings will result in increased investment and unemployment will disappear. Instead of pumping up demand to stimulate the economy, reliance would be placed on improving incentives on the supply side. 

The entire economic profession, along with the media could not believe that a former movie actor could come up with a revolutionary economic policy that completely contradicted the famous Keynesian theory. The reaction was fierce. 


Another reason is that public opinion and most of the politicians in Europe are against the US. Roland Leuschel, a Belgian investment stategist with German roots and a good friend of Jack Kemp with whom he wrote a book in German, "Die Amerikanische Idee" (which was also published in Dutch but is out of print), dedicated a complete chapter of this book to this phenomenon: “the favorite sport of the European intelligentsia: anti-Americanism”. 



Ronald Reagan was not the first government leader to practise supply-side economics, says Willy De Wit. After World War II Ludwig Erhard put in practice supply-side economics in Western Germany in 1948. At that time he was in charge of economic policy. He introduced an economic shock therapy completely in line with Reaganomics. He abolished rationing and price-controls, although he restricted his own power with this measure. Erhard believed in the self regulation of the market. Not only the Social Democrats were vehement opponents of the abolishment of price-control, but also Lucius D. Clay, the US. military governor, was furious. Erhard had pushed through the economic deregulation without ever asking the general. Clay called Erhard to account, thundering that the professor had infringed upon the Allies’ privileges by changing the rationing regulations. Erhard coolly responded : “you are mistaken, sir, I have not changed them, I have abolished them.” 

Later on Erhard, as secretary for the economy, cut the high marginal tax rate in two steps: first from 95% to 63% and afterwards to 53%. The first 8000 DM earned became tax free. The decisions taken by Ludwig Erhard allowed West Germany to rebuild itself at a pace never seen. No surprise that he was called the “father of the wirtschaftswunder”. 


The German economic miracle cannot be explained by the Marshall Plan. Britain and France received Marshall money too, but they wasted their chances. Britain voted Labour, which brought rationing and price controls. France opted for economic protectionism, which prevented Marshal help to be used in an efficient way. 


After Reagan, the theory of supply-side economics was applied in numerous countries. In Iceland, David Oddson became prime minister in 1991. He inherited a poorly performing economy burdened by heavy income taxes. He lowered the corporate tax rate from 50% to 30%. During the next five years the economy grew by 5% per year. Government income did not fall and social outlays could be maintained.

Ireland is another example. In 1987 this country was the “sick man” of Europe, with a public debt of 135 % of GDP. After the elections of 1987 a new economic policy was introduced. Corporate tax rate was reduced from 32% to 12.5% and capital gains tax was lowered from 40% to 20%. Ireland is now the fastest growing country of the EU. Japan, to the contrary, is a classic example of the failure of a Keynesian demand-side policy. The economy has been in shambles for many years and public debt has risen to a gigantic 170% of GDP.



The following graph compares government spending and GDP per capita in Ireland and Belgium between 1960 and 2003. The Irish 'turning point' came with the adoption of supply-side economics. 


During the Reagan presidency (1981-1989) a economic revolution unfolded.  An unprecedented welfare expansion took place with the creation of 18 million new jobs.  The understanding of the mechanism behind this economic miracle is important, because it can offer some tools to revive the economics in countries with overregulation and big governments.



Willy De Wit has a six point blueprint for the Belgian economy, based on Reaganomics. "My program can create 600.000 jobs", he claims. 
  1. A gradual but considerable cut of the highest marginal tax rates to 28%.
  2. The complete abolition of corporate taxes, with a repeal of all subsidies to corporations.
  3. The abolition of taxes on dividends. Investment and risk taking has to be encouraged, not punished. A reduction (or abolition) of tax rates can make investment opportunities profitable that formerly were not.
  4. The abolition of all agricultural subsidies. At this moment 45% of the total EU budget goes to agricultural subsidies, respresenting the huge amount of 45 billion euro per year. This is not only dramatic for the tax payers, but it is also very harmful for the developing world, mainly for the poor countries in Africa. As a consequence of the subsidies, European agricultural products are dumped (at prices far below the cost) on the markets of these countries, preventing them from competing on the world markets with their own products. To pacify our conscience for this scandalous behaviour, policy makers have created a government department for foreign aid. Allegedly, this is a compensation for the money we stole from the poor countries through agricultural subsidies for our own products. The tax payer has to pay twice: first for the subsidies and then for the foreign aid. It is a shame that Europe is pumping such huge amounts into agriculture, a sector we hardly need.
  5. A shrinking of the size of government. One out of four Belgians are working for the government. According to an analysis of the independent Flemish think tank Workforall the total cost of government in Belgium could be reduced by 50%.
  6. Abolition of the transfers of tax money from Flanders to Wallonia. About 10 billion euro is transferred each year from the Flemish tax payers to the French speaking part of Belgium. The reason invoked for these transfers is that Wallonia has an unemployment rate of 18% compared with 8% for Flanders. But the socialist political parties and the unions in Wallonia refuse to take structural measures to reinvogorate their economy. So long as Flanders continues to pay the unemployment benefits for Wallonia the latter have no stimulus to do so. A solution could be the splitup of Belgium into two parts. In a recent study, "The Size of Nations", professors Alesina and Spolaore demonstrate that it is easier for small countries to become rich than for large countries. Of the ten richest countries in the world (in terms of GDP), only four have more than 1 million inhabitants, and only one (the US) has more than 10 million. Flanders, Wallonia and Brussels could prosper more as separate states or as a confederation, compared to the present situation in a united Belgium.
 
  • Evolution of government employment in Belgium - source: KBC & WorkForAll. From top to bottom: defense, railways, postal service, education, police and justice, administration.
An even better solution than the above six point program, would be the introduction of a flat tax rate, not only in Belgium, but also in the (original) 15 EU countries. The flat tax is a system with only one tax rate for all income and profits. If for instance a flat tax of 20% were introduced it would apply to all personal income and corporate profits. All reliefs, deductions, allowances and subsidies will be eliminated. Loopholes would be impossible. The system would be so simple that it will perhaps take no more than five minutes to file a tax return. In the last decade, the flat tax system has been introduced in several countries of "the new Europe", namely Romania, Slovakia, Serbia, Lithuania, Latvia, Estonia and also in Russia, Ukraine and Georgia with rates varying from 12% to 33% (average rate of 19%). Estonia was the first to introduce this system in 1994 (at a rate of 26 %) and has seen its economy expand at a fast rate. 

A low level of a flat tax is important. The well-known Richard K. Armey, previous Majority Leader of the House of Representatives advocates a tariff for the US of maximum 17%. But this rate could even be lower. An analysis by the French economist Philippe Manière indicates that a flat tax rate of 10% in France would maintain the government revenues at the present level. 

For Belgium, the introduction of a flat tax rate of maximum 20% would have enormous advantages :

  1. The economic growth rate will explode. Indeed a strong incentive is created to produce, to take risk, to work, to invest and to save.
  2. Unemployment will disappear completely.
  3. Tax Evasion will belong to the past. People are willing to pay the correct tax burden when tax rates are low.
  4. An important part of a suffocating government bureaucracy can be eliminated and the employees can be switched to more productive tasks.
Will Reaganomics or supply-side economics ever be applied in Belgium? In the UK, Ireland, Iceland and Eastern Europe current economic policy has strong supply-side influences. Currently Germany is in a worse socio-economic situation than Belgium. Who knows, some day Germany might return to the successful formula of Ludwig Erhard and create a new Wirtschaftswunder, by applying supply-side economics. Such an example could show the way for Belgium and other countries. 

The Era of Bill Clinton, 1993-2001, and the 1997 Taxpayer Relief Act and the Real Sources Behind the Economic Boom During the 1990's -- and Its Eventual Downfall

Bill Clinton.jpg

(Above: Democratic President Bill Clinton, who raised enacted a major tax hike on the American people in 1993. Courtesy of Wikipedia.)

The passage of the Taxpayer Relief Act in 1997 by the Republican-controlled Congress and signed into law by President Clinton led to many additional changes in the U.S. tax code, and ultimately resulted in a tax cut for many Americans.  However, the piece of the new legislation that was met with both positive and negative attention was the Child Tax Credit.  While previous tax codes included various tax credits, this particular tax credit was very different from any other and set a new precedent for future tax policies at the federal level.  This was because the Child Tax Credit actually allowed for a refund for low income families who owed less in taxes than the value of credit, for each child in their family.  For many families, instead of having to pay taxes as citizens of the United States, they would actually receive checks from the federal government instead.  Thus, after all the changes President Reagan made toward reducing the rate of federal spending on government entitlement programs and various subsidies, President Clinton had returned the country back to the perpetuating of the welfare states that had once been prevalent some three decades earlier.

Prior to 1997, most tax relief was provided through either new tax deductions or increased tax exemptions, or just plain lower tax rates.  Those opposed to the Act claimed that this was the President's newest camouflaged spending program, operating under the guise of the federal tax system.  After the 1993 tax increase, additional changes that affected the taxes individuals would pay altered the fairly equal balance based on income and consumption more toward the consumption tax.  The idea behind these changes was to encourage saving for specific reasons. The graph below shows the effect the Clinton tax hike of 1993 had on the economy: 

Tax Hikes Dampened Economy in the 1990s, While Tax Cuts Spurred Growth

This debunks the Left's claims that the average American family was better off after the tax hike in 1993 than it was before. The current president, Barack Obama, bases current policy of raising income tax rates across the board on the premise that the economy of President Clinton grew, and the President infers that the economy can grow today likewise despite this practice.  

However, the Heritage Foundation debunks this myth perpetuated by today's Democrat in the White House:
A favorite liberal argument is to attribute the economy’s strong performance during the 1990s to President Clinton’s economic policies, chief among which was a huge tax increase. Clinton signed his tax hike into law in September 1993, the same year he took office. It included an increase of the top marginal tax rate from 31 percent to 39.6 percent; repeal of the cap on the 2.9 percent Medicare tax, applying it to every dollar of income instead of being capped to levels of income like the Social Security tax; a 4.3-cent increase in the gas tax; an increase in the taxable portion of Social Security benefits; and a hike of the corporate income tax rate from 34 percent to 35 percent, among other tax increases.
The economic defense of the Clinton tax hikes does not hold up against the historical facts. The economy did exhibit strong economic growth during the 1990s, but rapid growth did not occur soon after the tax hike—it came much later in the decade, when Congress cut taxes. After the 1993 tax hike, the economy actually slowed to a point below what one would expect, considering the once-in-a-generation favorable economic climate that existed at the time.
As for the overall economic recovery—that started well before President Clinton took office. In January 1993the economy was in the 22nd month of expansion following the recession from July 1990 to March 1991.
In addition to coming into office in the midst of an economic expansion, Clinton also benefited from a very unusual confluence of events that created a remarkably favorable environment for rapid economic growth:
  • The end of the Cold War brought a sigh of relief to the world and a powerful dose of growth-enhancing certainty to the global economy.
  • The price of energy was astoundingly low, with oil prices dropping below $11 per barrel and averaging under $20 per barrel, versus $100 per barrel today.
  • The Federal Reserve had tamed inflation to an extent previously thought impossible, with inflation averaging 2 percent during the Clinton Administration.
  • The biggest wind at the economy’s back was, of course, a tremendous set of new productivity-enhancing information technologies and the explosion of the Internet as a powerful tool for commerce and communication, further increasing productivity.
  • With these factors clearing the way, the economy should have displayed spectacular and accelerating growth in the years immediately after Clinton entered the White House, but growth of that magnitude did not materialize until later in the decade.
  • From 1993 until 1997, the economy grew at a pedestrian 3.3 percent per year. While solid, this growth was certainly not exceptional. During that same time, real wages declined, despite the perception that the 1990s were an era of unmitigated abundance.
It was not until after a 1997 tax cut, passed by the Republican-led Congress—a tax cut President Clinton resisted but ultimately signed—that the spectacular growth kicked in. While small in revenue impact, the 1997 cuts included a reduction of the capital gains rate from 28 percent to 20 percent. This opened the capital floodgates necessary for entrepreneurs to develop, harness, and bring to market the wonders of the new information technologies.
Business investment skyrocketed after the tax cut, and the economy grew at an annualized rate of 4.4 percent (33 percent faster than after the Clinton tax hike) from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time.
Altogether, how much worse did the economy perform because of the Clinton tax hike? The data from the period do not provide a clear answer. What is clear is that the economy performed well below reasonable expectations given the favorable conditions existing in the years after the tax hike—and took off after the often-forgotten tax cut. 
This was due in no small part to the Republican-controlled Congress keeping the President in check, as well as other factors such as the "U.S. Tech Boom," low interest rates and inflation, combined with the fall of the Soviet Union in 1991.  The latter resulted in the Clinton administration cutting spending on national defense and intelligence, which led to several terrorist attacks on American soil, most notably the Oklahoma City Bombing and the attacks on September 11, 2001.  However, by the end of Clinton's presidency, economic growth began to slow down, and with the election of George W. Bush in 2000, taxes would be cut again within two years by $1.35 trillion, according to the Cato Institute.

President George W. Bush's Tax and Economic Record:

A portrait shot of a smiling older male looking straight ahead. He has short gray hair, and is wearing a dark navy blazer with a blue styled tie over a white collared shirt. In the background is an American flag hanging from a flagpole.

(Above: 43rd President of the United States George W. Bush, who served from 2001-2009.  Courtesy of Wikipedia.)

Tax cutting was a key policy for George W. Bush when he was elected President in 2000.  Under President Clinton in the 1990's, there was only one real tax cut bill that was signed into law.  Thus, when Bush came to power in 2001, there was pent-up demand for tax cuts, and the administration soon delivered.  

Some of the key elements in the Bush tax cuts were:
  • A reduction of individual income tax rates from 15%, 28%, 31%, 36%, and 39.6% to 10%, 15%, 25%, 27%, 33%, and 35%.
  • An increase in the Child Tax Credit from $500 to $1,000.
  • A phased-in reduction in estate taxes, and a one-year repeal in 2010.
  • A big expansion of tax-favored retirement savings plans.
While some of the tax changes in the 2001 bill were not growth-oriented, the rate cuts and savings provisions were important reforms.  But the 2001 law included complex rules regarding when certain tax changes would be in effect.  The estate tax was repealed in 2010, but then reinstated in 2011.  All the 2001 tax cuts expired at the end of 2010 when the Obama administration elected not to extend them.  During his presidency, the economy has continued to suffer despite pumping more than $700 billion into the economy through his economic stimulus package.

