Super-tax the super-rich: an idea whose time has come. Again.

Warren Buffett, one of the wealthiest men in the world, is famous for saying that his tax rate (17.7%) is lower than his secretary’s (30%).*  Mr. Buffett makes a valid point.  Right now, multi-multi-millionaires in the USA are paying their lowest tax rates since the Great Depression. Fiscal conservatives insist that lower taxes spur job growth and stimulate the economy. They are only partly right. As I will show here, lowering taxes can improve the economy, but only if you lower taxes on the middle class. Not the very rich.

As Newt Gingrich reminds us with monotonous frequency, after the Republicans took over Congress in 1994, they lowered taxes, the economy improved, and tax revenues went up.  You remember the Clinton boom years, don’t you?

Chart, please.

Top marginal income tax rates from 1913 to 2011 (Source: Wikipedia.com)

An interesting point here is that tax rates for those with the highest incomes remained more or less flat from 1994 to 2000.  (See chart, above.)  The people who were getting more money in their hands and improving the economy were the middle class, who were spending and investing like crazy. 

In fact, history shows that raising tax rates on the very rich seems to stimulate the economy, while lowering tax rates for the very wealthy has historically hurt the economy and the middle class.

During and right after World War I, the top income tax rate rose to 77% (see that chart up there again).  However during three post-World-War-I Republican presidential administrations in a row — Warren G. Harding, Calvin Coolidge, and Herbert Hoover — highest-bracket tax rates were lowered from that high of 77% to a low of 24% in 1928 (yep, the chart shows that, too).  Harding’s Treasury Secretary Andrew Mellon insisted that lower rates would spur economic growth.  In fact, there was an economic surge, called the Roaring Twenties.  Only problem was that, soon after tax rates for the richest hit a new low in 1928, here came the Crash of 1929, and then the Great Depression.  Banks failed all over the country.  There were demonstrations, strikes and riots — even in red states like Nebraska.  Disgruntled war veterans staged their own “Occupy” actions in Washington D.C., resulting in bloodshed and the fall of the Hoover administration, and unemployment reached 24.9%. It was chaotic, desperate, and ugly.  And it followed more than a decade of policies still championed by Republicans:  deregulation, pro-business government policies, and lower taxes on “job creators” (top money-makers). 

Taxes on the very rich started going up again, especially during and after World War II.  And then, when they were at their highest, we had a big surprise. 

After the end of the Second World War, many feared that the Great Depression would return once we stopped building tanks and bombs.  Instead, the economy surged. We made cars in tank factories and airplanes instead of bombs. And there was a housing boom. New housing starts boosted a rise in our gross national product from about $200,000 million in 1940 to more than $500,000 million in 1960. Record numbers of Americans joined the middle class.  (Of course this was also helped by the rise in labor unions, but I will save that point for another argument.)

Here’s the corker. During the post-war boom, tax rates for the wealthiest Americans were at an all-time high: 94%.  (Yep, you can see it in that chart up there.)

The Republican blowhards would call a 94% tax rate socialism, transfer of wealth, class warfare, divisive politics; but to the American people, it looked like a 4.6% unemployment rate.  People were working, and a working man could support a family and buy a house.

Which leads us to the next point. 

Everybody knows that a key predictor of economic health is new housing starts.  Every new house creates a ripple effect throughout the economy:  new stoves, new refrigerators, new carpets, new drapes, new furniture, on and on and on. 

But.  Between the years 2005 to 2009, new housing starts dropped 75% (see chart, below).  This was unheard of.  It was unprecedented.  This plummet in new home construction also came, interestingly enough, right after 2004, when the Bush administration and the Republican-controlled Congress lowered top individual income tax rates and capital gains tax rates to 35% and 15%, respectively. 

Which brings us back to my main point:  Lowering tax rates on the middle class spurs economic growth, but doing so for the very rich does not. Like any of us, super-rich people hate paying taxes, but — unlike us — they have the money to hire expensive lawyers and lobbyists to ensure that they don’t ever have to pay taxes.

