Taxes!!! Pt. 2

—and a brief history of economics

Here’s the problem if you keep raising tax rates: You slow down economic growth—Paul Ryan

The problem with the above quote is that it is simply not true.  Earlier we talked about how you cannot adequately compare civilizations a century apart in regards to economies and taxes. What you can do is look at the overall picture to establish trends and you must use history to establish these trends; if for no other reason than to avoid making the same mistakes.  The above quote shows the mindset of the Republican Party for the last 30 years; a fanatical adherence to the ‘trickle down’ economic theory. The problem is that it has been proven false time and time again.

The so called ‘trickle down’ economic theory is nothing new and actually dates back to the 1890’s.  Despite what many will say, over the years this theory has never been proven. For those who don’t know, ‘trickle down’ is the theory that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole. In short, cut taxes and eliminate regulations on businesses. In theory—and remember it is a theory not fact—this should work. Except for one very important thing; trickle-down economics does not take greed into account.

Income tax was established in 1913 by the 16th amendment.  Since then, ‘trickle down’ economics has been tried on several occasions. It has failed, every single time—drastically in some cases. The rates began low in 1913, but due to war and increase in manufacturing rates began to climb.  Taxes were strangling business; business did better when the government had less regulation—or so the Republicans claimed.  Thus, due to Republican control, in the twenties the tax rates began to fall.  By 1925 they fell from 73% to 25%.  And we experienced an awesome economic boom.  No, you read that right.  We cut the tax rates and the economy soared, coining the term ‘roaring 20’s.’  But remember, we know how this story ends.

The economy soared after the tax rates were slashed in the 20’s but it was not sustainable. See, while millionaires were paying a third of the tax they had previously the protections for the lower classes were disappearing. The theory was that the wealthy would spend the money they saved in taxes and stimulate the economy.  Here’s the problem, the wealthy spent money but in the stock market.  Most of the wealth in the United States was invested in Wall Street. Meanwhile, these tax cuts did nothing to help the poor.  Inventories began to rise while consumer spending declined. These factors created an economic bubble—sound familiar.  A bubble is caused by a trade in products or assets with inflated values, in short, putting more money into an asset then it is actually worth. In 1929, the bubble burst and we went into a tailspin of a depression that has not been seen before or since.

With the arrival of FDR and his New Deal, tax rates began to climb.  That’s right; in the midst of a giant depression a president raised taxes to help the country out of it.  And it worked.  Slowly, the United States began to crawl up from the gutter.  Then came World War II. Taxes soared; but with the tax increase there was also an increase in manufacturing and thus, jobs. The 1950’s ushered in a huge economic boom…despite a tax rate of 91%.  To be fair, with deductions and everything available very few, if any, actually paid this rate.

I would also be extremely lax if I failed to mention the real reasons for the economic boom in the 50’s and 60’s.  First, the United States had almost no competition in manufacturing considering the centers in Japan and Europe had been leveled during the war. We began building an immense military and put tons of money into research, ,which also created jobs. In the 60’s, taxes began to fall.  And the economy still stayed strong.  The tax rate throughout the majority of the 60’s was at about 70% and stayed that way throughout the 70’s. The 70’s, however, would bring with it a whole new set of issues.

In a word, the economy of the 70’s sucked.  That was primarily due to the oil crisis of ’73 and, later, the energy crisis of ‘79.  The 70’s also ushered in a new economic platform that had never been seen before.  Stagflation is known as a period of stagnant economic growth and rapidly growing inflation and unemployment.  This was something that had never been seen before or since in the United States.  This new issue required new ideas in halting the downward spiral.  Ronald Reagan provided just these kinds of ‘new’ ideas.  This would be the reason he won the election in 1980.

When there is an income tax, the just man will pay more and the unjust less on the same amount of income—Plato

Reagan promised sweeping changes to the economy and boy did we get it. The perfect example of be careful what you wish for.  Reagan was a firm believer in ‘supply side’ economics, commonly known as ‘trickle down’ and eventually, Reaganomics. Reagan theorized that lower taxes would make people want to work harder and longer and would then save and invest more.   Reagan slashed taxes by 25% in his first three years and closed loopholes. These cuts primarily benefited wealthy Americans and the theory was that higher investment would bring new jobs and higher pay. Paul Volker, the Federal Reserve Chairman, stopped the growing inflation by slowing the growth of the money supply and increasing the interest rate.  While this initially caused a recession by 1983 the economy began to rebound, but this time only a few would benefit.

There is some debate as to whether it was Reagan’s tax cuts or Paul Volker’s actions to curb inflation and healed the 1980’s economy.  Whether it was Reagan’s deregulation or the massive increase in government spending. But one thing is clear, between 1981 and 1988 the income rate dropped from 70% to 28%. However, wages continued to remain stagnant and the manufacturing jobs that built the middle class continued to disappear. 70% of American households had no stake in the market so they saw none of the benefits.  On top of that the payroll tax was increased. The wealthy saw their earnings by 14% while the poor saw their incomes decline by 24%.  Income taxes are paid, primarily, by the wealthy while the working class and middle class pay more of the payroll tax.  The poorest 1/5th of Americans saw their tax burden increase while the richest 1/5th saw their tax burdens decrease (CBO). Essentially, the tax burden was shifted from the wealthy to the poor. Wall Street was riding high but the poor were suffering. The wealthy got wealthier and the poor suffered more.  We were hemorrhaging jobs.  Then in 1987 the market crashed, pushing us into another recession.

