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%.
"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.
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.
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.
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.
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.
(Above: Picture of President Woodrow Wilson, who served from 1913-1921. Courtesy of Wikipedia.)
"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."
(Above: Painting of former British Prime Minister William Pitt the Younger. Courtesy of Wikipedia.)
(Above on the Left: Karl Marx; on the Right: Fredrick Engel, co-authors of The Communist Manifesto. Courtesy of Wikipedia.)
"2. A heavy progressive or graduated income tax."
(Above: Picture of Frank Chodorov.)
"... 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."
"When there is a income tax, the just man will pay more than the unjust on the same amount of income."
"It would be a hard government that should tax its people one-tenth part of their income."
"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 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.
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.
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 AdministrationsIn 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
This surge in revenue was no surprise to Mellon:
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)."'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.'"
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.
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.
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.
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. 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.
"... 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 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.
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!"
|Year||United States ||Great Britain |
"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.)
"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.'"
"[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."
– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.
– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill
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.
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.
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....
"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."
"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%."
"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."
"...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."
(Above: Yet another picture of President Ronald Reagan. Courtesy of Wikipedia.)
"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 American taxpayer -- that's someone who works for the federal government but doesn't have to take the civil service examination."
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.
"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."
- 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.
Percentage of paid income tax Income Percentage of taxes paid 1984 1986 1987 $0 - $15,000 5.8% 4.0% 2.8% $15,000 - $30,000 21.1% 16.8% 14.7% $30,000 - $50,000 29.0% 25.9% 23.0% $50,000 - $100,000 22.0% 24.3% 27.7% $100,000 - $200,000 8.6% 10.2% 11.9% + $200,000 13.4% 18.9% 19.8% 100.0% 100.0% 100.0% Source: IRS
Incomes and Social Mobility (1991 dollars) Average Family Income of 1977 Quintile Members in 1977 Quintile 1977 1986 % Change Bottom 20% $15,853 $27,998 77% Second 20% $31,349 $43,041 37% Third 20% $43,297 $51,796 20% Fourth 20% $57,486 $63,314 10% Top 20% $92,531 $97,140 5% All $48,101 $56,658 18% Source: Urban Institute
|Job Creation in the Eighties|
|Jobs Created, Jan. 1982 – Dec. 1989|
|Job Category||Number (Mils.)||Percentage Increase||1989 Median Earnings|
|Source: Bureau of Labour Statistics (employment), Census Bureau (earnings)|
|Net Public Debt as a percentage of GDP|
- A gradual but considerable cut of the highest marginal tax rates to 28%.
- The complete abolition of corporate taxes, with a repeal of all subsidies to corporations.
- 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.
- 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.
- 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%.
- 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.
- The economic growth rate will explode. Indeed a strong incentive is created to produce, to take risk, to work, to invest and to save.
- Unemployment will disappear completely.
- Tax Evasion will belong to the past. People are willing to pay the correct tax burden when tax rates are low.
- An important part of a suffocating government bureaucracy can be eliminated and the employees can be switched to more productive tasks.
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
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 1993, the 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.
- 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.
- 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.
Recent additions to U.S. public debt
Fiscal year (begins
10/01 of prev. year)
Value % of GDP 2001 $144.5 billi
1.4% 2002 $409.5 billion 3.9% 2003 $589.0 billion 5.5% 2004 $605.0 billion 5.3% 2005 $523.0 billion 4.3% 2006 $536.5 billion 4.1% 2007 $459.5 billion 3.4% 2008 $962.0 billion (proj.) 6.8%
The Tax and Economic Record of Barack Obama
"When you spread the wealth around, it's good for everybody."
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 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-6 Unadjusted U-3 Adjusted U-3 Employment Civilian
Net December 2011 15.2% 8.3% 8.5% 133.292 Million 240.584 Million December 2012 14.4% 7.6% 7.8% 135.560 Million 244.350 Million January 2013 15.4% 8.5% 7.9% 132.704 Million 244.663 Million240 February 2013 14.9% 8.1% 7.7% 133.752 Million 244.828 Million March 2013 13.9% 7.6% 7.6% 134.562 Million 244.995 Million April 2013 13.4% 7.1% 7.5% 135.494 Million 245.175 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=1.931Historical 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."
- 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.
- 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.
"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."
"Because the Constitution permits such a tax, it is not our role to forbid it, or pass upon its wisdom and fairness."
"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
"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.
- 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."
"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."
- 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.
“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 in the United States,” said Andrew Fieldhouse, federal budget policy analyst with the progressive 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.'
"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.
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.
"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 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.'
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.'
"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?
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."
"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.
"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.
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 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.”'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."
"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."
"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."
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."
"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."
"...the disgusting peculiarities of the direct tax."
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.
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.
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."
"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."
''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.
- 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."
"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."