And so.  Following tax cuts for the very rich in the early G.W. Bush years, the U.S. economy took its worst nose-dive since the Great Depression (which, as you will recall, was also preceded by tax cuts for the very rich).  Our economy is just now, as of this writing in January 2012, starting to come around after four years of our current “socialist” president, Barack Obama.  And of course, to hear the Republicans tell it, he is the problem. 

But don’t forget.  Conservative politicians’ well-heeled backers have the money to propagandize their message on right-wing talk radio and Fox News, and in newspapers and books, almost all of which are published by large and wealthy corporations controlled by board members who constitute what Paul Simon referred to as “a loose affiliation of millionaires and billionaires.”

Thank God that at least Warren Buffett has not lost his humanity.  Or his common sense.

*

There’s another side of this story, an important one.

The history of Federal tax policy closely follows the history of U.S. war efforts.  Our first sales taxes came after the War of 1812; the first federal income tax was instituted after the Civil War. 

Traditionally, income tax rates have always gone up dramatically, especially for the wealthiest Americans, during and after major armed conflicts.  This has been the agreement.  We go to war, and the very rich — who often own the factories making tanks and bombs, and who prosper thereby (and whose children, incidentally, can usually avoid the draft) — pay much higher taxes.  As mentioned above, the top rate was 77% after World War I, and 94% after World War II. 

However during the invasions of Afghanistan and Iraq in the early 2000’s, the Bush administration kept the real cost of the wars hidden from public scutiny and media coverage with a little camouflage net called “off-budget emergency supplemental appropriations.”  The huddled masses were none the wiser.  Out of sight, out of mind.

And so it was the perfect storm.  We had lowered taxes on the wealthiest, while hemorrhaging billions in not one but two unfunded wars.  Of course we piled up record deficits, trillions upon trillions, borrowing from the Chinese and future generations to make up the difference. The economy sputtered along as people took out second mortgages on their homes, which had been re-appraised to show appreciation from the housing bubble, which finally popped, and it all came crashing down, as all houses of cards eventually will.

Predictably, no Republican is telling this side of the story, the dirty little secrets that a) taxing the ultra-rich helps the economy and b) “W” hid from us the real cost of his military adventures, both of which — taken together — ran our nation off a cliff.  Predictably, the Republicans and the right-wing talk shows and Fox News are all blaming Obama and the Democrats for the Bush-slash-Republican recession.  And those who read little, and think even less, believe what they hear from the propaganda organs of the far right — not from the gentle lessons of history and common sense. 

I believe, and hope, that greater numbers of the American people will see more clearly in the future.  I pray that they will understand that very rich people need to have their wings and their incomes clipped at times, especially after long and expensive wars. 

Times like right now.

*  For more on Warren Buffett, see this story on ABC News: http://abcnews.go.com/Politics/warren-buffett-raise-taxes-wealthy-friends/story?id=14307993

For a critique of Ronald Reagan’s tax cuts for the richest among us: http://rationalrevolution.net/war/trickle_down.htm

 

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About John Mears

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17 Responses to Super-tax the super-rich: an idea whose time has come. Again.

  1. Mark Lawrence says:

    Oh man, did you ever nail that one! Great job of expressing in simple, clear English why our economy is in the toilet and people in despair. I also hope people will wake up, hopefully before too much more pain is inflicted…

  2. Yes, but the tax should land-value based, not income-based, because that’s from whence the uber wealthy (except Warren Buffet) derive their riches. And see http://thedepression.org.au/?p=9941

  3. fancy rental says:

    This is the same rigmarole that is trotted out time and again that evidences a complete lack of understanding of the tax code. Yes tax rates were 90%+ 50 years ago but there were so many tax shelters and tax loopholes that were legal under the tax code that nothing close to those rates were ever paid. In today’s tax code virtually all tax loopholes are gone and so the overall percent of tax paid by the highest income earners is actually MORE than it was back then. That is, except for those who don’t work for a living but instead get their incomes from capital gains, ala Warren Buffett and other “investors”.

