Consider the 1950s. President Dwight D. Eisenhower, the general in charge of winning WWII in Europe, a Republican, and very much into heavy defense spending. That administration developed, mass-produced and deployed nuclear submarines, B-52 bombers, ICBMs, aircraft carriers, A-bombs, and H-bombs. Bases were maintained all over the world, with large numbers of troops. Plus, the US paid some of the costs of putting Europe and Japan back together, and the interest on the national debt from WWII.
Financial regulation was tight. There were commercial banks, which could take deposits and make loans, but couldn't trade in the stock market. There were savings and loans, which could make loans on houses and take deposits but not much else. There were stockbrokers, which could deal in stocks but not trade for their own account. Most stockbrokers were partnerships, such as Merril Lynch, Pierce, Fenner, and Beane, with the partners personally liable for losses. There were a few investment banks trading for their own account, such as J.P. Morgan. They were using their own money, and if they went under, that was their problem. Finance was very clearly subordinate to doing real stuff.
The CEO of United States Steel made about $42,000 a year. The first billionaire had not yet appeared; John Paul Getty, a Texas oilman, broke through that barrier in the 1960s.
Yet this locked-down economy produced the greatest economic boom in American history.
Keep in mind that the rest of the developed worlds' infrastructure and productive capacity had been bombed to oblivion. Of course it was a boon to the American economy, despite the political situation. The US was the only place left standing that could mass-produce complex goods in conjunction with its new-found standing as the most powerful military. The world we live in now is very different - it's flattened out. A large number of nations have either matched or surpassed the US in both productivity and standard of living.
Too many people think of post-WW2 as this huge time of prosperity. And it was.. for Americans primarily. All of the formerly-industrialized nations had to be "rebooted," primarily on the back of the Americans through efforts like the Marshall Plan. And this was a good thing.
The thing is that when you have ZERO competition, even a broken system looks pretty good and performs pretty well by comparison.
But conditions are fundamentally different now. The industrialized nations are still industrialized. New nations have become industrialized since. People travel easier and further. Capital flows easier and faster. News and information travels the fastest of all.
Copying the decisions of the 1950's 1960's without acknowledging that conditions are different is foolish at best and suicidal at worst.
You reinforce my point. Buying products from overseas was not viable because their capacity was bombed to hell. Not many electric washing machines coming out of these places after the war:
Right. Ocean shipping, before containers and faxes, used to be much more expensive, much slower, required far more packing, and was far less reliable. As the graph points out, US foreign trade was under 5% of GDP in the 1950s. Much of that was raw materials, not manufactured goods.
(The concept of ordering something from across an ocean and reliably getting it undamaged it is quite modern. Before containers, things had to be crated, in crates so strong they could be banged around and stacked. A packed manufactured item could weigh 5x its unpacked weight. Paperwork usually traveled with the item, and maybe it got there.
Faxes helped a lot, especially across language boundaries. Purchase orders and invoices are something of a universal language; if you can read item number, quantity, price, and destination address, you can probably do the transaction.)
Republicans in the 1950s were not the same as Republicans after Nixon and Goldwater.
Interesting you single out 1953. There was a recession the very same year! Not a lot of data on it (some JSTOR papers I can't access), but restrictive credit policies, massive military Keynesianism and housing supply shortages are listed as causing factors. Go figure. Then, of course, another much more severe recession hit the Eisenhower period again (but nowadays mostly forgotten) in 1958. Unemployment soared to 7% nationwide and in particular places like Detroit up to 20%. It's difficult to tell how it was alleviated, but this wealth advisor's [1] retrospective analysis claim a highly modest and fiscally conservative response (no great deficits). Wikipedia also cites a 2011 book "Eiseinhower and the Cold War Economy" which claims that some deregulation of mortgage loans helped in the recovery.
So, I can't immediately tell if a "locked-down economy" was the cause of the boom, or if it happened in spite of it. The post-WWII boom began as early as 1946, so I'm uncertain.