The Bush tax cuts promoted economic growth.  Liberals also like to argue that the Bush tax relief hurt the economy and cost jobs. Again, the evidence runs to the contrary.Unlike President Clinton, who entered office with a strong economic wind at his back, President Bush came into office on the precipice of a recession caused by the bursting of the “dot-com” bubble. President Bush entered office in January 2001; the recession began in March. In addition to the recession, the peaceful conditions President Clinton enjoyed reversed course. The terrorist attacks of 9/11 brought on the beginning of the war on terrorism. There was no growth-enhancing advancement comparable to the tech boom to further boost the economy; energy prices were creeping up. Instead of swimming with the current, the economy was now fighting squarely against it to achieve even modest growth.  Faced with this new reality, President Bush pushed for tax cuts to revive the economy and set it on a stronger foundation for economic growth.  In June 2001, President Bush signed into law the first wave of tax cuts. The relief included reductions of marginal income tax rates and tax relief for families, for example, doubling the child tax credit from $500 to $1,000. To reduce the budgetary impact, Congress phased in the tax cuts over several years.  Since the tax cuts were slow to go into effect, they were slow to help the economy. In fact, the economy continued to lose jobs after the tax cuts even though the recession officially ended in November 2001.  Realizing the error of its ways, in May 2003 Congress accelerated the tax cuts to make them effective immediately. In addition to reducing marginal income tax rates, Congress also lowered the tax rates on capital gains and dividends.  It was at this point that economic growth took off. From May 2003 until December 2007 (when the recession caused by the global financial meltdown occurred) the economy created 8.1 million jobs, or 145,000 a month. By comparison, after the beginning of the 2001 recession and before the 2003 tax cuts, the economy was losing 103,000 jobs a month.


Here is a graph supporting this data:


2003 Bush Tax Cuts Prompted Surge in Employment

(Courtesy of The Heritage Foundation)

Those opposed to the tax relief argue that it blew a hole in the budget and dramatically increased deficits. Again, a look at the numbers disproves that argument. While receipts were below the historical level of 18 percent of GDP in 2003 as a result of the sluggish economy, they rebounded to above their historical norm by 2006 and grew further above their historical level in 2007. They clearly would have continued growing thereafter had it not been for the housing bust and global recession.
Tax revenue rebounded quickly because the tax cuts encouraged economic growth by increasing the incentives to work, save, invest, and take on new risk. These are the basic elements of economic growth. When those activities increase, tax revenues increase because more Americans work and earn more money. From 2003 to 2007, the number of tax filers rose by 9.6 percent, and taxable income, by 44 percent. By contrast, in the last four years of the previous expansion, from 1997 to 2001, these numbers grew by 6.4 percent and 23.6 percent, respectively. With income and taxpayers growing at such a fast clip it is not hard to see why tax revenue did not suffer from the tax cuts.
The chart below is very telling when defending the Bush tax cuts' effects on the U.S. economy and unemployment:
Number of Taxpayers and Taxable Income Grew Faster During Bush's Expansion than Clinton's
 (Courtesy of The Heritage Foundation)
To be clear: The Bush tax cuts did not pay for themselves. Revenues, on balance, are lower as a result of the Bush tax relief. However, the Bush tax cuts did accelerate the recovery markedly, and they did, and still do, create the possibility of a permanently stronger economy which, in turn, means the net revenue cost of the Bush tax cuts is far less than the traditional static score implies.
In 2008, the last full year of the Bush presidency, the economy entered a severe recession brought on by the global financial meltdown. The 2001 and 2003 tax relief packages had made the economy more resilient against economic shocks, but no tax policy can protect an economy against the storm that struck that year. The tax cuts certainly did not contribute in any way to recession, nor can anyone credibly claim that these policies had something to do with the financial implosion that was global in origin and impact.
Even with a recession at the beginning of his presidency and another severe recession at the end, the economy still created more than 1 million net jobs during President Bush’s tenure. The tax cuts he pushed Congress to pass are a major reason for that job growth.
However, there were weak areas to the Bush tax policy.  In 2002, with concerns raging about the economy in the wake of the recession, Congress enacted a "stimulus" tax cut bill.  The main provisions allowed for business to "expense," or immediately write-off, 30% of the cost of equipment  purchases.  This was later increased to 50%.  Expensing is an important step toward converting the income tax into a consumption-based tax.  It simplifies the tax code and spurs economic growth by removing taxes on the normal return to investment.  Unfortunately, the partial expensing was only temporarily implement and is now expired.
In 2003, under President Bush's leadership, Congress passed a further package of pro-growth tax cuts.  The centerpiece was a cut in the top capital gains rate from 20% to 15% and a cut in the top individual rate on dividend from 35% to 15 %.  Tax experts had long discussed the distortionary effects of the excessive taxation of teh corporate equity in the U.S. tax code.  Under the 2003 law, the capital gains and dividend cuts expired for good after 2008.
In 2004, there had been increasing concerns about the uncompetitiveness of the complex and high-rate U.S. corporate income tax.  The U.S. corporate tax is one of the highest in the world, and it has remained unchanged while other nations around the world have made dramatic cuts.  The chairman of the House Tax Committee, Bill Thomas, was determined to deal with the problem, and he pushed for major corporate tax reforms.  However, what wound up being signed in 2004 was a "mixed bag."  Some important simplifications in the treatment of foreign income by multinationals were included, but the federal corporate rate was not cut except certain favored industries.  
In 2005, the main tax event was the appointment by President Bush of a commission to look into major tax reforms.  The commission produced a very good report that described two detailed and workable plans for the income tax.  (Tax Reform Panel.gov)  Unfortunately, the plans were not as far-reaching as a flat tax, but did include rate cuts, simplifications, as well as pro-savings provisions.  
In 2006, the Republicans tried to tie up loose ends from prior tax legislation.  They voted to extend the capital gains and dividend until 2010.  But they were less successful in making the estate tax appeal permanent, as the repeal repeatedly failed in a June Senate vote.  
  • In 2007, a family of four earning $40,000 saved an average of $2,053.The President's tax relief was followed by increases in tax revenue.  From 2005 to 2007, tax revenue grew faster than the economy.  The ratio to receipts to GDP rose to 18.8% in 2007, above the 40-year average.  Between 2004 and 2006, capital gains realizations grew by approximately 60%.  Growth in corporate income tax receipts was especially strong during the President's second term, nearly doubling between 2004 and 2007 and contributing to a full percentage point to the increase of the total federal receipts-to-GDP share.The President's tax relief has shifted a larger share of the individual income taxes paid to higher income taxpayer.  
  • With nearly all of the tax provisions in effect, the President's tax relief reduced the share of taxes paid by the bottom 50% of taxpayers from 3.9% in 2000 to 3.1% in 2005, which at the time of this web site's last update, was the last time the data had been available.  The share the top 10% paid increased from 46.0% to 46.4%.President Bush led the response to the Financial Crisis of 2008.  The years of economic growth was ended by turbulence in the housing and credit markets, which led the President to respond.  Bush addressed the issue by leading a bipartisan passage of an economic growth package geared toward booting consumer spending and encouraging businesses to expand.  This plan returned more than $96 billion to American taxpayers.  
  • When the financial crisis intensified, the President led the passage and implementation of a rescue plan to help address the root of the issue by protecting the deposits of individuals and small businesses, and helped enable credit to be available to individuals and families.  Moreover, he convened a summit of the leaders of the G-20 to discuss the efforts to strengthen economic growth, deal with the financial crisis, reaffirm a commitment to free market principles, and lay the foundation for reform so that a similar crisis does not happen again.
  • The Administration warned of the risk that government-sponsored enterprises (GSE's) Fannie Mae and Freddie Mac posed to America's financial security in 2001.  Bush's first budget warned of "financial trouble of a large GSE could cause strong repercussions in financial markets."  In 2003, the Administration began calling for a GSE regulator.  Despite resistance from Congress, the President continued to call for GSE reform until Congress finally acted in 2008 to provide the additional oversight the President called for five years earlier.  Unfortunately, the reform came too late to prevent systematic consequences.
However, what the Bush White House's website failed to mention is the Emergency Economic Stabilization Act of 2008.  This is what the American people have come to know as the government bailing out the U.S. financial system, and was a law enacted in response to the subprime mortgage crisis by authorizing the U.S. Treasury Secretary under President Bush Henry Paulsen to spend up to $700 billion to purchase distress assets, especially mortgage-backed securities, and supply cash directly to banks.  The funds for purchasing direct assets were most directed to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases.  Both foreign and domestic are included in this program.  The Federal Reserve also extended help to American Express, whose bank-holding application it had recently approved.  

To conclude Bush's tax record and record on the economy, there are shortcomings in his tax policies.  Most notably, the tax code grew more complicated by leaps and bounds.  Also, lawmakers had not repealed the alternative minimum tax, a parallel income tax systems that hit American families by the end of the decade.

Another major shortcoming was Bush's failure to make the tax cuts permanent.  Nearly all of the Bush tax cuts -- individual rates, capital gains, dividends, and estate tax -- expired in 2010 and most were not renewed by the Obama administration.  

Republicans have their own policy of big spending to blame.  Tax cutting has been made more difficult because Bush was the most "profligate" president in several decades at the time he served as president. Between 2001 and 2006, federal spending increased 45% and deficits soared.  What the Cato Institute failed to tell its readers was that the Bush administration had to dramatically increase spending on the military because of the war on terror and the Iraqi War, which turned out to be unwarranted.  It is tougher to convince a few centrist Democrats in the Senate to go along with making federal tax cuts permanent when government is growing exponentially. During the Bush administration, the federal deficit skyrocketed.  Here is a chart discussing Bush's contributions to the deficit by each year of his presidency:
Recent additions to U.S. public debt
Fiscal year (begins
10/01 of prev. year)
Value% of GDP
2001$144.5 billi
on
1.4%
2002$409.5 billion3.9%
2003$589.0 billion5.5%
2004$605.0 billion5.3%
2005$523.0 billion4.3%
2006$536.5 billion4.1%
2007$459.5 billion3.4%
2008$962.0 billion(proj.) 6.8%
In the 10/2008 - 9/2009 Fiscal Year, the federal deficit was estimated at approximately $11,909,829,000.00.  This means the debt more than doubled from the 10/2000 - 9/2001 Fiscal Year, which was when Bush took the oath of office, at which time the deficit was at approximately $5,807,463,000.00.

The Tax and Economic Record of Barack Obama

(Above: This is what I have always associated President Obama as being: "a card-carrying communist.")

"When you spread the wealth around, it's good for everybody."
                                -Barack Obama,  in reply to Samuel J. Wurzelbacher, aka. "Joe the Plumber," in 2008

During the first year of the Obama administration, the President moved forward with plans to ram an $800 billion economic stimulus package with the hope of pumping money into the economy to get it "out of a big rut." Strangely, this is a return to the principles of Keynes, whose macroeconomic came to be widely-accepted between the 1930's and the 1970's.  Keynes' philosophy stated that if government manipulate or impose temporary tax breaks, they could scientifically managed the economy and smooth out the "booms/bust" business cycles.  Many economists thought that there was a trade off between inflation and unemployment that could be exploited by skillful policymakers.  If unemployment was rising, the government could stimulate aggregate demand to reduce it, but with the side effect of somewhat higher inflation. Keynesianism as a widespread practice internationally ended in the 1970's.  Government spending and deficits ballooned, but result was higher inflation, not lower unemployment.  These events, and the rise of Milton Friedman and his economic philosophy of monetarism, ended the belief in an unemployment-inflation trade off.  Friedman's research showed that the Great Depression was caused by a failure of government monetary policy, not a failure of private markets, as Keynes had claimed.  

And yet, the American people are being taken on a trip back in time to the days where high taxation and heavy government intervention in the free market led to a the two worst economic downturns in the 20th Century for not just the U.S., but for the rest of the Western world. 

Thus, the economy continues to stagnate under President Obama despite his attempt at rekindling America's old flame in the form of Keynesianism.  Though unemployment has dropped some -- down to 7.5% -- that is only a marginal decrease over period of three and a half year when the rate had reach somewhere in excess of 8.9% in 2009.  However, rather than cutting taxes or extending the Bush tax cuts in order to encourage economic growth, he chose to let them expire in 2010 and in 2013, began the time-honored tradition of the Democratic party by raising them.  When he was ran for his second term, he promised to only raise taxes on the wealthiest Americans.  With the Fiscal Cliff compromise with Republicans in Congress as well as his proposed budget, he has successfully managed to convince the American people what a liar he is by proposing to not only increase taxes on the wealthy, but the middle class as well.  The problem with simply increasing taxes on the wealthiest Americans is that most of the money is made by the middle class since there are more of them.  Hence, when his socialist policies result in the need for massive increases in revenue as the eventual implementation of the Affordable Health Care Act (Obama Care), he can only turn to one other source of tax revenue, and that is the middle class.