  4. sbourg says:

    John: I believe the error you’re making is very common……..correlation does not imply causation. More likely with your argument, the truth was that the US economy did well in spite of high marginal tax rates. I can certainly think of reasons our manufacturing succeeded starting 1945 that had NOTHING to do with high taxes. The infrastructure of the rest of the developed world was wiped out (Japan, Germany). Since the 1950s, state and local taxes have become much larger. But alas, it’s easy enough to prove your hypothesis wrong. To liberals, huge taxes are mainly one purpose: to move money to the lower paids via the govt, with programs and govt jobs. Well, my good man…….THAT’S BEEN DONE THE PAST 4 YEARS. I don’t think it would be possible to spend much more than the fed and states (blue states esp) have recklessly spent. Fed spending is in 4th year in a row of massive, egregious, reckless, Euro-style, semi-socialist-style SPENDING ORGASM. And, as Henry Morgenthau said to Congressional Dems in 1937: ” We’ve spent more money than ever thought possible, and it has not worked. ” QED, my good man. Take all you can/want from the ‘rich’. It won’t create a vibrant private sector. What does? More economic freedoms and less ‘central-planning’. Period.

    • John Mears says:

      You’re right, correlation does not imply causation, but where there is smoke, there is often a fire. Your argument that the lack of competition from a devastated industrial infrastructure in Germany & Japan is cogent. BUT. It remains true that a: the Great Depression occurred after a string of pro-business Republican administrations that lowered taxes on the very rich and also deregulated banks and investment practices; and b: some of the proudest times of U.S. history — our recovery from that Depression and our victory over Axis fascism — occurred during a long FDR presidency whose policies would be booed off the stage by present-day Republican or Tea Party audiences. It also remains true that the Bush-era orgy of warmongering and UN-taxing the very rich has driven our country into a ditch, which it has taken our current “Socialist-Muslim-foreign-born” president to get us out of. Finally, recent polls show overwhelming support for taxing the very rich. So, my friend, it seems to me that the time has come to tax the super-rich. Again. And if it were up to me, I would SUPER-DUPER-tax them, so they don’t have enough to buy up any more of our government, our media, or our educational system.

      • sbourg says:

        John: I think you should read some recent books about the Depression, “FDR: New Deal or Raw Deal”, and “The Forgotten Man”. They are each brilliant, and you would find, factually frightening. No, FDR’s policies did not get us out. They did the opposite. They worsened the depression and lengthened it. We didn’t come out of it until he died and Harry Truman announced to the country that the business and regulatory environment would henceforth be improved. And the business owners listened. And no, the depression didn’t start because tax rates on the wealthy were too low. There were about 4 reasons and one of the keys was Smoot-Hawley. I think you would even boo FDR’s policies off the stage if you knew more about them. You should read those books. The blue-eagle NIRA put balls and chains on businesses, fixing their prices, could not be lower than x.

  5. Auntiegrav says:

    Two things (whether they dovetail with what you are saying…I will leave to you):
    Redisribution of wealth is important because of accumulation. Accumulation of wealth is a tool that, when misused as it is today, denies access to resources for most in order that a few can hold some power or wealth against them. Redistribution of that accumulated wealth only works if there are enough resources to redistribute after the overhead is paid (environmental costs, accumulation infrastructure) in perpetuity. Since perpetual growth always leads to a bust, the solution is probably to prevent too much accumulation in the first place, rather than encouraging growth and then trying to put the cat back in the bag.
    Second: Housing starts are a reflection of resources being available to the masses to build their own houses (all those contractor jobs, landscapers buying pickups, etc. are just a modified version of peasants building their houses in their spare time). Redistribution of cash doesn’t necessarily make resources available to the masses if those resources have been burned up building the wealth base in the first place.
    Thanks for the post. It’s always nice to see pretty charts….;-)

    • John Mears says:

      Well, I hate to take money away from hard-working people who have earned every cent the hard way, but many of the very rich and the super-rich these days got their money the easy way — with smoke & mirrors. And I would like to see their money put to good use in, say, quality schools in poorer neighborhoods.

  6. Butch says:

    The central piece of evidence is missing form your piece. Other than an anecdotal relationship how does increasing the taxes on the rich improve the economy? I agree with you, just wishing you had linked more evidential support to your argument.

    • John Mears says:

      Good point, Butch — I’m obviously not an economist, but from my experience, very rich people are often very cheap (that’s how many of them got rich — by saving money & being stingy, then investing their savings), and these days at least, many of the opportunities for making money are overseas, so their savings don’t benefit this country, they benefit China & other Asian countries, whose rich are also getting richer while the working classes are choking on coal dust and soot from coal-burning power plants. When we tax the rich and provide services such as education to the lower classes, those “little people” spend money on necessities & consumer goods & houses, and economies boom. Just a guess.

