Raising Taxes on the Wealthy During a Recession [View All]

[Time for change]

I am so sick and tired of hearing the presstitutes of our national corporate news media talk about how unwise it would be of our new President to make good on his campaign promise of reversing the Bush tax cuts on the wealthy. Oh my, we can’t have a tax increase during a recession, they say – as if it is common knowledge that increasing taxes on the wealthy during a recession or depression means certain death to the economy.

And now we hear that Obama is considering going along with that advice. How disappointing.

We should look at this in an historical context. There was one time in our nation’s history when our government raised taxes on the wealthy substantially during a serious recession or depression. That was during the Presidency of Franklin Delano Roosevelt, who took office in the midst of the worst depression in our nation’s history and who is generally ranked by presidential scholars to be the second greatest President in our nation’s history. Before taking a look at how FDR’s tax increases on the wealthy worked out, let’s consider his attitude towards the subject.


FDR’s attitude towards great concentrations of wealth

FDR did not feel that there was anything sacred about people piling up vast economic fortunes during times when so many other people were starving or homeless. He did not see that phenomenon as something that propelled our economy. In fact he saw it as a big part of the problem, something that prevented other people from obtaining their fair share of our nation’s resources. This is what he had to say on the subject at the 1936 Democratic National Convention:

Out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital – all undreamed of by the fathers – the whole structure of modern life was impressed into this royal service.

There was no place among this royalty for our many thousands of small business men and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things.

It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.

The hours men and women worked, the wages they received, the conditions of their labor – these had passed beyond the control of the people, and were imposed by this new industrial dictatorship…

Those who tilled the soil no longer reaped the rewards which were their right. The small measure of their gains was decreed by men in distant cities. Throughout the Nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise…

FDR also believed that the enormous income inequality that existed at the time was deleterious to democracy itself:

An old English judge once said: "Necessitous men are not free men." Liberty requires opportunity to make a living – a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor – other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

An historical perspective on taxing the wealthy in the United States

Increasing taxes on the wealthy was not the only thing that FDR did in his attempt to decrease income inequality and bring us out of the Great Depression. But it certainly was one of his major actions. One reasonably good indicator of taxing the wealthy is the “top marginal tax rate”, which is the highest tax rate paid on income above a certain level.

The 16th Amendment to our Constitution, the Progressive Income Tax Amendment, ratified in 1913, opened the door to our nation’s ability to tax the wealthy disproportionately. It was first used to raise money for the costs of World War I, the top marginal tax rate peaking at 77% in 1918, and then gradually decreasing after the war was over, to 25% by 1925, where it stood when FDR took office.

Consistent with his vow to reduce income inequality, FDR progressively raised the top marginal tax rate, as can be seen in this graph, to 63% in 1932, to 79% in 1936 to 88% in 1942, and to 94% in 1944.

It then continued at high levels, 70% or more, for several decades after FDR’s death, until it declined precipitously at the start of the Reagan presidency in 1981. It continued to decline during the Reagan and Bush I years, then rose moderately during Bill Clinton’s presidency, before substantially declining again under Bush II.


How did FDR’s tax increases on the wealthy work out?

From listening to today’s right wing conservatives and the blathering talking heads of our corporate news media you’d expect catastrophic consequences to our economy from any attempt to increase taxes on the wealthy, even to the relatively moderate levels that existed just prior to the Bush II presidency. From these warnings you would think that the extremely high rates of taxation on the wealthy beginning with FDR’s presidency and lasting for half a century would have ruined our economy for many years to come.

Many people consider median income to be a more accurate indicator of economic well being than gross national product, since it is an indicator of the economic health of the average citizen, whereas sometimes a high GNP can coexist with economic hardship for much of the population if wealth is grossly unequally distributed towards the top.

I could not find statistics on median income in the United States prior to 1947. However, the fact that FDR was re-elected to three consecutive Presidential terms, all by large margins, concurrent with the largest top marginal tax rate in our nation’s history, is a pretty good indication that we weren’t doing too badly during this period.

