Evidence abounds that major tax increases, particularly those targeting investors, helped cause, and then intensify and extend, the Great Depression.
Commentary
Evidence abounds that major tax increases, particularly those targeting investors, and intensified enforcement in collection by the federal government helped cause, and then intensify and extend, the Great Depression, with blame shared by Republican President Herbert Hoover and his Democrat successor, President Franklin Roosevelt.
There were the Smoot‐Hawley tariffs in 1930, the largest such levies on foreign-manufactured products in peacetime in U.S. history, and the retaliation they provoked by countries importing U.S. goods; the massive, broad, retroactive increases on income, corporate, excise, and estate tax rates enacted in 1932—also the biggest in peacetime history—skyrocketing the top marginal income tax rate from 25 percent to 63 percent (then rising to 79 percent in 1935 and 94 percent during World War II); the new taxes on farming, capital, profits, and dividends the following year; the tripling of taxes on alcohol consumption during the course of the 1930s; and the broadenings of the income tax base plus corporate surtaxes in the middle of the decade.
Uncle Sam had indeed stuck his hand deep into the pockets of U.S. businesses and workers. The amount of money extracted from the private sector by the federal government
rose by about 60 percent during the decade. It was not the sole factor; a misguided Federal Reserve cut the money supply by 30 percent from 1929 to 1933, and banks failed in the face of over-regulation that prevented diversification of their holdings.
Not insignificantly, this harassment of the private sector came on the heels of policies in Washington that had been exceedingly friendly to private investment, resulting in the boom of the 1920s under President Calvin Coolidge. The top individual income tax rate had been cut from 73 percent to 25 percent before Presidents Hoover and Roosevelt grabbed away the punchbowl—as President Joe Biden plans to do today.
On the eve of President Roosevelt’s reelection in 1936, the justifications he made for himself sounded remarkably like the current rhetoric from President Biden, claiming that such tax increases placed no new burdens on businesses and those they employ, that the object was simply “fairness,” and that such policies actually reduced taxes on regular Americans.
“For the average American, we have reduced the individual income tax,” President Roosevelt
boasted as he campaigned in Worcester, Massachusetts, in October of that election year, adding that “more than 99 percent pay less than they did,” that it was justifiable that “taxes are higher for those who can afford to pay high taxes,” and scoffing that “you would think, to hear some people talk, that those good people who live at the top of our economic pyramid are being taxed into rags and tatters.”
Such language, then as now, exploits the widespread ignorance of economics in society, which misconceives wealth as stacks of cash and chests of baubles being hoarded within fat cats’ mansions, instead of that capital being in motion out in the real world, employing and providing livelihoods to so many millions via private investment.
President Roosevelt went on to tout providing “a credit to earned income,” that his administration “decreased the tax rates on small corporations” and “increased the taxes paid by individuals in the higher brackets” and “increased still further the taxes paid by individuals in the highest brackets—those with incomes over one million dollars a year” plus “increased the tax on very large estates,” and finally imposed “the undistributed profits tax ... merely an extension of the individual income tax law and a plugging-up of the loopholes in it, loopholes which could be used only by men of very large incomes.”
In defending increasing corporate taxation, President Roosevelt said, “98.5 percent of all American corporations will pay a smaller normal corporation tax under the new law.”
It is not for nothing that President Biden
replaced the portrait of George Washington that hung above the Oval Office fireplace through successive Republican and Democrat presidencies with that of President Roosevelt. Next year, former President Donald Trump’s tax cuts expire, and President Biden has promised they are “gonna stay expired.” That means nearly $4 trillion in tax increases, with the top marginal income tax rate reverting to its previous 39.6 percent from the current 37 percent, and a halving of the standard deduction taxpayers can take.
Taxable income exceeding $426,700 would
again be hit with a rate of 39.6 percent, whereas today, everything between $243,725 and $609,350 is taxed at 35 percent, and income above that gets taxed at 37 percent. Looking lower down the income scale at the vast numbers of taxpayers within the middle class, those earning between $38,700 and $93,700 will again be hit with a 25 percent income tax rate, whereas today, incomes between $11,600 and $47,150 are taxed at 12 percent, and above that, to $100,525, are subject to 22 percent.
President Biden also proposes raising the corporate income tax rate that, before President Trump, had been the highest in the industrialized world at 35 percent, from its current 21 percent to a globally uncompetitive 28 percent. A dozen of the 20 biggest companies in, of all places, tiny Ireland, with its population of a little more than 5 million, are the result of U.S. firms’ legally
moving their headquarters there to take advantage of the Emerald Isle’s 12.5 percent corporate tax rate, complemented by a young, well-educated, English-speaking workforce. In such a competitive global environment, a 28 percent U.S. corporate tax would leave the United States with the second-worst corporate tax rate of all the nations in the Organization for Economic Co-operation and Development (OECD), a rate higher than even communist China’s.
As if that were not enough of a war on investment and entrepreneurship, President Biden seeks to
raise the federal tax rate on long-term capital gains to its highest in a century: 44.6 percent. Adding state capital gains taxes, this would mean federal and state government taking more than half of the spoils of financial success in the most populous states in America. In California, it would mean taking 59 percent; in New York, 53.4 percent; in New Jersey, 55.3 percent; in Minnesota, 54.4 percent; and in Oregon, 54.5 percent.
A capital gain is a tax on the increase in the value, as determined by a market sale, of an asset—most significantly in terms of the economy, stocks in companies. Their being defined as income and legitimately subject to taxation is a highly
debatable proposition. High taxes on capital gains not only penalize successful investments and companies’ performance but also keep wealth locked in less productive firms, withholding it from more promising ventures, since investors are forced to factor in being hit by the tax when they consider moving their money from stock A to stock B; they will often settle for keeping it in a company they have determined to be less promising so as to avoid the tax. Multiply this by the many thousands of investor decisions made every year and the economy suffers massively as a result.
Looking again at the Depression era, Alan Reynolds, a senior fellow with the Cato Institute and formerly director of economic research at the Hudson Institute,
found that “capital gains realizations collapsed in 1934 when the capital gains tax was greatly increased then surged in 1938 as that tax was cut to 15 percent.”
As Philip Fischer, founder of eBooleant Consulting in New York, who has taught finance at SUNY and advised Merrill Lynch and Bank of America on investment strategies, has
observed, “History shows us when Congress raises taxes, you can expect those new tax rates to live with us deep into our future.” This is a truth that investors appreciate.
Those holding great amounts of wealth, which they are willing to risk, will keep their investments at a minimum if they see government poised to yank away their returns as far into the future as the eye can see. They will wait out a Biden presidency for more business-friendly times, possibly a very long wait. And, in recession and even during depression, it will not be they who suffer as they sit on their fortunes. It will be those who would have benefited from the jobs investors would have provided but didn’t thanks to the greedy hand of politicians who fail to understand the nature of wealth.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