At the end of the war, the US made up about half of the world economy. It was the only major economy not smashed by the war. That seems like a recipe for economic success even if mismanaged.
I'm not saying that the high taxes actually hurt, only that it's hard to tell just from observing success.
Piketty points out that the post-WWII American confiscatory taxation regime was also a way to prevent the principle-agent problem[0] with corporate executives.
Why, if I control the company, would I not just transfer all the valuable assets of the corporation to myself and leave the shareholders holding a sad sack of debt?
Under postwar taxation, I wouldn't do that because I wouldn't actually personally end up with anything: it'd all go to the taxman.
Now that the top marginal income rate is so low and the capital gains rate is even lower, we see top executives transferring vast amounts of corporate assets to themselves.
Nothing like preventing principal-agent problems by greatly incentivizing state representatives' propensity to pork barrel projects through funds for the massive principal-agent problem known as representative democracy (Bretton Woods still had convertibility to gold).
The 90% tax rate is completely misleading, as there were so many deductions and loopholes that hardly anybody ever paid it.
Every time somebody brings up the 90% rate, it's always someone on the left attempting a "We could raise tax rates a whole lot more; just look at how high they used to be". It's one of the most disingenuous arguments in politics.
Just a reminder: due to the exceptional circumstances following World War II, the top marginal individual tax rate was around 90%. (The effective rate was really about 70% for the highest incomes since so few paid actually the top rate.)
This was largely to prevent war profiteering, though it lasted until 1964 when the top marginal tax rate was lowered to 70%. It's not really relevant to our times unless you're forecasting another global war, in which case all bets are off.
> It's not really relevant to our times unless you're forecasting another global war, in which case all bets are off.
According to http://www.csmonitor.com/Business/new-economy/2011/1025/Iraq..., the Iraq war will wind up costing "more than the $3.6 trillion the US spent to fight World War II, even after adjusting for inflation". Add in Afghanistan and the ongoing airstrikes and likely expansion into other areas of extremism, and maybe we should start talking about Americans at home paying a bit for the militarism in the form of higher tax rates.
Is that an argument for higher tax rates or lower ones? After all, if you are anti-war, would you really say tax rates should be higher so that we can have more wars?
The weird thing seems to be that the people who are most anti-war want higher tax rates for things that are not war, and then when the money gets spent on war, they want even higher tax rates for the things they were originally promised but didn't get.
Looking at tax history it seems like a repeating game of bait and switch.
Just a reminder that modern wars are done off the books without "pay fors" that congress insists on for everything else or your taxes would be absolutely insane. Like the $2 Trillion Iraq War.
I'm not sure about the "pay fors" you're talking about, but I believe your sentiment is correct-- and effectively, that $2T came out of the economy via the hidden tax of inflation.
While people would be mad to see the $2T in direct taxation (what you called "Absolutely insane") they do not realize it when it is done via inflation. (Eg: your gas prices, food prices, everything else is higher, because the government just printed the money to spend on the war, increasing the debt and devaluing the dollar.)
From The Economic Consequences of the Peace:
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.”
John Maynard Keynes
Generally when new spending is proposed it needs to be budgeted and either money repurposed from somewhere or new taxes introduced. This is sometimes referred to as "pay-fors".
Cool data source. Thanks for sharing. In case anyone is curious about the early history of the income tax, or why it is so spotty prior to 1913:
The income tax was first imposed in 1861 to help pay for the Civil War. Prior to that, the government got most of its income from excise taxes and tariffs.
In 1895, the Supreme Court declared the income tax unconstitutional, since it was not apportioned fairly between states, which is why the government added the 16th amendment in 1913, which gave it the power to impose an unapportioned income tax.
For most of that time, the USA was more a collection of halfway sovereign states than a singular nation. It would be weird for the shared government to reach into the individual states and tax their citizens. The appearance of the federal income tax coincides with the gradual restructuring of the country to be a single strong government with geographical subdivisions.