In the U.S., jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained. (Courtesy of The Washington Post)

The current Seasonally Adjusted Unemployment Rate for April 2013 (released May 3rd) is 7.5% down from 7.6% in March, 7.7% in February and 7.9% in January and the unadjusted Unemployment Rate is the same at 7.1%: (Courtesy of Unemployment Data.com)

Unemployment Rate April 2013
Current US Unemployment Rate Chart
(Click for Larger Image)

The key question of course is whether we can actually trust the numbers coming out of the BLS. I’ve been saying for a while that the unemployment numbers don’t match up with the employment numbers. And in January the BLS decided to “fix” this problem so they went back to July of 1991 and changed the employment numbers. How the number of people employed could have changed that far back is beyond me.
Over the last 15 months there are 4.837 Million more jobs which sounds good until you realize that the population has increased by over 2.9 million. So the “Net Increase” is 1.93 million.  To recap:
Unadjusted U-6Unadjusted U-3Adjusted U-3EmploymentCivilian
Population 
Net  
December 201115.2%8.3%8.5%133.292 Million240.584 Million
December 201214.4%7.6%7.8%135.560 Million244.350 Million
January 201315.4%8.5%7.9%132.704 Million244.663 Million240
February 201314.9%8.1%7.7%133.752 Million244.828 Million
 March 201313.9%7.6%7.6% 134.562 Million244.995 Million
 April 2013 13.4%7.1% 7.5% 135.494 Million245.175 Million
2 mo. Change-1.5%-1%-0.2%1.742 Million 0.347 Million
 1.742-.347=
1.395
15 mo. Change-2.8%-1.7%-0.8%4.837  Million 2.906 Million
 4.837-2.906=
1.931
Historical ContextCurrently the US unemployment rate is 7.6% according to the ”Current Population Survey” (CPS; household survey) and according to the Current Employment Statistics (CES) survey (the Employment Survey) there are 134.48 million people employed down from 135.560 million in December 2012. But somehow this loss of 1 million jobs results in the same unemployment rate in spite of an increase in the population?Discouraged Workers:Back at the peak of the unemployment, there was some discussion in the media about “discouraged workers” U-6 is the broadest measurement of unemployment which includes ”discouraged workers” and part-time workers who would rather be working full-time but can’t find full-time employment.  Back in November 2011 the unadjusted U-6 unemployment rate was 15.0% and in November 2012 just in time for the election it was down to 13.9% but in December 2012 it jumped up to 14.4% and in January 2013 it jumped back to 15.4% (worse than November 2011) in February 2013 it is 14.9% and in March 2013 it is back to 13.9%.See U-6 Unemployment Rate for more information on the broader U-6 unemployment calculation that includes these “discouraged” unemployed and gives a truer picture of the total unemployment situation. Also see the Misery index ( which includes Unemployment Rate+ Inflation Rate).The adjusted unemployment rate in January of 2009 when Obama was sworn in was 7.8%. The current adjusted unemployment rate is 7.6% but in the intervening years the rate reached a peak of  10.1% with an average of 8.91%.  The average unemployment rate during the Bush presidency was 5.3% and during the Clinton presidency  it was 5.2%. In addition to looking at the unemployment rate, I prefer to look at the actual employment rate, which often shows a different picture, in that we can see how many people are actually employed and it is less easily manipulated since the number of people who have opted for retirement or just stopped looking for work is not a factor.  See the Current Employment Data.How the US Government Comes Up with the Current Unemployment RateAccording to the U.S. Bureau of Labor Statistics they don’t actually track the unemployment numbers but instead they base the all important “Unemployment Rate” on a survey. You would think they would collect the numbers from the 50 states who would get them from their unemployment offices. But that is not how it is done. Unemployment rates are calculated based on a random survey called the Current Population Survey (CPS). Instead of calling the main office of 50 state offices, the government  calls up 60,000 households every month and then estimates the unemployment rate based on that sample. According to the BLS:Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months.  This practice avoid placing too heavy a burden on the households selected for the sample.  After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months, and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good.  This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year." (Courtesy of Unemployment Data.com)

Here is what  USA Today says about the Obama record on taxation with regard to the Fiscal Cliff Agreement:
Obama boasts that "middle-class income families" will not have to "pay upwards of $2,000 more in taxes this year."  That's accurate for income taxes, but Obama does not mention that the deal allowed the payroll tax cut to expire.  About 77% of taxpayers will pay more in taxes this year -- nearly $1,200 more for those earning between $75,000 and $100,000, a group that fits square within Obama's broad definition of middle class.
  • Obama says the agreement will reduce the deficit.  In fact, the deficit will increase by about $4 trillion because of the extension of the Bush tax cuts for all but those in the top 1%.  The deal will "reduce the deficit" only compared to what it would have been if the Bush tax cuts had been extended to everyone.
All the president's talk about preserving middle class tax cuts in the just-passed bill to avert the fiscal cliff may give one the impression that, except for the wealthy, people will paying the same amount in taxes this year as last.  But that is not correct.  Left out of Obama's analysis is a temporary, two-year in Social Security payroll taxes was allowed to expire.  As a result, more people will actually pay more in taxes this year.
In some cases, Obama has been clear that the fiscal cliff means an extension of lower income tax rates for middle income workers.  For example, he told reporters on January 1 that under the new law more than 98% of Americans "will not see their income taxes go up."
He made no mention of payroll taxes in that meeting.  Nor is there mention in the White House fact sheet about the fiscal cliff deal.
And in a campaign-style video sent out to supporters, Obama says only that the deal spared middle income households from a bruising tax hike.
Here is a quote from President Obama from January 2 of this year:
"You know my top priority has been to prevent a tax hike that could have hit 98% of Americans in 2013.  Because the last thing middle-class families can afford right now would be to be to pay upwards of more than $2,000 more in taxes this year."
The article says that while it is true that the deal spares middle-income taxpayers the worst of the fiscal cliff tax hikes and that this will result in revenues of $620 billion due to allowing Bush-era tax cuts for those making $400,000 a year and couples earning $450,000 annually to expire (this affects 1% of Americans, not 2%, as Obama said), for people beneath that income threshold, their income tax rate will remain the same.  But the video may lead some to believe that if they do not earn upwards of $400,000 per year, they will not see a tax increase.  This is misleading the American public, and I am sure that when the American people saw their first paycheck this year, it was noticeably lighter.  But here is an especially harrowing tale told by the non-partisan Congressional Budget Office (CBO): if all the expiring tax cuts were allowed to go away, the nation would slide into another recession and the unemployment rate would rise to 9.1%.

As for President Obama's claim that the fiscal cliff deal will reduce the deficit, that depends on one's basic assumption.  The deficit is smaller than if the Bush tax cuts had been extended to everyone, including the wealthy.  But it is larger than if the Bush tax cuts had been allowed to expire for everyone as scheduled at the end of 2012.

Among budget experts, it is the difference between starting with the baseline of "current policy" -- which assumed that the Bush tax cuts were extended to everyone, as in 2010 -- and "current law," which called for the expiration of the Bush tax cuts on January 1, 2013.

Obama is trying to have it both way, as he "toggles" between the two assumptions.  By assuming the tax cuts would expired for everyone without his action, the president claims credit for averting an income tax for middle-income taxpayers.  But, in order to take credit for cutting the deficit, Obama is assuming that the tax cuts would have been extended for everyone. (USA Today, January 5, 2013, written by Robert Farley)

But in April, Obama changed his mind. The middle-income taxpayers the president had championed throughout the process of his fiscal cliff battle with the Republicans on Capitol Hill had the screws put to them with his decision to raise income taxes on that segments of the public.  Here are some more details from the Conservative Daily News:
  • Obama has proposed more than $800 billion in new taxes, which forms the centerpiece of his new budget plan with some $1.2 billion in cuts to future spending growth.  Neither Republicans or Democrats seem willing to support the plan. This indicates the administration's plans to move the government toward an economic principle known as austerity, which in a nutshell is when governments institute policies to reduce budget deficits during adverse economic times by means of spending cuts and increased taxes.
  • The Democrats in Congress say the tax increases do not go far enough and therefore point to the liberal plan from the Senate that raises taxes by more than twice what the president's proposal calls for.
  • Republicans see no spending cuts at all.  The budget does not reduce spending from year-to-year, only at the rate at which spending will increase every year.  In fact, Obama's budgets adds $1 billion for 15 manufacturing institutes, additional funding for high-speed rail, and free preschool for low-to-moderate income families.
  • Both parties are concerned about the tax increases for the the middle class.  
The political publication The Hill also says:
  • President Obama's 2014 budget would raise income taxes on the poor and middle class despite his repeated vows not to increase taxes on those earning $200,000 annually.
  • The non-partisan Tax Policy Center said poor households making less than $10,000 annually would see an increase in taxes of approximately $18 if Obama's budget were enacted.  Households making as little as $30,000 a year would pay an average of $61 more in 2015 and $54 in 2023.  
  • The Obama budget contains a new measure of inflation known as the chained consumer price index and new tobacco laws, both of which would hit the middle class.
The Tax Policy Center's Howard Gleckman wrote on his blog:
"His proposed increase in the tobacco tax would disproportionately affect low and moderate-income taxpayers, who spend a bigger share of their income on cigarettes than the wealthy.  However, middle-income households would benefit from two other tax changes: a more generous child a dependent tax credit, and Obama's proposal to extend those relatively generous rules for the earned income credit, child tax credit, and education credit."
The TPC found that higher income individual would pay the bulk of the $1.1 trillion under the Obama proposal, which would eliminate tax breaks while keeping tax rates the same or lowering them.  The budget would cap the value of deductions at 28% and establish a minimum tax known as the Buffet Rule.

"For high-income taxpayers, the news is nearly all bad," said Gleckman.

Households making more than $1 million a year would see their income taxes go up by 2.3%, or $83,000 by 2015.  By 2013, their income taxes would be $93,000.

To conclude the article, it says that the top 1% of wage earners would pay 67.2% of the taxes in the president's budget by 2023.  Those making less than $30,000 will see a net tax cut, and upper-middle class taxpayers earning between $100,000 and $200,000 will experience an increase in 0.2% in taxes of an estimated $382 by 2023.

The Obama administration got itself into major trouble fiscally when it rammed through the Affordable Health Care Act in 2009.  When the case was brought before the U.S. Supreme Court, it ruled in favor of Obama Care because as an individual mandate -- the requirement that the American people buy health insurance or pay a fine -- is constitutional as a tax. Chief Justice John Roberts, who was appointed to his post by President George W. Bush, said in his statement after he broke ranks with the conservative justices in the High Court:
"Because the Constitution permits such a tax, it is not our role to forbid it, or pass upon its wisdom and fairness."
This brings to question, to close this section on Obama's taxation policies, what exactly constitutes a tax?

The current national debt clock, according to Brillig.com's numbers, is at $16,768,396,492,194.91, up by about $5 trillion in less than four years since President Bush left office.  In a July 22, 2012 article on Mother Jones, the costs that will be incurred by the federal government are revealed:
"On the one hand, the federal government saves money if there are fewer people enrolled in Medicaid.  So that would bring the cost of Obamacare down.  On the other hand, some of the people who are no longer going to be eligible for Medicaid will probably choose to buy subsidized private insurance via the exchanges.  That's more expensive than Medicaid would have been, which raises the projected cost of Obamacare.
"So what is the net cost?  Today, the Congressional Budget Office weighed: 
  • Decreased cost of Medicaid: -$289 billion
  • Increased cost of subsidies: $210 billion
  • Miscellaneous changes: -$5 billion
  • Net difference between 2012-2022: -$84 billion
"So we're saving money.  But wait!  The American Action Forum also released an estimate today, just for the six states that have already promised to opt out, and it looks like this:
  • Decreased cost of Medicaid: -$120 billion
  • Increased cost of subsidies: $195 billion
  • Miscellaneous changes: -$3 billion to +$5 billion 
  • Net difference between 2014-2022: $72-$80 billion
In 2010, The Weekly Standard reported that Obama Care would cost taxpayers over $2 trillion.  The article's source was none other than the same Congressional Budget Office that Mother Jones reported to have stated the American people would actually save money.

Furthermore, Obama Care will probably usher the U.S. economy into another major recession.  On February 13, 2013, Dick Morris wrote an article for Money News stating the following about Obama's economic policies:
"Now that the economy is officially contracting, it's a good time to look back and list the various Obama policies that are causing it.  We do this not in the spirit of blame but rather to point to the corrective steps he needs to take to head off a new recession.
"After several quarters of encouraging but rigged showing the economy growing at a 2 percent clip, the truth is emerging: We are on the verge of a double-dip recession.
"Here's why:
  • Our exports to China are artificially depressed because of Beijing's deliberate weakening of its currency to underprice its good in the U.S. market and to overprice ours in theirs.  Correction: Demand that China stops manipulating its currency and impose taxes on currency exchanges if they don't.
  • Stop insisting on tax increases which fall on small businesses.  Cut spending instead.  The negative multiplier effect of a spending increase is much less than that of a spending cut.
  • Be far more aggressive in expanding oil and gas production.  Our huge oil import bill -- about $400 billion a year -- is dragging our economy down.
  • The current contraction is before the tax increases Obama just passed have hit.  These tax hikes on upper income people will take about $50 billion of demand out of the economy and his 2 percent increase in the payroll tax will take out over $100 billion more.  Correction: Cut spending instead.
  • The rising cost of health insurance due to Obamacare and increased costs of government -- particularly EPA -- regulation.
The Bureau of Labor Statistics -- aka. the B.S. -- will doubtless show unemployment steady at some ridiculously low number like 7.8%.  But University of Maryland economist Peter Morici says that 'labor force participation is lower today than when Obama took office...factoring in discouraged adults and others working part time who would prefer full time work, the unemployment rate is 14.4%.'
"And, around the corner is a likely reduction in the U.S. credit rating by Moody's.
"People ask: How can the Republican Party come back? Because of the impact of Obama's economic policies which will soon be evident even to the most optimistic and obtuse."
And Dr. Milton R. Wolf of The Washington Times said this:
"800,000 jobs.  That's what Congressional Budget Office Director Doug Elmendorf estimated in 2011 that Obamacare will destroy, and the day of reckoning has begun.  In the wake of Mr. Obama's re-election, companies large and small have already begun announcing layoffs, 45 so far, including (but certainly not limited to): Boeing, Hawker Beechcraft, U.S. Cellular, Husqvarna, Caterpillar, Bristol-Myers, and on and on.  Expect more.  Lots more.
"Small businesses are especially vulnerable, particularly without the resources for throngs of lobbyists and lawyers.  A recurring theme is unfolding: "Elections have consequences," said one Las Vegas business owner as he explained that the survival of his company demands that he lay off 22 of his 114 workers.  The Twitter aggregator website Twitcher.com has compiled distraught business owners facing the new normal.  One user tweeted: "I own a small business...as of today, I will be laying off 10 of my 60 workers...Thanks Obamacare."
"These tragic stories are accumulating, and the human toll is devastating despite the administration's assertions of a recovery.  "The private sector is doing fine," claimed the president earlier this year (the article was written on November 12, 2012).  This is fine?  Mr. Obama came into office promising us change, and now he's delivering it: 800,000 layoffs and lost jobs would indeed be some kind of change."
An article from November 12, 2012 on Investors.com proves this theory further in graphs:
  • A higher unemployment rate. Right now, the jobless rate stands at 7.9%, which is higher than when Obama took office and higher than it was when voters tossed Gerald Ford, Jimmy Carter and George H.W. Bush out of office.
  • More unemployed. There are 209,000 more people out of work today than in January 2009. That's a stunning statistic, considering the fact that the recession ended five months after Obama was sworn in.
  • More long-term unemployed. Unlike other economic recoveries, this one has created a bigger pool of long-term unemployed, with 2.3 million more people who've been out of work 27 weeks or longer than there were in January 2009.
  • To put that in perspective, just the number of long-term unemployed added under Obama is bigger than the total number of long-term unemployed in all but a handful of months since 1948.
  • • More people out of the labor force. Obama has also presided over an unprecedented explosion in the number of people who've dropped out of the labor force. Some 7.8 million Americans have stopped looking for work. Because these people don't get counted as unemployed, that has the effect of making the unemployment picture look better than it is.
  • In fact, had the labor force participation rate not dropped under Obama, the unemployment rate today would be 10.6%.
  • More people who can't find full-time jobs. The vast pool of part-time workers also masks the country's unemployment crisis. According to the Bureau of Labor Statistics, nearly 1 million more workers today are working at part-time jobs because they can't find full-time jobs than there were in January 2009. That is hardly a sign of progress, but instead is a sign of a country falling further behind because Obama's stagnant economy can't lift any boats.
On January 8, 2013, Charles Krauthammer wrote for St. Augustine.com:
"The rout was complete, the retreat disorderly. President Obama got his tax hikes -- naked of spending cuts -- passed by the ostensibly Republican House of Representatives. After which, you might expect him to pivot to his self-proclaimed 'principle' of fiscal 'balance' by taking the lead on reducing spending. 'Why,' asked The Washington Post on the eve of the final 'fiscal-cliff' agreement, 'is the nation’s leader not embracing and then explaining the balanced reforms the nation needs?”'
Because he has no interest in them. He’s a visionary, not an accountant. Sure, he’ll pretend to care about deficits, especially while running for re-election. But now that he’s past the post, he’s free to be himself — a committed big-government social-democrat.
As he showed in his two speeches this week. After perfunctory nods to debt and spending reduction, he waxed enthusiastic about continued “investments” — i.e. spending -- on education, research, roads and bridges, green energy, etc.
Having promised more government, he then promised more taxes — on 'millionaires' and 'companies with a lot of lobbyists,' of course. It was a bold affirmation of pre-Clintonian tax-and-spend liberalism
Why not? He had just won Round 1: raising rates. Round 2 is to raise yet more tax revenues by eliminating deductions. After all, didn’t John Boehner offer him $800 billion of such loophole-closing revenues just a few weeks ago?
To paraphrase Churchill on the British Empire, Barack Obama did not become president of the United States to preside over the liquidation of the welfare state. On the contrary, he is dedicated to its expansion. He’s already created the largest new entitlement in half a century (Obamacare). And he has increased federal spending to an astronomical 24.4 percent of GDP (the postwar norm is about 20 percent), a level not seen since World War II.
But this level of spending requires a significantly higher level of taxation. Hence his hardball fiscal-cliff strategy of issuing an ultimatum to Republicans to raise tax rates — or be blamed for a massive across-the-board tax increase and a subsequent recession.
I’ll get you the money by eliminating deductions, offered Boehner. No, sir, replied the president. Rates it must be.
Why the insistence?
(1) Partisan Advantage
As I wrote last month, the ultimatum was designed to exploit and exacerbate internal Republican divisions. It worked perfectly. Boehner’s attempted finesse (Plan B), which would have raised rates but only for those making more than $1 million, collapsed amid an open rebellion from a good quarter of the Republican caucus.
At which point, power passed from the House to the Senate, where a deal was brokered. By the time the Senate bill reached the House, there was no time or room for maneuver. Checkmate. Obama neutralized the one body that had stymied him during the last two years.
(2) Ideological Breakthrough
Obama’s ultimate ambition is to break the nation’s 30-year thrall of low taxes — so powerful that those who defied the Reaganite norm paid heavily for it. Walter Mondale’s acceptance speech at the 1984 convention promising to raise taxes ended his campaign before it began. President George H.W. Bush’s no-new-taxes reversal cost him a second term.
On this, too, Obama is succeeding. He not only got his tax increase passed. He did it with public opinion behind him.
Why are higher taxes so important to him?
First, as a means: A high-tax economy is liberalism’s only hope for sustaining and enlarging the entitlement state. It provides the funds for enlightened adventures in everything from algae to Obamacare.
Second, as an end in itself. Fundamentally, Obama is a leveler. The community organizer seeks, above all, to reverse the growing inequality that he dates and attributes to ruthless Reaganism. Now, however, clothed in the immense powers of the presidency, he can actually engage in unadorned redistributionism. As in Tuesday night’s $620 billion wealth transfer.
Upon losing the House in 2010, the leveler took cover for the next two years. He wasn’t going to advance his real agenda through the Republican House anyway, and he needed to win re-election.
Now he’s won. The old Obama is back. He must not be underestimated. He has deftly leveraged his class-war-themed election victory (a) to secure a source of funding (albeit still small) for the bloated welfare state, (b) to carry out an admirably candid bit of income redistribution and (c) to fracture the one remaining institutional obstacle to the rest of his ideological agenda.
Not bad for two months’ work."

