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?
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