This is interesting because the federal government still owns a lot of the land in the western half of the country. I saw an infographic recently (sourcing a federal agency's statistics) which said that 48% of California's and 88% of Nevada's land are owned by the federal government.
I see this kind of comment an awful lot, and I have two immediate reactions:
The first is a sort of dumb and dumber "we landed on the moon!" feeling where I actually can't believe that someone didn't know that there used to be a 90% marginal tax rate. Perhaps you live outside of the United States?
The second is that the 90% tax rate is completely misleading, as there were so many deductions and loopholes that hardly anybody ever paid it.
Every time somebody brings up the 90% rate, it's always someone on the left attempting a "We could raise tax rates a whole lot more; just look at how high they used to be". It's one of the most disingenuous arguments in politics.
There's also the point pg brought up in his most recent essay[1]:
"To some extent this was an illusion. Much of the de facto pay of executives never showed up on their income tax returns, because it took the form of perks. The higher the rate of income tax, the more pressure there was to pay employees upstream of it."
As I pointed out with a link to this in a comment a while back: remember these are marginal rates, and remember there's inflation.
In order to pay the top 91% marginal rate in 1950, for example, you had to be making over 40 times the median income in the US, and that rate only applied to income past $200,000 (in 1950 dollars -- adjusted for today that's close to $2m). And just to end up paying a higher marginal rate than today's maximum of 39.6% you needed to be making roughly 3x the median income.
Some tax shelters were eliminated/reduced in their effectiveness, shifting some of their wealth gain through the year to being classified as actual income.
Marginal tax rate. That's an extremely important distinction.
A lot of people think moving up in to a higher tax bracket means their entire income is taxed at that rate, but it's entirely untrue. The top US tax bracket for 2015 starts at $413,201, but if you make $413,202 only the last $1 is taxed at that top rate.
Well, then, "God damn, 90% marginal tax rate!" For ultra-high income people, say making ten times the income where 90% rate kicks in (or around $10M in 2013 dollars annually in this historical data) the marginal tax rate can end up very close to their overall tax rate. Remember also, that historically the rates for capital gains and dividends were identical to those of ordinary income. All this is what people need to reference when they talk, e.g., about the rich having manipulated a redistribution of wealth over past decades.
The sad thing is tiny percentage of current populace (including the rich) have no idea that current income taxes are extraordinarily low historically. Formerly it was generally understood that progressive taxation was a good thing and made sense. America's "glory days" somehow happened with tax rates that conservatives now call "socialist".
Taxes discourage work. In the 70's it was common for just one member of a family to work, because if another person worked, all their dollars would be taxed at the 50-70% rate. The cost of working in terms of taxes, owning a car, gas, etc., got to the point where if a second person worked, the household would actually lose money, which of course leads to economic stagnation and recessions.
I agree progressive taxes make sense. The argument that a flat tax is fair by virtue of already being proportional fails to take into account the relative value of a dollar to the owner of that dollar.
In the 70's it was common for just one member of a family to work, because if another person worked, all their dollars would be taxed at the 50-70% rate.
Even as late as the 70s, it was common for just one member of a family to work because that person was the husband/father, and the wife/mother was strongly expected (and, through the way the employment system worked, often more or less forced to) stick to housework and childrearing.
> For ultra-high income people, say making ten times the income where 90% rate kicks in (or around $10M in 2013 dollars annually in this historical data) the marginal tax rate can end up very close to their overall tax rate.
Sure, but I'd happily take 10% of a billion versus taking home 90% of $40k without shedding too many tears.
Marginal tax rates mean a vanishingly small proportion of the population gets hit by increases to the top brackets, but Americans have been conditioned to see themselves as "temporarily embarrassed millionaires".
"Sure, but I'd happily take 10% of a billion versus taking home 90% of $40k without shedding too many tears."
What does this have to do with anything? Yes, there's a difference between marginal rates and overall rates. If people don't understand that as background context then they shouldn't even be in this discussion.