Look at the liberal-leaning CNN graph below at unemployment:

Unemployment 
Unemployment

The unemployment rate surged to 10% in Obama's first year in office and has fallen gradually since then, landing at 7.8% as of December. Part of the decline has come as some Americans have gone back to work, but also because many workers have dropped out of the labor force.  (Courtesy CNN.com)

I am sure that since the unemployment rate has dropped a grand total of .3% since December 2012, the President will no doubt take credit for it.  But Mike Obel of International Business Times reports in an article from April 13, 2013 that we are already in the another recession according to one note economist:

Nominal GDP
Photo: Economic Cycle Research Institute
Nominal GDP
“We are not seeing signs of an imminent growth upturn that so many claim to see,” the report concludes.
In many ways it doesn’t matter if the U.S. is in recession or not; after all, even the economy’s most optimistic observers are having a difficult time putting a rosy hue on its recent performance. So, if there is at least consensus among economists that serious challenges remain before the U.S. can return to full economic health, two critical questions are raised:
  • Has the federal government failed in its efforts to overcome the worst downturn since the 1930s or is the U.S. and indeed the rest of the world facing structural and fundamental economic forces that are impossible to mitigate with old ideas?
  • What should businesses and investors do in this type of confounding economic environment?
As the slow recovery or recession tightens its hold on the U.S. economy, an increasing number of experts are reaching the conclusion that Washington bears some blame for the failure of the economy to rebound. For one thing, they argue, the government’s spending initiatives have diverted capital from employers and entrepreneurs. And the Federal Reserve’s lavish money printing has buoyed too-big-to-fail banks, super-charged U.S. stock markets and punished savers -- while failing to lend to businesses sufficiently enough to grow the economy substantially.
ECRI is in the minority in saying that the U.S. is in recession currently, but the group’s conclusions shouldn’t be taken lightly, no matter how unpopular those conclusions are. They’ve been accurate before when others thought differently. Here’s what the New York Times wrote in 2011 about ECRI: “Over the last 15 years, (ECRI) has gotten all of its recession calls right, while issuing no false alarms.”
And then there is the proliferation of costly regulations. The Obama administration has approved far more than [George] Bush did in his first three years in office. According to a report from the [White House Office of Information and Regulatory Affairs] report, Obama approved 37 “major” regulations between Jan. 20, 2009, when Obama was sworn into office and Sept. 30, 2011, including 29 that cost more than $100 million, according to FactCheck.org. 'During a similar span at the start of the Bush administration, Bush had approved nine — six of which cost more than $100 million. The estimated cost of Obama’s major regulations also far outweighed the cost of major regulations approved by Bush, $18.8 billion to $4.3 billion,' FactCheck.org said.
It estimates that the cost of Obama's major regulations cost $18.8 billion, compared with $4.3 billion for Bush.
Indeed, the World Economic Forum noted Washington's increasing tendency to meddle in the business sector when it explained why it lowered its rating of the U.S. over the last three years from No. 2 to No. 5 in its annual ranking of global competitiveness. 'The business community remains concerned about the government’s ability to maintain arms-length relationships with the private sector and considers that the government spends its resources relatively wastefully,' the WEF wrote.
This point of view is amplified by Salim Furth, a senior policy analyst at the Heritage Foundation, who attributes the economy’s continuing weakness to high fixed costs, which inhibit startups -- the main source of new hiring -- from taking on more workers. “With new regulations and business requirements in health insurance, small-business finance, environment, energy and tax compliance, not to mention the ever-expanding reach of state licensure boards, it is expensive to open a business,” he writes. “High fixed costs and onerous regulations are textbook ‘barriers to entry.’”

To be sure, more liberal, Keynesian economists, who believe that government spending is a strategic weapon in the fight against unemployment and stagnation, contend that the Obama administration and the Fed have not gone far enough to jump-start the economy with their stimulus and monetary initiatives.
'After successfully arresting the economy’s free-fall with expansionary fiscal and monetary policy, policymakers’ failures on the fiscal side have exacerbated the anemic economic recovery in the United States,” said Andrew Fieldhouse, federal budget policy analyst with the progressive Economic Policy Institute, who has elaborated on his views in a paper with co-author Josh Bivens.  
'The United States is mired in a liquidity trap and depressed $975 billion (5.8 percent) below potential output -- in this context expansionary fiscal policy is the only means of ensuring a full economic recovery and avoiding a Japanese-style lost decade (we’re already half way there in terms of output, more than a decade there in terms of middle class incomes)," he said. "The pace of trend U.S. economic growth has markedly decelerated as expiring fiscal stimulus has been replaced with austerity, and growth prospects for 2013 imply renewed labor market deterioration, particularly if sequestration remains in effect.'
But while there is some historical evidence for the effectiveness of that type of approach, much of it is decades old, coming from a time when the U.S. had an insular economy and virtually every dollar rolled into the money supply stayed in the country to pay for consumer purchases, personal and corporate investments, wages, and commercial or agricultural production; this government money directly impacted economic growth. In a globalized economy, however, Keynesian principles are not that easy to apply effectively as they once were.
For example, when the government pours money into the economy now, much of it ends up being spent on products made in other countries; in a sense, the money is exported, often to return to the U.S. as currency used by overseas investors to buy American treasury bonds that fund the deficit. That’s the simplest illustration of globalization’s impact on national economies and how difficult it is these days to address local economic concerns with local and traditional solutions.
Add to this the complexity and interwoven relationships involved in international derivative transactions, currency swaps and other tangled and unfathomable equity and capital arrangements, and it’s little surprise that government economic policymakers are increasingly feeling hamstrung and powerless.
The impact of globalization has produced an intriguing but little-known long-term drift toward economic weakness in the developed world that takes at least some of the heat off the government for its inability to drive greater growth over the last four years.
At least since the 1970s, because of structural changes in global economic fundamentals, “growth in GDP and jobs has been stair-stepping down in successive economic expansions,” ECRI’s Achuthan told IBTimes. He elaborates on this in a 2012 study and concludes that the U.S. economy and its cousins in Europe can expect more frequent recessions in the future followed by less than satisfactory rebounds. 
That may offer some answers to economists like Gluskin + Sheff's Rosenberg, who are perplexed by the current weak recovery despite economic activity that would have in the past generated robust overall gains.
'This includes the wealth effect [from the stock market]," says Rosenberg, "the wonders of shale gas; the manufacturing renaissance; more than four years of 0 percent policy rates; and a tripling of the Fed balance sheet. This includes all the bailout stimulus. It includes the ballyhooed housing recovery. And it includes four straight years of $1 trillion deficits. Epic.'
In another statement by Professor Peter Morici, he says the following about the collusion between the President and the Federal Reserve (Courtesy of UPI):
"COLLEGE PARK, Md., April 18 (UPI) -- Anti-growth policies continue to frustrate the aspirations of working Americans. The U.S. economy is likely growing at less than 2 percent in the second quarter, making prospects for a better job market remote.
Higher payroll taxes and income taxes paid by the wealthy took away $165 billion in purchasing power. Consumers reacted, but with a lag, because they need to keep driving to work and feeding their children. Now car dealers and shopping malls report slowing sales.
Overall the fiscal drag of about $165 billion in higher taxes and another $44 billion in federal outlays mandated by sequestration are subtracting a tidy sum from aggregate demand but the focus on short-term budget policies fails to reckon with a tougher issue -- before these, even with record government spending and rock bottom interest rates, the economy has averaged only 2.1 percent growth since mid 2009.
Simply, what was broke and caused the financial crisis hasn't been fixed.
The $500 billion trade deficit -- mostly on oil and with China and Japan -- drags on demand for U.S. goods and services about three times more than recent tax increases. Drilling bans and restrictions off the Atlantic, Pacific and Gulf of Mexico coasts and in Alaska, and the reluctance of the Obama administration to bring meaningful pressure on China and Japan to fairly value their currencies, make significant relief unlikely.
By contrast, the Reagan recession was just as deep and wrenching as the Obama recession but President Ronald Reagan accomplished 5.3 percent growth over the comparable period.
Banking is increasingly concentrated on Wall Street with the top five or six firms controlling about half of all deposits nationally. Even as the Fed pumps record amounts of money into the economy, these mega-banks have difficulty assessing local business projects. Small businesses that formerly relied on independent regional banks constantly complain "banks will give us a loan when we don't need one."
Big banks are happy to lend to multinationals like GM but much less so to their suppliers and they are hamstrung by litigation and adopting to excessively cumbersome Dodd-Frank regulations.
They aren't alone -- manufacturers complain that federal and state regulators make building, running and hiring increasingly difficult. Either chief executive officers can spend their best talent building their businesses or fencing with regulators and in court -- the Obama administration has made that choice for them.
Obamacare ladles on mandates, taxes and higher health insurance premiums, leaving consumers with fewer dollars to spend and making businesses of all sizes even more reluctant to hire.
Now the U.S. Energy Department is considering boosting liquefied natural gas exports, when keeping the new bounty from shale deposits at home to boost manufacturing would increase gross domestic product and employment much more.
The Federal Reserve -- by buying massive amounts of Treasury and mortgage backed securities -- has kept the big banks profitable and boosted the housing market. But rock bottom interest rates allow banks to "earn" profits and pay big bonuses with virtually free money.
This puts off the necessary and inevitable restructuring of U.S. banking -- investment houses must be separated from commercial banks to reduce systemic risks and large depositories like Bank of America have too many layers of bureaucracy that regional banks don't have. Those make loans scarcer, more expensive and cumbersome to obtain than they need to be.
The housing market continues to recover but new home construction is less than 3 percent of GDP and cannot power a recovery.
Moreover, easy Fed policies are creating new bubbles in big city markets -- rock bottom interest rates are elevating prices above what incomes will sustain when the Fed takes its foot off the accelerator. Asset bubbles are appearing in other markets -- stock, corporate debt and agricultural land.
In the near term, the Fed can keep the economy growing at a modest pace but without better regulatory, healthcare, trade and energy policies, Americans face slow growth, higher taxes and stagnant or falling wages.
So, when it comes to the U.S. Department of Labor reports, do not believe everything you read.