In any event, the high top marginal tax rates continued for several decades after FDR died, at 70% or more (far higher than what Obama is proposing increasing it to), until the Reagan Presidency starting in 1981. This chart shows median family income levels, beginning in 1947. With the top marginal tax rate approaching 90% at this time, median family income rose steadily (in 2005 dollars) from $22,499 in 1947 to more than double that, $47,173, in 1980. Then, for the next 25 years, except for some moderate growth during the Clinton years, there was almost no growth in median income at all, which rose only to $56,194 by 2005 (85% of that growth accounted for during the Clinton years).

However one wants to interpret those numbers, nobody could possibly conclude that they indicate overall bad financial consequences accruing from high tax rates on the wealthy. To the contrary, as Nobel Prize winning economist Paul Krugman notes, this period coincides with “the greatest sustained economic boom in U.S. history”.


Income inequality and depression

An article by Gabriel Thompson’s in The Nation contains a graph titled “Plutocracy Reborn – Re-creating the Gap that Gave us the Great Depression”. Here it is:



This chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90%. Note that preceding the great stock market crash of 1929, which plunged us into depression, the ratio rose from about 250 at the start of the 1920s to a peak of about 900 by 1929. The ratio then plunged, and by the start of WW II it had declined to about 200, where it remained with some relatively minor ups and downs until the beginning of Ronald Reagan’s Presidency. It then began another precipitous climb, with a sharp decline beginning during the last year of Clinton’s Presidency, but then another sharp increase beginning at about the time that the Bush tax cuts for the wealthy first went into effect, so that by the end of 2006 we’ve exceeded even the peak ratio of 1929 that preceded the Great Depression. The three green bars in the chart represent the stock market crash of 1929, the last pre-Reagan year, and the present.

The chart below this one (Click on “Full size chart”), titled “Our Incredible Shrinking Top Marginal Rate”, which is close to the mirror image of the top chart, shows that our top marginal tax rate has historically been inversely proportional to income inequality in our country.

I should note that Thompson wrote this article several months ago, to sound a warning. The point was that record breaking levels of income inequality, associated with a very low top marginal tax rate, immediately preceded the Great Depression – and now we have very similar levels of income inequality, along with an historically low top marginal tax rate. Since that time, Thompson’s warning seems to be bearing out.


Implications for our situation today

We have now reached a level of income inequality not seen in our country since just prior to the onset of the worst depression in our history – and it appears that history may be repeating itself. Today the top 1% of U.S. households owns more than the bottom 90% of our population combined. The Bush administration has done everything in its power to encourage that income inequality, not least of all through the lowest sustained marginal tax rates for the wealthy that we’ve had since the 1920s.

Recent statistics show: 47 million Americans without health insurance, associated with the first rise in infant mortality in our country in 40 years; an unemployment rate of 6.5% and rising rapidly; 35.5 million Americans living in food insecure households; approximately 3.5 million homeless Americans in any given year, including 1.35 million children; a poverty rate of 12.5%, up from 11.7% in 2001. All of these statistics are getting worse.

Senator Obama’s Presidential campaign included comprehensive plans to ameliorate the economic distress of our nation’s people, including: a health care plan to make health insurance affordable and accessible to all Americans; plans to tackle poverty; reversal of the Bush tax cuts for the wealthy, and; tax breaks for middle and working class Americans.

The reversal of the Bush tax cuts for the wealthy was a crucial part of Obama’s plan because, not only would that directly reduce income equality, but it would make the other parts of his plan affordable without necessitating crippling additions to our national debt. Without them, how is President Obama going to proceed with his other economic plans?

Now we have the conservative elites of our country, including our national corporate news media, trying to pressure President-Elect Obama to cancel his plans to reverse the Bush tax cuts for the wealthy, using the phony excuse that increasing taxes on the wealthy during a recession is not sound economic policy. But there is no historical basis for that conclusion, and in fact it flies in the face of our historical experience.

Continuing the worst of the failed Bush policies would not only do nothing to reverse the toxic trends in income inequality in our country, but it would greatly hamper the initiation of plans to provide relief to the vast majority of our citizens and get our economy back on track. I fervently hope that President Obama decides to proceed with his plans as originally formulated.