  7. Larry C says:

    Tax the uber rich if for no other reason than to reduce their affect on media, political and election processes.

  8. Matt Davidson says:

    Just another article for ignorant people. All this talk about “tax rates” is totally BS because all you are talking about is INCOME TAX RATES! What about Capital Gains, Corporate Taxes, Excise Taxes, Sales Taxes, Property Taxes, etc. etc. etc. AND YOU FAIL TO MENTION THE BIGGEST TAX OF ALL “THE INFLATION TAX”. The inflation tax is so big that it has taken 98% of your money’s value since 1913. In other words, what you could buy in 1913 for 2 cents now cost a dollar. That is the government taxing you on your dollars. You try to make a point that taxes were lower during the 1990s… that is total BS… total tax rates are FAR HIGHER today than in the 1990s. The fact is that when Obama took office (January 2009), the national average for a gallon of gasoline was $1.80, today that gasoline costs twice as much… same with most food (beef, chicken, wheat, oranges, etc. etc.)… don’t be hoodwinked by BS numbers about income taxes… income tax is one of the smallest taxes that the government collects. In fact, it only makes up 30% of Federal revenues! By the way, the boom after World War II was a direct result of a 80% decrease in federal government spending in 1946. If the federal government cut spending by 80% next year, we would again see an economic boom, because all the federal government does is collect the money and waste it (give aways to big corporations like Solyndra and foreign aid to brutal Muslim dictators and scheming Zionist Israelis and don’t forget the maintaining 800 military bases in 130 countries). There is a real simple solution to all this madness… VOTE RON PAUL!

    • John Mears says:

      I would vote for Ron Paul only to get us out of foreign wars & stop sanctimonious moralists like Rick Santorum from telling us what to do in the privacy of our own homes.

  9. Shrekgrinch says:

    The ’28 crash was caused by suddenly raising tariffs via Smoot-Hawley, not because tax rates for the rich were ‘too low’. The tax cuts through out the 20s also did not happen all at once, but over time…and each time the economy boomed. The Rich were also contributing 75% of the federal income tax revenues. In the 1950s, when we had that absurd 91% tax rate they only provided 9% of the federal tax take.

    When Kennedy dropped the top rate to 70%, the economy boomed. Likewise when Clinton was forced to cut the cap gains tax rate in 1998. Remember the tech boom? That only happened AFTER that tax cut happened.

    As for the average American middle-class becoming more prosperous after WWII, that does tend to happen when your economic competitors get bombed to the stone age, yes. Likewise, the competitive pressure from overseas started in the late 1960s for the opposite reason: Germany and Japan had rebuilt.

    And the real culprit why the middle-class has seen its purchasing power erode since the early 70s was because we abandoned Bretton Woods and have been practicing open dollar debasement ever since. The rich can protect themselves better from inflation.

  10. sbourg says:

    Hey John: Bush’s tax rate cuts didn’t change higher-paid taxes as much as it did for lower-paids! Higher-paids saw39.6% reduce to 35%. You’re describing your economic answer as super-taxing the uber-rich. So Buffett’s $40m of dividends and cap gains would go from $6m federal tax to what? And how much would that raise for the federal govt? (not much). And how would that help the economy? Did you actually read my first post? You didn’t respond to any details.

  11. sbourg says:

    For each of you who voted for Obama (maybe 2x), consider that the Democrats are just playing the american people like fools/puppets. They could’ve passed any tax increase on the ‘rich’ they wanted in 2nd half of 2010 when they had 60 votes in the Senate. Why do you think they didn’t? Two reasons, probably equally true: They didn’t want to risk it making the economy WORSE, and here’s the 2nd reason, the ‘coupe-de-grace’: They didn’t want to LOSE the “soak-the-rich” campaign slogan !!!!!!!!!! If they actually DID IT….then they couldn’t USE the slogan any more !!!
    Once again, they fooled their voters for ’12 and they’ll use it again for ’16 !!!

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