In addressing Obama's dangerous tango with economic austerity, Michael Hirsh of National Journal writes this:
"What was Jacob Lew thinking? In his second major trip as Treasury secretary, he toured Europe this week, lecturing the troubled eurozoners about the dangers of 'austerity.' For all the seriousness with which his words were taken, Lew might as well have been an itinerant clown vagabonding across the Continent to provide comic relief--the Germans and French do need that--and he was quite a soggy one at that.
Back home, at precisely the same time Lew was passing on his oh-so-stern message, his boss, President Obama, and congressional Republicans were making him look all wet. They were vying to out-austere each other with budget proposals that--whichever is adopted in the end--are likely to slow down the already chronically ailing U.S. economy. This latest bucket of frigid water on an economy that desperately needs to warm up was only further evidence, coming after the spectacle of across-the-board sequestration cuts, that Americans know as little about managing budgets as the Europeans do.
The Germans, who have expressed continued irritation at American presumptuousness, all but dismissed Lew’s advice publicly. 'We trust in the American government to know what’s best for the country,' Finance Minister Wolfgang Schäuble said archly. 'We in Europe have enough work to do … so we don’t need to give the United States advice.'
When will American officials learn that 'Do as I say, not as I do' just doesn’t cut it abroad?
More and more, the U.S. economy seems to be going in one direction and Washington policymakers in another. And, as Lew’s trip suggests, the latter don’t even seem to realize how absurd they look when they talk one way and act the opposite. We already know that if the $85 billion in cuts in the budget sequester go through as planned, gross domestic product will slow 0.5 percent and about 750,000 jobs could be lost by the end of the year, according to the Congressional Budget Office. Now despite Obama’s efforts to replace the sequester with a budget deal that comes preloaded with concessions, the politicians are probably just going to make things worse. Obama’s fiscal 2014 budget, which calls for $1.8 trillion in deficit reduction, is an opening bid for that elusive “grand bargain” with Republicans that will seek to trade Social Security and Medicare cuts for GOP concessions on higher taxes for the wealthy.
Both things--the Republicans’ entitlement cuts and the Democrats’ additional tax hikes--will slow the economy further. And even if they don’t actually happen now, just the expectation will have a dampening effect.
Some Republicans pronounced themselves pleasantly surprised at Obama’s liberal apostasy on entitlement reductions, but they still drew the line at additional taxes. If the past is any guide, the negotiations will probably spiral downward toward more tit-for-tat talk of austerity, with the president offering up more cuts in exchange for a few tax increases.
Well into the second term of a Democratic president who once pledged to revive the middle class, Republican monomania about the deficit continues to dictate Washington’s agenda at a time when deficit spending--future investment in the economy--is needed more than ever. The latest round of talks comes as the prolonged nature of this “after-recession”--what else can we call it, since the official recession ended in 2009--is setting records for both slow job growth and inequality.
In this economy, the poorer and more middle-class you are, the worse you are feeling the effects. This is not only the slowest recovery of the postwar period, it’s also one of the most unequal. Both the slowness and the inequity will worsen under the sort of plans that Obama and the GOP are discussing, which amount to austere treatment of average Americans. It’s not just that 7.7 percent unemployment is something of a grim new “normal,” along with still-high long-term unemployment. It’s also that, while the economy has recovered most of the wealth lost in 2008, the bulk of it is coming from higher stock prices and therefore “has been flowing mainly to richer Americans,” the Associated Press reported.
The latest job numbers, out April 5, were one more reminder of this growing disparity. According to the Bureau of Labor Statistics, the unemployment rate edged down to 7.6 percent, but only because many more people dropped out of the workforce, bringing the labor participation rate to 63.3 percent, a new low since 1979. That means 469,000 Americans joined the record 90 million who are no longer even looking for work; most of them lack a college education, so government-funded training programs are desperately needed.
Although the sequester had little to with this particular jobs report, among the large government programs slated for cuts is the unemployment trust fund, to the score of about $2.39 billion. Regular unemployment benefits are exempt from sequestration, but payments intended for people who have been unemployed longer than 26 weeks are not. According to the Bipartisan Policy Center, most of these long-term jobless Americans will eventually see their benefits cut by a ruinous amount, more than 10 percent, for the remainder of fiscal 2013.
Both Democratic and Republican budget proposals will exacerbate these trends. According to Dean Baker of the Center for Economic and Policy Research, Obama’s budget proposal will hurt seniors far more than his tax hikes in December hurt the wealthy.
So, come home, Jacob Lew. The problems of austerity--American austerity--badly need your attention.
EuroUnemployment.png
Here is a study of how economic austerity has affected unemployment within nations in the Eurozone. (Courtesy of The Atlantic)

A portrait shot of Paul Ryan, looking straight ahead. He has short brown hair, and is wearing a dark navy blazer with a red and blue striped tie over a light blue collared shirt. In the background is the American flag.

(Above: Rep. Paul Ryan, R-WI. Courtesy of Wikipedia.)

Matthew O'Brien in the article the graph was in accused the Republicans in Congress of pushing for austerity, but a release from Rep. Paul Ryan (R-WI), who is widely being blamed by the Left for instituting a budget calling for economic austerity, saying on the economic consequences of Obama's reelection states otherwise:
"House Budget Committee Chairman Paul Ryan said that if President Obama is reelected in November, Europe’s current economic crisis will be America’s future.
'The president, his budget, the fact the Senate hasn't done a budget in three years, puts us on a path towards European-like austerity,' said Ryan, R-Wis., on NBC’s Meet the Press on Sunday.
He continued: “If the last four years is any indication of the next four years under current management, we'll keep kicking the can. We'll keep making empty promises to voters. And then we'll probably have a debt crisis ... in the next presidency if we stay on this path.'
Ryan offered his own, House-passed budget plan as an alternative, which he said would 'preempt' austerity by reducing U.S. debt and reigning in borrowing.
'The whole premise of our budget is to preempt austerity by getting our borrowing under control, having tax reform for economic growth, and preventing Medicare, Social Security and Medicaid from going bankrupt. That preempts austerity,' he said."
The answer to our economic woes is to not only cut the federal budget dramatically, but to cut taxes and end to practice of printing money in order to pay for federal programs.  No matter what the president believes, there is no such thing as public money.

William K. Black, in an article written for AlterNet.com, reveals the true source for America's policy of austerity that will lead this country's economic establishment in ruins for the first time since the Great Depression:

"The two most revealing sentences about the gratuitous Eurozone disaster – the creation of the deepening über-Depression – was reported today.   The context (rich in irony) is that U.S. Treasury Secretary Lew spent his Spring Break in Europe meeting with his counterparts.  The Wall Street Journal’s article’s title explains Lew’s mission and its failure: 'U.S. Anti-Austerity Push Gets Cool Reception in Europe.'  Here are the sentences that capture so well why Germany’s destructive economic policies caused the über-Depression: 'Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,' said Mr. Schäuble. 'We have a growth-friendly process of consolidation.'
Wolfgang Schäuble is Germany’s finance minister.  'Fiscal consolidation' is his euphemism for austerity.  “Austerity” is an infamous word to tens of millions of Europeans.  'Growth-friendly' is his euphemism for causing the über-Depression.  I have explained in a recent column that current unemployment rates in the European periphery are often multiples of the average unemployment rates in large European nations from 1930-1938.  Current unemployment rates in the U.K. and France are broadly comparable to their average unemployment rates in 1930-1938.   
Schäuble’s economic policies (austerity) have proven catastrophic.  They are contrary to everything we have learned in economics.  In my April 9, 2013 column criticizing the New York Times’ coverage of the self-destructive austerity the EU and the IMF inflicted on Cyprus I quoted Paul Krugman’s devastating criticism of the EU austerians’ dishonest response to their failures and the massive misery they have inflicted.
Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield ‘lasting returns.’ Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline ‘Europe must stay the austerity course.'
Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letterto finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.
Schäuble’s claims about austerity repeat two of the great lies that are driving the über-Depression: (1) austerity in response to the Great Recession stimulates economic growth and (2) everyone agrees this is true.  The third great lie is that “there is no alternative” to austerity.  
Economists have known for at least 75 years that austerity is likely to make economic contractions more severe.  The eurozone’s infliction of austerity has produced precisely the self-inflicted damage that economists predicted.  The European leaders who caused this wholly gratuitous economic disaster, unsurprisingly, will not admit or remedy their errors.
But America has its own variant of this insanity and Lew is one of our most self-destructive austerians.  Like Schäuble, Lew is a lawyer.  As Obama’s OMB Director, Lew prepared a budget and a rationale for that budget that was an ode to austerity.  I demonstrated this in detail in a prior column.
Lew was also one the group of Obama aides noted for their protection of Wall Street’s interests who led the effort to inflict austerity and begin to unravel the safety net through what they called the “Grand Bargain” (actually, the Great Betrayal).
Obama’s decision to send Lew, the great proponent of self-destructive austerity, to Europe to urge them to end their self-destructive austerity exemplifies the incoherence of the administration’s financial policies.  The fact that Obama is simultaneously proposing the Great Betrayal – its sixth form of austerity that Obama has agreed to inflict on our Nation since 2011 – produces a level of incoherence, incompetence, and hypocrisy so epic that it is likely to cause economists to act like manic depressives bouncing between wild-eyed gales of laughter and crying jags.'
This year's first move for the administration toward austerity came in the form of the sequester.  Here below are the details about it (Courtesy of The Washington Post):
"The sequester, explained
The White House has released its plan explaining how the sequester's mandatory spending cuts to defense and domestic spending will be implemented in 2013.  Here's the background on what the sequester is, how it happened and what happens from here:
What is the sequester?
It’s a package of automatic spending cuts that’s part of the Budget Control Act (BCA), which was passed in August 2011. The cuts, which are projected to total $1.2 trillion, are scheduled to begin in 2013 and end in 2021, evenly divided over the nine-year period. The cuts are also evenly split between defense spending — with spending on wars exempt — and discretionary domestic spending, which exempts most spending on entitlements like Social Security and Medicaid, as the Bipartisan Policy Center explains. The total cuts for 2013 will be $109 billion, according to the new White House report.What is the sequester?
Under the BCA, the cuts were triggered to take effect beginning Jan. 1 if the supercommittee didn’t to agree to a $1.2 trillion deficit-reduction package by Nov. 23, 2011. The group failed to reach a deal, so the sequester was triggered.
Why does everyone hate the sequester so much?
Legislators don’t have any discretion with the across-the-board cuts: They are intended to hit all affected programs equally, though the cuts to individual areas will range from 7.6 percent to 9.6 percent (and 2 percent to Medicare providers). The indiscriminate pain is meant to pressure legislators into making a budget deal to avoid the cuts.
How would these cuts affect the country?
Since the details just came out, it’s not entirely clear yet. But many top defense officials have warned that the cuts will lead the military to be “hollowed out.” Democratic legislators have similarly warned about the impact on vital social programs. And defense, health care and other industries that are significantly dependent on federal spending say that major job losses will happen if the cuts end up taking effect.
At the same time, if legislators try to avoid the sequester without replacing it with real deficit reduction, the U.S. could face another credit downgrade.
Why did Congress and the White House agree to the sequester in the first place?
The government was approaching its debt limit, which needed to be raised through a congressional vote or else the country would default in early August 2011. While Democrats were in favor of a “clean” vote without strings attached, Republicans were demanding substantial cuts in exchange for raising the debt limit.
President Obama and congressional leaders ultimately agreed to the BCA, which would allow the debt ceiling to be raised by $2.1 trillion in exchange for the establishment of the supercommittee tied to the fall-back sequester, as the Center for Budget and Policy Priorities explains. The deal also includes mandatory spending reductions on top of the sequester by putting caps on non-entitlement discretionary spending that will reduce funding by $1 trillion by 2021.
Who supported the debt-ceiling deal?Party leaders, the White House and most members of Congress supported the debt-ceiling deal: The BCA passed on a 268-161 vote in the House, with about one-third of House Republicans and half of House Democrats opposing it. It passed in the Senate, 74-26, with six Democratic senators and 19 Republican senators opposing it.
Can the sequester be avoided?Yes, but only if Congress passes another budget deal that would achieve at least $1.2 trillion in deficit reduction. Both Democrats and Republicans have offered proposals to do so, but there still isn’t much progress on a deal. The political obstacles are the same as during the supercommittee negotiations: Republicans don’t want to raise taxes to generate revenue, while Democrats are reluctant to make dramatic changes to entitlement programs to achieve savings.
What happens from here?No one on Capitol Hill thinks any deal will happen before Election Day. After Nov. 6, Congress will have just a few weeks to come up with an alternative to the sequester. The challenge is complicated by the fact that the Bush tax cuts, the payroll tax, unemployment benefits and a host of other tax breaks are all scheduled to expire Dec. 31. The cumulative impact of all of these scheduled cuts and changes is what’s popularly known as the fiscal cliff. There’s already talk of passing a short-term stopgap budget plan during the lame-duck session to buy legislators more time to come up with a grand bargain."
The President's plan for $1.2 trillion in budget cuts and $800 billion is a disaster waiting to happen.  Still, this does nothing to address the issue of taking measures to reduce the deficit next year because the deficit is still estimated to be approximately $744.2 billion, which is the first time during his presidency the debt total has dropped below $1 trillion. At the same time, there is the economy, where instead of people having more money to spend on necessities and discretionary items, the President is taking away their hard-earned money! But wait!  The TPC estimates that Obama's tax hikes will give him $1.1 trillion in tax revenue.  Apparently, the American people are being misinformed about the Obama budget by the administration.