George H. W. Bush  raised taxes to deal with the crushing deficits left to him by Reagan, ,costing Bush the election in ’92.  Clinton took over and raised the tax rate to 39.6%.  In a few short years he turned a deficit into a surplus, added needed regulation, and turned a recession into an economic boom.  Everyone benefited from Clinton’s economic plan. The rich stayed rich while the poor slowly began to climb out of poverty.  George W. Bush cut taxes to 35% and issued more deregulation.  Things went well for a while but it wasn’t to last. This time money was being spent in the over-inflated housing market and created, you guessed it, a bubble In the fall of 2008 the bubble burst and once again the United States began a tailspin recession.

It must be noted that outside influences had an effect on the US economy as well.  These were influences that we could not control regardless of how high or low our tax rates were.  But we would also be remiss if we didn’t note that our economy has crumbled after every major tax cut. If there was ever any doubt, ,the 1980’s should have proved that.  This backwards economic theory requires the heads of corporations to do the right thing, to increase wages and production with the savings they receive, to create more jobs…something they have proven time and time again that they will not do.  The rich get even richer on the backs of the poor.  Wall Street rides high and Main Street suffers.   That is the legacy of ‘trickle down’ economics.

Congressional Budget Office, “Congressional Study: Tax Progressivity and Income Distribution,” 26 March 1990. CIS#H782-11.

Taxes!! Pt. 1

…a little bit of history…

This month marks 100 years of income tax in the United States.  Naturally, this means that anti-taxers are out in force.  The other day I stumbled across this little nugget on the troll heaven that is Facebook and I just had to respond.

tax chart

Oh let me count the ways where this is inaccurate.  First of all, you cannot make adequate comparisons of societies a century apart.  Lots of things happen in 100 years.  It is actually no different than comparing 2013 to 1313…doesn’t work. You can look at the big picture and see trends over time, but you cannot compare the numbers directly.

Some things that were different about the world in 1913:  Passenger air travel is still primarily by zeppelins. While Ford introduced his Model-T in 1909 the moving assembly line would not come out until December of 1913, prompting a manufacturing boom.  These early engines ran on gas, kerosene, and ethanol.  Oil based engines would come later but big oil wouldn’t exist until the 1930’s.  The Romanov’s still ruled Russia.  Women couldn’t vote.  There had yet to be a world war.  Stainless steel wouldn’t be invented until August of 1913. Alaska and Hawaii were not states and Puerto Ricans were not US citizens. Those are just some of the ways that life was different in 1913.

It is worth pointing out that while none of this really has much, if anything, to do with actual taxes and economies the graphic does give a lot of numbers.  However there are quite a few it fails to mention.  First of all, ,the grand total for world trade in 1913 was 38 billion or in today’s dollars that would be 881 billion.  In 2011, it was 18.2 trillion.  Also, the population of the United States was 97 million.  Today it is 314 million.  These are some pretty important numbers to have if you want to compare tax rates and economies.  This is especially true if you want to compare tax revenues.

See, if you want to compare revenues you need more comparative data. The graphic claims that total tax revenues in 1913 were 16.6 billion in today’s dollars and that tax revenues were 2.7 trillion in 2013.  But that is if you compare the actual numbers without regards to population.  We have over three times as many people in this country than we did 100 years ago.  So that 16.6 should actually be multiplied by three to account for the increase in population making the correct number closer to 50 billion. Still, pretty big difference right?  Not so fast. A few more numbers are missing from this graphic.

In 1913, approximately 5% of the population paid taxes; in 2011 it was 56%.  So not only did the population increase three times over in the last hundred years but the percentage of Americans taxed went up 51%.  That’s 10 times the amount of the population paying income taxes making the actual number closer to 500 billion.  Not to mention the fact that the top rate of 7% was paid by exactly .05% of the population while today the top rate is paid by 2% of the population. But tax revenue was not the only thing to increase.  In 1913, the GDP was 600 billion in today’s dollars.  Currently, it is at 15.09 trillion—big difference.

So, why was it that only 5% of Americans paid income tax in 1913?  Well, this is where deductions kick in.  It was a simple deduction in 1913 of $3000 for single people and $4000 for families.  This essentially meant that no one who made less than $4000 paid taxes.  The average income in 1913 was $900.  So it goes to follow that the majority of the population was exempt from paying income tax.   Counting for inflation, this means the average income was $20,872.18 and no one making less than 93K paid any income tax at all

What happened? Why are more people paying at lower incomes now than in 1913?  This is where the hundred years of history kicks in and all the stuff I mentioned before becomes relevant.  As cars, planes, and assembly lines took off, manufacturing increased.  This provided a higher need for steel, oil, and workers.  This led to not only a boost in the economy but a big boost in worker pay as well. However this is not the only thing that happened.

In history, 1917 was a huge year.  First, let us start with Russia.  This was the year of the Bolshevik Revolution.  The year the Romanov family was slaughtered and Lenin took control of Russia.   This is hugely important because these events would lead directly to the Cold War.  This is also the year the United States would enter into an unprecedented conflict…World War I.  The events of 1917 would not only change the United States but would have far reaching impact on the world at large.

Another big year would be 1929.  The October crash and following Great Depression would have a tremendous impact on our economy and our tax code.  The 1930’s would see an implementation of public policy, supported by taxes, to ensure that Americans would be taken care of in times of crisis.  Roosevelt’s New Deal would have a huge impact, not just on our economy, but on our civilization as a whole.  The 1940’s would see yet another world war but this time the US would discover just how profitable war could be.  The 1950’s would not only see a huge economic and manufacturing boom, but would also give us the highway system…which is supported by taxes.  By the end of this decade we would also gain two new states.

Yes, the tax rates are higher now than they were 100 years ago, ,but we also have a larger country, bigger population, and a global economy that did not exist 100 years ago.  This is why you cannot adequately compare the two years.  Time has called the world to change and we must change with it.