econscius

Soaking the Rich, Herbert Hoover Style

In Great Depression, Herbert Hoover on August 18, 2011 at 12:01 am

The economy is in tatters.  Unemployment continues to rise.  America is losing its confidence amidst foreclosures and a seemingly never-ending drop in home prices.

Populist fingers of blame are pointed at Wall Street financiers.  Many blame a Republican President who was in office when the financial markets collapsed.  The budget is in the red and the federal deficit may double during the President’s term. 

The President signs into law a big increase in income taxes to balance the budget.  Marginal income tax rates more than double for millionaires.  The estate tax is doubled and corporate taxes are raised [1] as America asks the rich to pay ‘their fair share’. 

Is this President Obama’s America in 2011?

No, it is Herbert Hoover’s America in 1932.

In a way, it is odd Herbert Hoover is not an icon on the Left.  The Revenue Act of 1932 was steeply progressive, raising the top personal tax rates on $1 million in income from 25% to 63%.   A “check tax” of two cents on every bank check was even introduced.[1] [2]

Today, some on the Left propose a similarly large tax increase on the ‘rich’.  US Rep. Jan Schakowsky (D-IL) recently introduced a bill to increase income tax rates to 45% for $1 million – up to a top rate of 49%.  She has many co-sponsors in the US House. [3]

History never quite repeats itself the exact same way.  Thankfully, 2011 is not quite 1932.  Economists and historians do not agree on the exact causes of length and severity of the Great Depression, though the causes noted often include the Stock Market Crash of 1929 and ensuing declines, tightening of the money supply by the Federal Reserve [the opposite of what modern theory holds the Fed should do], Hoover signing the protectionist Smoot-Hawley tariff, a terrible drought, a lack of confidence perhaps exacerbated by the increasingly aloof President Hoover, and anti-business policies of FDR.  The tax increases proposed by Schakowsky is not quite as draconian as that of 1932.

Be that as it may, the big tax increase of 1932 most certainly was not followed by any economic improvement.  Unemployment rose from 13% in 1931 to 18.8% in 1933, 19.8% in 1934, 21.3% in 1935, was 19.5% in 1935, 16.6% in 1936, 14.1% in 1937, 17.8% in 1938 and 16.0% in 1939. [2]   A big rise in tax rates in a recession did not work any magic on the economy in 1932-3 and would not work in 2011-2.

[1] http://en.wikipedia.org/wiki/Revenue_Act_of_1932

[2] $1 million is $16.5 million in 2011 dollars http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1000000&year1=1932&year2=2011

[3] http://www.huffingtonpost.com/2011/03/16/jan-schakowsky-income-tax_n_836624.html

[4] http://en.wikipedia.org/wiki/User_talk:Peace01234

Pictures from Wikipedia commons.

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