Glenn Beck laid out the startling similarities between present day America and the Weimar Republic (Courtesy of The Blaze):
"For roughly half of the country, or at least those who strongly following both politics and history, the 2012 election serves as a harbinger of the fundamental transformation expedited by Barack Obama that will, ultimately, cause the sun to set on America and its exceptionalism. Those who recall the not-so-distant past recognize a number of similarities in present-day America and European countries that ultimately succumbed to the devices of Socialism or Fascism. During his Wednesday evening broadcast, Glenn Beck examined these similarities, particularly as it relates to the Weimar Republic.
For those unfamiliar, the term 'Weimar Republic' refers to Germany between the years 1919 and 1933 when the country was a parliamentary democracy, governed by a true constitution which had been drafted in the city of Weimar. While the Weimar Constitution technically survived until 1945, its last vestiges were truly snuffed out with the installation of Adolf Hitler and his Third Reich.
Under the Weimar Republic, German citizens enjoyed rights not so dissimilar to those found in modern-day America, including the freedom to vote. Thus, Weimar was Germany’s first foray into the concept of democracy. Before World War I, Germany was relatively prosperous, with a gold-backed currency and a burgeoning manufacturing industry.
Even from the start, however, the Weimar’s days were likely numbered, as by 1923 the country was in the throes of severe hyperinflation. While difficult to imagine, by this time, the currency exchange rate between the dollar and the German Mark was one trillion to one.
Of course with such mind-boggling numbers, needless to say, the Republic embarked on a rapid downward trajectory.
During his program, Beck examined some of the crucial elements that led to the collapse of the Weimar and solidified the Third Reich’s place in history. Among them were the country’s abandonment of a gold standard, tremendous debt and entitlements coupled with inadequate revenue streams that ultimately led to printing money and devaluing the nation’s currency. Soon, riots and overall societal decay. Given the meme that had been perpetuated in Nazi propaganda painting the Jews only as money-hoarding bankers who were robbing Germany of all its wealthy, of course the most notable form of this societal decay was manifest through anti-Semitism.
The rest, as they say, is history."
Finally, to quote the source claiming that Obama's tax plans for $800 billion in new revenue next year,  Prison Planet says this:
"President Obama's recently released fiscal 2014 budget proposal would continue near-record level deficits despite tax hikes, largely because it would increase spending by more than 20 percent over the next five years.  The deficits would continue an increase in tax collection by 46 percent over the same period under Obama's plan.
The budget proposal submitted to Congress (two months later than required by law) calls for a $744.2-billion deficit in fiscal 2014, the first under a trillion dollars since Obama took office. The president is able to claim to bring deficits down to the $500 billion per year deficit level after 2014 only because he assumes outlandishly high economic growth rates: about 3.5 percent real GDP growth average for the next four years, along with low 2.2-percent price inflation.
Obama’s expectation of 2.6-percent growth in fiscal 2013 is already behind schedule, as the first quarter of the fiscal year (September-December 2012) saw an anemic 0.4-percent annual growth rate. And while the U.S. economy has traditionally rebounded from a recession with four-percent growth for several years, nations with high national debt and a low national savings rates -- which the U.S. economy has -- historically grow at a much slower rate. The U.S. government currently carries double the proportionate debt load it had during the 1980s, and the economy maintains only two-thirds the national savings rate compared to the same time period. The United States should instead expect a recovery-era growth rate similar to that being experienced by the United Kingdom, Germany, and Japan, which also have high national debt levels (though a higher savings rate than the United States).
Only by projecting unreasonably high economic growth does Obama make projected additions to the national debt more modest than his first four years as president. Yet even assuming his growth figures, the president seeks to add an additional $4 trillion to the national debt over the next five years. The proportion of debt compared to the size of the U.S. economy would remain in the 100-110 percent of GDP range, he predicts, because the economy would grow with the debt level. Without that vigorous growth, the debt level would rise significantly. And with a new recession, such as the United Kingdom appears to be entering, the national debt would skyrocket toward Japanese levels of debt.
Even Obama’s inflation figure seems unreasonable, and will certainly become so if the economy picks up. The Federal Reserve Bank has been pumping an extra $45 billion per month into the economy under its “quantitative easing” program. This drastic increase in the money supply (with the same amount of goods in the market) is bound to raise prices eventually.
The budget proposal document claims that President Obama “believes we must invest in the true engine of America’s economic growth” and that this true engine of economic growth is more government spending. More government spending didn’t start true economic growth during either the Bush administration or Obama’s first term, but that hasn’t stopped Obama from trying to do more of the same thing and expecting a different result. More government spending would “make America once again a magnet for jobs,” his budget document claims. In order to do this, his budget would spend more on a laundry list of pricey items, including “high-tech manufacturing and innovation, clean energy, and infrastructure, … it invests in education from pre-school to job training.”
The highlight of the president’s budget proposal is a program which he describes in his letter to Congress this way:
'My Budget includes $50 billion for up-front infrastructure investments, including a 'Fix-it-First' program that makes an immediate investment to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally-deficient bridges across the country.'
The budget proposal is loaded with Washington-speak, which is another word for half-truths. Obama claims: 'The Budget does all of these things as part of a comprehensive plan that reduces the deficit and puts the Nation on a sound fiscal course. Every new initiative in the plan is fully paid for, so they do not add a single dime to the deficit.' The above statement is true only in a very narrow and misleading sense. The deficit -- the annual increase in the national debt -- is smaller than previous Obama years; however, it is larger than during any non-Obama year in U.S. history — i.e., any year of any previous president. And the increased spending is paid for only if one counts more borrowing on the credit of the taxpayers as “paid for.” The U.S. government would continue to borrow at unprecedented levels into the medium-term future under Obama’s fiscal 2014 budget proposal.
Obama reiterates the slogan in his budget letter that 'we cannot just cut our way to prosperity.' Not surprisingly, he proposes no substantial spending cuts in the budget, and admits that his proposal would never balance the federal budget, even as it engages in typical Washington-speak: 'In total, the Budget will cut the deficit by another $1.8 trillion over the next 10 years, bringing the deficit below 2 percent of GDP by 2023 and putting our debt on a declining path.'
In essence, if Obama’s budget proposal were a family budgeting document, he would be patting himself on the back with words something like this:
'Up until this year, I had planned to spend $50,000 more per year than I make in salary at my job. And I had planned to add that extra $50,000 every year onto my credit card. But this year, I’m being financially responsible and reducing the deficit by $180,000 because I plan to spend only $32,000 more than I make, every year, for at least the next 10 years. And even though I will continue to add to my debts, I hope to get a really big promotion at work that will make a lot more money. So I expect that as my debts increase, it will remain proportionate with my income.'
Harry Hopkins, former advisor [sic] to President Franklin Delano Roosevelt, was once reputed to have summarized to Republican fundraisers FDR’s political strategy as “tax and tax, spend and spend, elect and elect.” Though the quote was not an accurate reflection of Hopkins’ words, the mis-attributed words were an able summary of the Roosevelt political strategy.
The Obama administration has added 'borrow and borrow' to Roosevelt’s political strategy."
In the U.S., jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained. (Courtesy of The Washington Post.)

So, there you have it.  Obama's record on taxation and the economy is an absolute abject failure.  He is more committed to growth of the welfare state and socialism in American than fixing the economy, and in doing so, he is printing money en masse in order to pay for his programs.  He and Federal Reserve chairman Ben Bernanke have colluded together to the end of continuing to pump money into the economy by borrowing from the American people, a practice that will eventually lead to massive inflation. In his attempt to cut the deficit, he is implementing an economic policy of austerity, which calls in budget cuts and tax hikes.  This is not only a zero growth proposal by the president, it will send unemployment through the roof to levels we see in Europe at this time. (Spain's unemployment rate is 25%, Greece's is 21%)  His attempt at reapplying the failed economic philosophy of Keynesianism is dooming this economy to a fate potentially worse than what the nation experienced in the 1970's with stagflation.

Taxation Serves as a Source of Government Oppression

The Wisdom of John Marshall on the Issue of Taxation

John Marshall by Henry Inman, 1832.jpg

(Above: John Marshall, 4th Chief Justice of the United States of America from 1801-1835. Courtesy of Wikipedia.)

Chief Justice John Marshall's Ruling on McCulloch v. Maryland

John Marshall (1755-1835) was the longest serving Chief Justice in the history of the U.S. Supreme Court, as well as the Court's fourth-longest serving justice.  He was also one of its most influential.  Serving from 1801-1835 as Chief Justice, his court decisions helped lay the foundation by which American constitutional law would interpreted, and he made the Court a coequal branch of the federal government along with the executive and legislative branches. Previously, he had served as leader of the Federalist Party in Virginia and served in the U.S. House of Representatives from 1799 to 1800.  He Secretary of State under President John Adams from 1800-01.  Upon Adams and the Federalist-controlled Congress' defeat in the Election of 1800, the President and the lame duck Congress passed what became known as the Midnight Judges Act, which made sweeping changes to the federal judiciary, including a reduction in the number of justices from six to five to deny Jefferson an appointment until two vacancies occurred.  Marshall was Adam's second choice for the position, as John Jay was his first; Jay had declined Adams' first attempt at appointing him Chief Justice.  Thus, Marshall, despite the original misgivings of the U.S. Senate, was confirmed on January 27, 1801, and received his commission on January 31.

Marshall served as Chief Justice for all or part of six Presidents: John Adams, Thomas Jefferson, James Madison, James Monroe, John Quincy Adams, and Andrew Jackson. He remained a stalwart advocate of Federalist politics and a nemesis of Jeffersonian school of government throughout its heyday.  He participated in over 1,000 decisions, writing 519 himself.  He helped establish the U.S. Supreme Court as the final authority on the meaning of the Constitution in cases and controversies that must be decided by the federal courts.  His impact on constitutional law is without peer, and his imprint on the Court's jurisprudence remains indelible.  

On of the most well-known of Marshall's decisions came during the case McCulloch v. Maryland (1819). The case involved the issue of taxation.  The state of Maryland had attempted to impede operation of a branch of the Second Bank of the United States by imposing a tax on all notes of banks not chartered in Maryland.  Though the law, by its language, was generally applicable to all banks not chartered in Maryland, the Second Bank of the United States was the only out-of-state bank then existing in Maryland, and the law was recognized in the Court's decision as having specifically targeted the bank.  The Court invoked the Necessary and Proper Clause of the Constitution, which allowed the federal government to pass laws not expressly provided for in the list of the Constitution's express powers, provided those laws are in useful furtherance of the express powers of Congress under the Constitution.  The case established two important principles in constitutional law: First, the Constitution grants to Congress implied powers for implementing the Constitution's express powers, in order to create a functional national government.  Second, state action may not impede valid constitutional exercises of power by the federal government.

Handing down one of the basic decisions of U.S. constitutional law, then, the Supreme Court ruled that the Constitution exempts the federal government from state taxation.  Stating in his now-renowned dictum that "the power to tax involves the power to destroy," Marshall declared that the states, and by inference, the local governments, "have no power, by taxation or otherwise, to retard, impede, burden or in any other manner control the operations of the constitutional laws enacted by Congress."  

Thus, by the decision of the most influential justice in the history of the U.S. Supreme Court, yet again the issue of taxation is addressed.  

The Wisdom of Thomas Jefferson on the Issue of Taxation


(Above: Portrait of Thomas Jefferson, painted by Rembrandt Peale in 1800.)

Thomas Jefferson, who as a member of the Democratic-Republican party vehemently opposed John Marshall's Federalist party, said the following line with regards to the "General Welfare" clause of the Constitution:
"To take from one, because it is thought that his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, to guarantee to everyone a free exercise of his industry and the fruits acquired of it."
However, members of the Left are playing the part of historical revisionists and putting words into the Founding Father's mouth.  Josh Dowlut on his blog Josh Dowlut's Instablog tries to claim that Jefferson was a precursor to the socialist movement that would be begin sweeping through the United States some 50 years after this death.  Here is what the left-wing extremist had to say about the nation's third president and author of the Declaration of Independence:
1) "I hope that we crush ... in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country."
This exact quote has not been found in the writings of Thomas Jefferson.  It may be a mistaken amalgamation of the author's comments in the above 1994 quote with the exact reference.  Jefferson wrote in 1825 to William Branch Giles of :
"a vast accession of strength from their younger recruits, who, having nothing in them of the feelings or principles of '76, now look to a single and splendid government of an aristocracy, founded on banking institutions and monied incorporations under the guise and cloak of their favored branches of manufactures, commerce and navigation, riding and ruling over the plundered ploughman and beggard yeoman." 
Noam Chomsky's 1994 book quotes Jefferson's 1825 letter to Giles and then comments that "[Jefferson] warned that that would be the end of democracy and the defeat of the American revolution." (Courtesy of Thomas Jefferson's Monticello)
2) "Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise."
This statement appears on the Internet on at least one website I have found..  However, it contradicts everything else about Jefferson's policies regarding taxation. This leads me to conclude that it is potentially a spurious statement.
"An industrious farmer occupies a more dignified place in the scale of beings, whether moral or political, than a lazy lounger, valuing himself on his family, too proud to work, and drawing out a miserable existence by eating on that surplus of other men's labor, which is the sacred fund of the helpless poor."
When I typed this quote into the Google search engine, there was no record found of such a quote.  However, even if it were a real comment, I find it to be terribly inconsistent to the comments Jefferson has made in other writings.  However, there were a few examples of this statement that, while not listed as verbatim, suggest that Jefferson might have supported a progressive estate tax:

In a letter to James Madison from October 28, 1785 while serving as U.S. Minister to France, Jefferson said:
"The property of this country is absolutely concentrated in a very few hands, having revenues from a half million guineas a year downwards... I am conscious that an equal division of property is impracticable.  But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand-in-hand with the natural affections of the human mind.  Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax a higher portions of property in geometrical proportion as they rise. (Listed above) Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural law.  The earth is given as a common stock for man to labor and live on."
Hence, let us establish once and for all that Jefferson was not in favor of an income tax.  However, this seems to contradict his future beliefs in the implementation of direct taxes, as one will these statement:

To Edward Pendleton in 1799:
"...the disgusting peculiarities of the direct tax."
So, apparently later in Jefferson's political career, his political views on direct taxes changed.

As for the next comment Dowlut posted that supposedly came from Jefferson:
"An aristocracy of wealth is of more harm and danger than benefit to society."
I found no record of this comment as being written verbatim by Jefferson.  However, he did manage to ram a bill through the Virginia state legislature banning the practice of primogeniture and entail called the Bill for Abolition of Entails, passed on August 11, 1776, a little over a month after the signing of the Declaration of Independence.  In an 1813 letter to John Adams, Jefferson proposed:
"...instead of an aristocracy of wealth, of more harm and danger than benefit to society, to make an aristocracy of virtue and talent, which nature has wisely provided for the direction of the interests of society, and scattered with equal hand through all its conditions...."
The ParisTampaBlog writes more about the present condition of today's "aristocracy of virtue and talent":
What we have now, while still very much an aristocracy of wealth, is no less an aristocracy of Jefferson's 'talent,' or rather the talented, especially those with exceptional mathematical, verbal, artistic, and athletic skills.  This is all to the good.  But we are still quite without that other aristocracy of virtue, perhaps even more so than in Jefferson's time.
"Also," according to the above-blog, "we are still without that which Jefferson most wanted from the schools, and as he wrote elsewhere, an informed citizenry."  The article goes on, but I will conjecture to say that the Left in America has taken advantage of this country's lack of an "informed citizenry" by placating to their fears and creating a society delusional to the point that they actually believe in the Marxist idea of a class struggle.
"There is a natural aristocracy among men. The grounds of this are virtue and talents…There is also an artificial aristocracy, founded on wealth and birth, without either virtue or talents. Natural aristocracy I consider the most precious gift of nature. The artificial aristocracy is a mischievous ingredient in government, and provision should be made to prevent its ascendency."
- Thomas Jefferson to John Adams, 1813
This quote is a redundant statement because it refers to the spurious one above.  However, the concept is just the same, as while Jefferson does not advocate class warfare as Dowlut would lead the average reader to believe.  The whole opposition to such a class of aristocrats stems from the Founders' disdain for European lines of royalty and nobility.  The rise of the Left in Western civilization began during the French Revolution for that very reason.  The Estate System in France -- in the First Estate, the Roman Catholic Church; in the Second Estate, the monarchy; and in the Third Estate the nobility -- ruled as absolutists for many centuries.  Thus, this quote by Jefferson does not represent the classical definition of "class warfare" that we see from the pages of The Communist Manifesto.