The main question to ask is, "How much tax is now being forgone by the trend to lower marginal rates over recent decades?" I don't know the number but it is at least many, many billions annually. Also, there were formerly lots of different tax brackets for the ultra-rich, with only the ultra-ultra-rich reaching highest marginal rate.
The question is not whether marginal rates are different from overall rates (which is a given). The question is how much could be gained by creating more brackets at the very top and raising marginal rates on all these top brackets up a bit (though by no means to where they've historically been), because it would make no real difference to the way America's ultra-rich live their lives. In other words, how much could be raised by making our income tax truly progressive again.
Exactly. I've had to explain to many people over and over our tax bracket structure. They keep thinking their entire money is taxed at a specific rate when you earn that much.
Instead of having all of these tax brackets, which for all of the smart people and companies they are meaningless anyway since they take advantage of the hundreds and hundreds of loopholes (also called "deductions") so they don't pay the full amount, why not have a flat 15-20% income tax for everyone instead - rich or poor?
I think it would be simpler, more honest, more transparent, and more fair (slightly favoring the rich, but it more than makes up or it in other ways). You also wouldn't have these endless discussions about whether you should tax the poor 10% (because the tax affects them more) and the rich 30%, or the poor 30% and the rich 10% (because they are the "job creators")?
A moderately fair flat 15% income tax for everyone. No deductions for any special interest.
I'm not a huge fan of subsidies either, but if you really think you need to "make it easier" for some vital or up and coming industries, then you could give them some subsidies for a while. That would also be a more direct and more transparent approach than giving them lower taxes, because then you'd know exactly how much of the taxpayer's money is going into aiding an industry and there would be bigger pressure to end that subsidy eventually.
A flat tax disproportionately hurts the poor. Losing 15% of your income when you can barely make ends meet is much worse than losing 15% of your income when you're making a million dollars. It looks fair mathematically, but it's anything but.
Of course, the current crazy tax structure ends up being fairly flat. Poor people pay different taxes, but the proportion is the same. But it would be better to fix that, not codify it.
>You also wouldn't have these endless discussions about whether you should tax the poor 10% (because the tax affects them more)
>No deductions for any special interest.
>I'm not a huge fan of subsidies either, but if you really think you need to "make it easier" for some vital or up and coming industries, then you could give them some subsidies for a while.
Easy answer - it removes divisive politics from the equation. No more "the rich don't pay their fair share" from the left and "what's mine is mine" from the right. Both of those are powerful tactics that the bureaucrats employ to keep us bickering while them and their cronies rob us blind.
It's interesting to get down votes for sharing link to wikipedia. Is taking a look at functioning flat-tax systems of other governments not even worth investigating, or does the very idea simply clash with some folks political agendas? Several of the nations are able to provide for both social welfare (including free secondary education and basic healthcare) as well as national defense on a (typically low) flat tax. Russia's 13% stands out for a large country and Estonia's 21% for a small country.
Consider the 1950s. President Dwight D. Eisenhower, the general in charge of winning WWII in Europe, a Republican, and very much into heavy defense spending. That administration developed, mass-produced and deployed nuclear submarines, B-52 bombers, ICBMs, aircraft carriers, A-bombs, and H-bombs. Bases were maintained all over the world, with large numbers of troops. Plus, the US paid some of the costs of putting Europe and Japan back together, and the interest on the national debt from WWII.
Financial regulation was tight. There were commercial banks, which could take deposits and make loans, but couldn't trade in the stock market. There were savings and loans, which could make loans on houses and take deposits but not much else. There were stockbrokers, which could deal in stocks but not trade for their own account. Most stockbrokers were partnerships, such as Merril Lynch, Pierce, Fenner, and Beane, with the partners personally liable for losses. There were a few investment banks trading for their own account, such as J.P. Morgan. They were using their own money, and if they went under, that was their problem. Finance was very clearly subordinate to doing real stuff.
The CEO of United States Steel made about $42,000 a year. The first billionaire had not yet appeared; John Paul Getty, a Texas oilman, broke through that barrier in the 1960s.
Yet this locked-down economy produced the greatest economic boom in American history.