The last two quotes I find particularly perplexing because they defy every comment and policy written down and implemented into law by Jefferson the political philosopher and politician:
"We are all the more reconciled to the tax on importations, because it falls exclusively on the rich, and with the equal partition of intestate's estates, constitutes the best agrarian law..the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spare a cent from his earnings."
Through much of the America's tax history, there have been business taxes and tariffs enact to raise tax revenue.  They were in place prior to the 16th Amendment, and they are still in place today. 
"Taxes should be proportioned to what may be annually spared by the individual."
This is a given, and I, for the life of me, do not get where Dowlut derives the idea Jefferson was for a progressive income tax based on this comment.  He makes it sound like taxation was, to Jefferson, the great social equalizer.  And to think he bases this opinion on the great Thomas Jefferson, who believed in limited government as his writings and domestic policy as president indicate, is absolute ludicrous as the record above indicates.  It is common knowledge on those who study history and do not practice the bane of recording the events of the past called revisionism that Jefferson thought taxation was bad. He believed that large debt and direct taxes were a curse and thus were aspects of public policy to avoid as it was a source of oppression.  Jefferson was one of the Founding Fathers whose vision of government was one of freedom and liberty for people to live their lives without the excess burdens of government.  He spoke the following line regarding both of those aspects of the present-day government that have become cumbersome in the lives of the American people:
"And the forehorse of this frightful team is public debt.  Taxation follows that, and in its train wretchness and oppression." 
In one of his State of the Union addresses, Jefferson wrote about "the freedom of labor from taxation."  He felt government should protect its citizens from taxation.  This is further evidence that Jefferson does not support any kind of a progressive income tax.

He believed in war times when the nation is fighting for its survival with enemies at the gate, it could raise capital, but it should be paid off as soon as possible and in a method that would least burden its citizens:
"I cannot hope that Congress in reviewing their resources will find means to meet the immediate interests of this additional debt without recurring to new taxes, and applying to this object only the ordinary progression of our revenue.  Its extraordinary increase in times of foreign war will be the proper and sufficient fund for any measures of safety or precaution which that state of things may render necessary in our neutral positions."
Jefferson did not even like accumulating wealth for a treasury in times of war in case war broke out:
"...but the principles will not justify out taxing the industry of our fellow citizens to accumulate treasure for wars to happen we know not when, and which might not, perhaps, happen but from the temptations offered by that treasure."
The very fact that the federal government passed the 16th Amendment in 1912 suggest that the party of the lawmakers who created it, the Democratic party, took advantage of the good faith of the American people by plunging the nation into four major wars throughout the course of the 20th Century, with each resulting in massive tax hikes.  Thus, Jefferson was right again, and this proves that Dowlut's remarks are completely false. 

According to the author of the article "Thomas Jefferson on Taxes," he mentioned his first learning about the feud between Alexander Hamilton and Jefferson.  His first impressions were that only hippies would follow in Jefferson's lead.  In the author's own words, I will post the following quote for my readers:
"Clearly we need a strong central bank, treasury and debt to finance the government, centralised [sic] financial markets.  Jeffersonian views for a libertarian American seemed too radical for me.  I was 16 years old in high school when I thought that.  Now that I have studied economics and lived in the world for at least 30 years, I realize the opposite.  The government that governs least governs best.  If the freedom and prosperity of the citizens are to be protected [with] no or low taxes and debt are the way to go."
Jefferson wrote on the issue of taxation long before he served as president.  In a 1787 letter to James Madison, he said: 
"...the fundamental principle, that people are not to be taxed...."
To John Jay in 1789:
"The embarrassments of the government, for want of money, are extreme."
To John Taylor in 1789:
"I wish it were possible to obtain a single amendment to our constitution.  I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its constitution; I mean an additional article, taking from the federal government the power of borrowing." 
To Edmund Pendleton in 1799:
"...the disgusting peculiarities of the direct tax." (I posted this earlier, but thought it wise to rewrite it in order to further reiterate Jefferson's disdain for any tax, let alone a direct tax, particularly by the time he was a national political figure rather than a war governor from Virginia.)
To John Dickerson in 1801:
"You will perhaps have been alarmed, as some have been, at the proposition to abolish the whole of the internal taxes.  But it is perfectly safe.  They are under a million dollars, and we can economize the government two or three million a year."
And finally, Jefferson said this in an 1817 letter to Albert Gallatin:
"Our tenet ever was…that Congress had not unlimited powers to provide for the general welfare, but were restrained to those specifically enumerated, and that, as it was never meant that they should provide for that welfare but by the exercise of the enumerated powers, so it could not have been meant they should raise money for purposes which the enumeration did not place under their action; consequently, that the specification of powers is a limitation of the purposes for which they may raise money."
While Thomas Jefferson might not have been a saint, he was clearly enlightened, and he did not advocate the widespread passage and implementation of direct taxes such as a progressive property tax or the income tax as the Left in this country would have the American people believe.  This is merely another Leftist attempt at historical revisionism in order to propagate their cause for higher taxes and increased government spending that is landing the federal government further and further into debt by the day.  When it comes to the issues of the radicalism of taxation in the history of the U.S. political economics, Jefferson and Ronald Reagan were the two presidents who were the biggest advocates for extremely low taxes in the history of the United States, as well as the country's most  radical.


Conclusion: The Current Income Tax System is Unconstitutional and Leads to Class Warfare

I have always maintain that the two bases for the founding of this democratic-republic were guns and taxes. I have already discussed the issue regarding gun control in another blog. However, this is the first time I have really delved into the world of taxation, and if one takes into account that this issue was ultimately one of two reasons leading to the American Revolution -- the other was over the Proclamation of 1763 that forbade the American colonists from settling lands in the Ohio Valley -- then it is especially important that we address the issue of taxation as a form of tyranny.  Reading on the history of the income tax beginning with the passage of the 16th Amendment in 1912, it is clear that the politicians who sought to enact it at the various percentages, the Democrats, used this to create and then perpetuate the cause of class warfare in America. Woodrow Wilson was the first true liberal to be elected president; he was also the one who supported the passage of the 16th Amendment and even increased the percentage each income bracket would pay dramatically between 15% for the top wage earners in 1916 all the way to 67% in 1917, and in 1918, Congress increased taxes again for the top wage earners to 77%. Still, the economy boomed due to war manufacturing. In the 1920's, however, the economy experienced a massive economy period of prosperity until 1929, when the Stock Market crashed.  It was during this decade that taxes were dramatically cut, thus propagating even more economic prosperity.

The beginning of the American welfare state and socialist economic policies started with Democratic president Franklin Roosevelt. He raised taxes during his administration in order to cover the costs of his socialist programs, particularly the implementation of the Social Security tax upon the passage of the Social Security Act in 1935.  However, his socialist endeavors did not bring the country out of the Great Depression, the nation's entrance into World War II did.  As the government employed more workers, the economy prospered, with an unemployment rate of only 1.2% during the conflict.  It was also at this time that taxes were the highest in the nation's history, at a whopping 94%.  Throughout the years following the second world war, taxes would remain very high, with the top income bracket in 1954 paying 87% of their income. However, by the 1960's, the economy was about to begin a long period of malaise, as taxation remained extremely high, yet inflation spiraled out of control.  As a result, unemployment and inflation rates soared. The period between 1970 and 1982 became known as the era of stagflation, which consisted of the following information courtesy of The Washington Post:
The Arab oil embargoes of the early 1970's triggered an economic slump that lasted until the mid-1980's.  Inflation rose and the nation's economic growth began to slow, a trend known as stagflation.  The country entered a time when the economy was in "serious trouble," [Professor David B.] Sicilia said.  President Richard M. Nixon sought to ease inflation by implementing price and wage controls.  When Jimmy Carter became president in 1976, he began deregulating the oil and gas industries.  Unemployment, inflation and interest rates crept up during Carter's last year in office.  Those factors paved the way for Ronald Reagan to win the presidency in 1980.
President Reagan ushered in a new era of fiscal and tax policy in the federal government with his signing into law the Economic Recovery Act of 1981 and the Tax Reform Act of 1986.  The nation's 40th president first cut taxes by about 25% down to 50% of the income of the wealthiest Americans, and then later to 28%.  As a result, the economy boomed through the encouragement of entrepreneurship, and tax revenues actually grew at record levels. Though the federal deficit would nearly triple during the 1980's due to Reagan launching a massive arms buildup in his quest to end the Cold War, that can be blamed on the Democrats in Congress for failing to cut public expenditure programs, though these expenditures of government only increased at the rate of inflation, which were indexed into his tax cuts so that they would not spiral out of control. And, not coincidentally, "Reaganomics" resulted in inflation dropping from 10% in 1981 down to 4% in 1988.

His successor, George H.W. Bush, bailed on "Reaganomics," signing into law an income tax increase in 1990 that would result in a recession the following year.  This, I believe, marked the beginning of the fall of the Republican party in America, as President Bill Clinton took power in 1993 and raised taxes in his first year in office. Couple this with his signing into law the Brady Crime Bill, and the Republicans running for Congress in 1994 had plenty of ammunition to defeat the long-serving Democrats in the midterm elections. Through the watchful eye of the Republican-controlled Congress, President Clinton could not possibly pass such socialist acts as a national health service in law. The Clinton economy benefited from low energy prices and the information technology revolution.  Clinton also tackled free trade and the deficit, which excited Wall Street investors. The economy boomed once again due largely to the boom in the technology sector as well as the fall of the Soviet Union, leading to a dramatic drop in unemployment, a lot of corporate, government, and consumer borrowing, which led the Clinton administration to cut military and intelligence spending. It was because of this cut in military and intelligence spending that the September 11, 2001 terrorist attacks occurred since the federal government did not have the proper capabilities to monitor against such an incursion on U.S. soil.  Also, the economy that Clinton had taken so much pride a "fixing" began to falter, for by 2000, the economy was back into a recession, and it would be left up to another Republican, George W. Bush, to fix it.

The collapse of the Internet bubble during the final year of the Clinton presidency and attacks on September 11, 2001 led the nation into another recession, as was stated in the previous paragraph. In an effort to spur growth, President Bush and Congress passed an economic act that called for $1.35 trillion in tax cuts and gave everyone who filed a 2000 income tax return a rebate check.  The economy hummed along, with the housing market enjoying record price.  But then housing prices began to decline and the current financial crisis began as a result of the fall of the investment company Lehman Brothers.  Shorty after Barack Obama took office, Congress passed an $800 billion economic stimulus package designed to jump-start the economy lower unemployment.  However, high energy prices and the overhang of the housing market may have brought economic growth to a virtual halt.

With the patterns demonstrated, the only other times the economy enjoyed a boom cycle was during times of war, in which every single instance a major war was fought over the past 95 years -- World War I, World War II, the Korean War, and the Vietnam War -- a Democrat was in office.  Woodrow Wilson was the first of the major liberal Democrats, and Franklin Roosevelt created the modern welfare and socialist economic state that America is today. The period of near-communist taxation in the form of $0.9 to every the highest tax bracket in the U.S. paid played a major role in the phenomenon known as stagflation, and sadly, these very economic factors are being put into use today by the Obama administration in the form of increased payroll taxes as well as increased income taxes on all income brackets, including the poor and middle class, which the president had vowed to never touch.  As Dick Morris said, because of Obama's economic policies, America is on the verge of "a double dip recession."  And despite reports to the contrary by the Obama administration reporting unemployment dropping to 7.5% in the most recent studies as well as the growth of the economy is at a 2% clip, I beg to differ, because those are merely the reports the Bureau of Labor Statistics show, which is a puppet of the Obama administration.  Unemployment is actually more like what Professor of Economics at the University of Maryland Peter Morici said, at about 14.4% when one factors in discouraged adults who have essentially given up on finding work or those in the workforce working part-time but would rather work full-time.  And the issue with Obama Care is, in and of itself, going to push the U.S. economy back into a recession and severely increase the rate of unemployment.  With estimates of expenditures on the program being as high as $2 trillion and the cost to the average American, according to Congressional Budget Office, is as follows:
Cost of a basic health plan: ... The bronze plan is expected to be the least expensive plan in the line-up that will be offered through the ObamaCare health insurance exchanges.  The Congressional Budget Office estimates that in 2016, the cost of a bronze-level plan for a family will be between $12,000 and $12,500 a year.
And remember that the U.S. Supreme Court upheld the constitutionality of the Affordable Health Care Act based on the premise that is was a form of a tax, and thus the government has the right to enforce the law as such.

Dowlut writes the following very scary line about the American Left's affinity for the progressive income tax:
Why would the country grow faster under higher top marginal rates than under lower top marginal rates?  In other words, why does the history conflict with what most every Republican wants you to believe?  It is because of how taxes on net earnings work.  If you are owner-operator of a business, and are faced with taking personal income that will taxed at 70%, or reinvesting that money back into the company where it won't be taxed at all, there is a compelling case to invest it.  Under high marginal tax rates for extremely high incomes, more profits are reinvested, as opposed to taken out for the personal consumption of the owner operator.  It is a trade of between growing the business, or growing the owner's exotic car collection....
From 1936 to 1982, the top marginal tax rate in the U.S. ran a low of 70% to a high of 94%, and stayed over 90% from 1944-1963.  Top marginal rates substantially less than 50% are a relatively recent invention of the modern era.  The data doesn't support that they correlate with higher growth forever.
The purpose of 70-94% top marginal rates was not to raise revenue, and it was not to fund a welfare state.  These rates started at incomes of over half a million dollars a year in today's dollars, and only applied to a small fraction of the top 1%.  Both of the major entitlement programs of the 20th Century had their own dedicated regressive funding through the payroll tax.  The purpose of these rates was to limit the growth and compounding of aristocracy. It was to guard against the rise of a class that could challenge or control the federal government.  These are not my ideas, they are Jefferson's."
So just as the plaintiffs in the case Pollock v. Farmers' Loan and Trust Co. feared, the prototypical liberal pushes the agenda for a progressive income tax for purposes of class warfare.  Dowlut states that the owners of businesses, if not taxed heavily, will not reinvest the profits his or her business earns into the workers, but rather into himself.  If this is not the very essence of Karl Marx and Fredrick Engels, I can think of nothing better to compare this blog to. Then, Dowlut attempts to make the case that the purpose behind the 70-94% top marginal rats was not to raise revenue but rather to fend off the perceived growing aristocracy, "...to guard against the rise of a class that could challenge or control the federal government."   Lastly, if this is any indicator of the Far Left's thoughts, the belief in the omnipotence and supremacy of the state over the will of the people, it just came out of the mouth of a member of the Left.  That is yet another example of Marxist philosophy that is imbued within the American Left's consciousness.

To think he bases this opinion on the great Thomas Jefferson, who believed in limited government as his writings and domestic policy as president indicate, is absolute ludicrous as the record above indicates!  It is common knowledge on those who study history and do not practice the bane of recording the events of the past called revisionism that Jefferson thought taxation was bad. He believed that large debt and direct taxes were a curse and thus were aspects of public policy to avoid as it was a source of oppression. Jefferson was one of the Founding Fathers whose vision of government was one of freedom and liberty for people to live their lives without the excessive burdens of government.  He spoke the following line regarding both of those aspects of the present-day government that have become cumbersome in the lives of the American people:

The very fact that the federal government passed the 16th Amendment in 1912 suggests that the party of the lawmakers who created it, the Democratic party, took advantage of the American people by plunging the nation into four major wars through the course of the 20th Century.  Thus, Jefferson was right.

According to the author of the article "Thomas Jefferson on Taxes," he mentioned his first learning about the feud between Alexander Hamilton and Jefferson.  His first impressions were that only hippie would follow in Jefferson's lead.  In his words:
"Clearly we need a strong central bank, treasury and debt to finance the government, centralised financial markets.  Jeffersonian views for a libertarian America seemed too radical for me.  I was 16 years old in high school when I thought that.  Now that I have studied economics and lived in the world for at least 30 years, I realize the opposite.  The government that governs least governs best.  If the freedom and prosperity of the citizens are to be protected [with] no or low taxes and debt are the way to go."
Thomas Jefferson may not have been a saint, but he was enlightened.

In an article from Tax Analysts titled "New Deal Taxes: Four Things Everyone Should Know," Joseph J. Thorndike discusses the Recession in relationship with World War II-era tax and economic policies of Franklin Roosevelt.  What he says is quite startling:
''Suddenly, everything old is New Deal again,'' according to Paul Krugman. And he's right: As darkness descends on the U.S. economy, almost everyone is reaching for Roosevelt. Newspapers are replete with Depression speculation, and pundits are pondering the prospects of a second New Deal.  But much of today's New Deal nostalgia is deeply ahistorical. Liberals have engaged in more than a little romantic recollection, while conservatives have waged a dubious rearguard action to discredit New Deal achievements. So let's set the record straight on at least one key element of the New Deal: taxation. Here are four things that everyone should know about New Deal taxes.
 John Maynard Keynes.jpg

(Above: Picture of John Maynard Keynes, one of the most influential economist who studied the concepts behind macroeconomics during the 20th Century. Courtesy of Wikipedia.)
  • 1. The New Deal made liberal use of conservative taxes. Some of the most important elements of the New Deal tax regime were engineered by Herbert Hoover. Congress passed the Revenue Act of 1932 five months before Franklin Roosevelt won his bid for the White House. But key elements of the law -- including an array of regressive consumption taxes -- remained a cornerstone of federal finance throughout the 1930s.
  • The 1932 act imposed the largest peacetime tax increase in American history. Congress expected it to raise roughly $1.1 billion in new revenue, much of it from the rich. Lawmakers raised income tax rates across the board, with the top marginal rate jumping from 25 percent to 63 percent; overall effective rates on the richest 1 percent doubled, according to economic historian Elliot Brownlee. Meanwhile, estate tax rates also climbed sharply, while the exemption was cut by half.
  • For all its progressive features, Hoover's revenue swan song -- which passed with strong support from the Democratic majority in Congress -- also included an array of regressive excise taxes. The law created new levies (including taxes on gasoline and electricity), while raising rates for old ones. As a group, most of these consumption taxes fell squarely on the shoulders of Roosevelt's famous Forgotten Man. Yet once in office, the new president did nothing to reduce them. Indeed, excise taxes provided anywhere from a third to half of federal revenue throughout the 1930s.
  • 2. Most New Dealers were not Keynesians -- at least not initially and not when it came to taxes. Why did Roosevelt tolerate regressive taxation? Because he needed the money. The president -- and most of his economic advisers -- believed that unchecked borrowing posed a threat to recovery. While English economist John Maynard Keynes was urging the president to embrace an aggressive program of debt-financed spending, many New Dealers clung to more orthodox notions of public finance.
  • Keynesians were a rare breed in the early 1930s. (Indeed, the word "Keynesian" didn't enter popular usage until 1938, when countercyclical fiscal policy began to attract a broader following.) Most policymakers believed that government spending could help spur recovery, but few endorsed wholesale fiscal intervention. "Despite enormous, if not profligate spending, the New Deal has never achieved the volume or kind of pump-priming expenditure which Keynes insists is necessary to start private enterprise going," The Washington Post observed in 1934.
  • Keynes himself said as much in a December 1933 letter to FDR. 'The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new Loan expenditure during your first six months of office,' he scolded the president. 'The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.'
  • Pump priming did accelerate toward the middle of the 1930s, but it was never adequate to the task. As economist E. Cary Brown later concluded, stimulatory fiscal policy failed to end the Depression, 'not because it did not work, but because it was not tried.'
  • Spending never had a chance to spur recovery because taxes kept going up. Both parties worshiped at the altar of fiscal responsibility. In 1932 they had competed to see who could inflict more pain on the American taxpayer, with Democratic leaders even sponsoring a manufacturers' sales tax (ultimately defeated by a rank-and-file rebellion). With revenue in a free fall, policymakers across the political spectrum felt compelled to raise taxes.
  • FDR, for his part, remained deeply conflicted when it came to fiscal stimulus. On one hand, he was genuinely committed to the notion that budgets should be balanced -- someday, at least. His close friend and Treasury secretary, Henry Morgenthau, was even more averse to red ink. But Roosevelt also wanted to spend. So he embraced regressive elements of the 1932 tax act, convinced that consumption tax revenue was indispensable. Later he championed a series of additional tax hikes in 1935, 1936, and 1937.
  • Most New Deal economists -- at least those working in the Treasury Department -- shared Roosevelt's orthodox inclinations. They worried about unchecked borrowing, even when it was used to finance expansionary spending. "The situation calls for more than merely drifting with the tide of expenditure on the assumption that no grave problems would be presented by a large increase in the present Federal debt," they warned in a key 1934 report.
  • Treasury economists remained deeply suspicious of countercyclical tax policy.'Talk of more ambitious attempts to use the Federal revenue system as a regulatory mechanism has been heard,' they noted with some disdain. 'The tax system, so the argument runs, may be employed to eliminate business cycles or at least to lessen their severity, by penalizing 'over-saving' and encouraging consumption, by checking speculation, by favoring certain geographical or social classes at the expense of others, by encouraging business initiative, by discouraging 'unwise' business expansion, and so on.'
  • All of which struck these sober minds as more than a little dangerous. 'The use of taxes for other than revenue purposes is not necessarily an evil," they concluded, "but in all such cases great care should be taken to consider all possible effects, some of which may be undesirable and contrary to the ultimate goal originally contemplated.'
  • Eventually, most New Deal economists hopped aboard the Keynesian Express. But it would take the better part of a decade. In the meantime, they were more than willing to contemplate substantial tax hikes -- at least on some people.
  • 3. New Dealers believed that heavy taxes on the rich were a moral imperative. Roosevelt was a vigorous champion of progressive tax reform, especially when it came to raising taxes on the rich. Since 1934, Treasury economists had repeatedly urged the president to lower taxes on the poor; they wanted to expand the income tax and use resulting revenue to pay for excise tax repeal. But the president cast his lot with a different group of advisers: Treasury lawyers more interested in soaking the rich than saving the poor.
FDR embraced this approach in 1935, driven by a keen instinct for political opportunism. The New Deal faced a challenge from the left, particularly in the colorful person of Sen. Huey Long. The Louisiana populist was making headlines with his tax plans to share the wealth, and Roosevelt was determined to steal his thunder.

  • But FDR was also motivated by moral outrage over tax avoidance. He considered taxpaying a pillar of citizenship, a civic responsibility that transcended narrow questions of legality. But in 1935, Treasury lawyers gave Roosevelt detailed evidence that rich Americans were successfully avoiding much of their ostensible tax burden.
  • This was hardly news, but Roosevelt used it to justify a series of dramatic soak-the-rich measures. Some, like the Revenue Act of 1935, were designed simply to raise statutory rates. Others, like the Revenue Act of 1937, tried to close egregious loopholes. And one, the Revenue Act of 1936, imposed a new tax on undistributed corporate profits, which supporters believed would curb tax avoidance among wealthy shareholders.
  • As a group, the New Deal revenue acts of the mid-1930s substantially boosted the tax burden on rich Americans. According to Brownlee, the income tax changes alone raised the effective rate on the top 1 percent from 6.8 percent in 1932 to 15.7 percent in 1937.
  • Some New Deal critics have questioned whether such changes were meaningful. High taxes on the rich didn't really compensate for regressive taxes on the poor. They were, in the words of historian Mark Leff, largely symbolic.
  • Leff is right: New Deal tax reform was largely symbolic (although it felt real enough for those facing higher tax burdens). But symbols can be important. Sometimes they even change the world.
  • 4. To understand New Deal taxation, we have to understand World War II taxation. The New Deal experiment with soak-the-rich taxation ended with a whimper. In 1938, business leaders, Republicans, and conservative Democrats united to destroy the undistributed profits tax, Roosevelt's most ambitious but least durable tax innovation. For a moment, it looked as though progressive taxation had reached its high-water mark.
  • In fact, the tide was still coming. World War II changed the politics of taxation forever -- or at least for the next 50 years or so. Driven by staggering revenue needs, lawmakers in both parties agreed to raise taxes on everyone: rich, poor, and -- especially -- the middle class. Treasury economists got the broad-based income tax they'd been seeking since 1934; the number of people paying the levy increased sevenfold in just a few years. But New Deal lawyers got their high rates on the rich, too. The top marginal rate for individual income tax payers reached 94 percent in 1944, and effective rates on the top 1 percent reached nearly 60 percent the same year.
  • After the war, effective rates dropped substantially. But the income tax retained both its breadth and its steep nominal rate structure. What changed was the focus on loopholes. High rates made loopholes valuable, and lawmakers in both parties tacitly embraced them. As long as rates stayed high, members of Congress could do a brisk business selling tax preferences. Narrow ones could be marketed to well-heeled contributors. Broader ones could be used to assuage the worries of middle-class voters. It was a good deal for everyone - - at least for a while.
  • Lessons From History?
  • Are there lessons to be gleaned from the history of New Deal taxation? Today's pundits seem to think so, and they're probably right. But the lessons may not be the ones they expect.
  • Lesson #1: Progressive taxation can be its own worst enemy. Roosevelt's support for a steep nominal rate structure eventually undermined the apparent fairness of the tax system. The bipartisan tax consensus that followed World War II proved unstable. Tax preferences drew scrutiny from influential lawmakers, and voters began to suspect that some taxpayers were getting a better deal than others. By the mid-1970s, confidence in the fairness of the tax system had eroded. By the 1990s, it had all but vanished. If proposals to scrap the income tax, including its progressive rate structure, ever succeed, a good share of the blame will belong to FDR.
  • Steep rates may have advanced the cause of progressive tax reform in the 1930s; they almost certainly ensured that wartime taxes were more broadly progressive than they otherwise would have been. But the Roosevelt rates had a pernicious effect in the out years. Sustainable taxation is moderate taxation -- something New Deal economists understood -- but New Deal lawyers did not.
  • Lesson #2: Sometimes regressive taxation can be an element of progressive reform. Roosevelt's tolerance for excise taxation was almost certainly unwise; by almost any calculation, the 1932 revenue act slowed recovery at the worst possible moment. But Roosevelt understood that regressive taxes had a role to play. In the early years of the New Deal, he accepted them as a fiscal necessity. Later he chose them deliberately to finance the New Deal's most important innovation: Social Security.
  • That being said, Roosevelt also managed to poison the well against other forms of consumption taxation -- forms that might have financed an even more ambitious welfare state. His vigorous opposition to a general sales tax made it hard for the United States to consider other forms of broad-based consumption taxation (like a VAT), even while the rest of the world was discovering their utility.
  • Lesson #3: If you want progressive tax reform, talk a lot about tax avoidance. FDR sometimes frankly made the case for the redistribution of wealth (although he usually framed it as an attempt to thwart the concentration of wealth -- a subtle but crucial difference). More often, however, he focused instead on the evils of tax avoidance. Americans respond well to the suggestion that everyone should pay their fair share. Demonstrate that some people are not, and voters will rally to your cause."
And thus, you see that the economic policies of Roosevelt led to the creation of class warfare in America, and in spite of what many Democrats would have you believe, it did nothing to spur economic growth, but actually quite to the contrary, as the historical account of his economic and tax policies earlier in this article will bear out.
Who can spend you money best: you or the government?  The Democrats will try to tell you when you say you could better, more wisely spend your hard-earned income and therefore are desirous of low taxes that they are not sure that you could; I know one of my English professors did several years ago, which led me to believe that she was an elitist of the Left.   Dick Morris' article above ended with:
"People ask: How can the Republican Party come back? Because of the impact of Obama's economic policies which will soon be evident even to the most optimistic and obtuse."


(Above: This is a funny graphic alluding to his 2008 comment made to "Joe the Plumber.")

The Midterm Elections of 2014 and the Presidential Election of 2016 will show what the American people have learned from history, of the hope that there is an "informed citizenry" rather than a nation blinded by tales of a "Great Society" where the government will take care of the masses for the price of their hard-earned income and the relinquishing of the people's rights.  Most of all, I fear that we are a nation bereft of the Jeffersonian concept of "the aristocracy of virtue and talent."  The Democrats in government have managed to take the ingenuity and American drive to succeed away from the people over the course of the past 100 years.  In the meantime, it has created the modern welfare state and instituted a socialist economic and political system which has stifled American entrepreneurship and innovative ingenuity at every turn. What will our leaders in Washington over the next few years do to create new jobs and rekindle the concept of J. Hector St. John de Crevecouer's famous Latin maxim "Ubi panis ibi patria" (English translation: "Where there is bread, there is my country")?  We are on the verge of what Dick Morris above said is a "double-dip recession," yet this administration's answer for bolstering the economy has been by pumping $800 billion taxpayer dollars into the economy and an across-the-board tax hike. I have better ideas for how I can use my money than than the government, yet I had a professor one time tell me that she "wasn't sure" the average American knows what to do with his or her money.  This is an example of the Left in this country's tendency to believe that they, as a collective of individuals, are the intellectual elite, and therefore know what is best for you. Only we, the American voters, who happen to be the labor force and the nation's taxpayers no longer having the capacity to pay due to the conditions in the labor force for they are a part as well as decreases in salary should they be fortunate to retain their jobs, know for sure what is best for us, and this can only be decided by our votes.  This decision should be answered by one very fundamental question: Are you better off now than you were eight years ago?

Crevecoeur.gif

(Above: Hector St. John de Crevecouer, author Letters from an American Farmer in 1782.  Courtesy of Wikipedia.)