I understand the natural aversion to paying income tax. I have twinges of it myself when I write big cheques. I also understand the concern that more tax can lead to bigger governments and waste. I hate waste more than most things. But when I hear people complaining that we pay too much tax in North America and that we need to lower not increase our rates, I think they are entirely missing the reality of our present situation.
For the past 40 years we have had a growing wage disparity in North America. This trend is common in human history and has repeated in cycles throughout. The timeless driver continues to be the human tendency toward greed and hoarding of resources. It starts with a few people getting enough and starting to want more. Attaining more than the average gives one a leg up and they start to create hierarchy and distance between themselves and the masses. The more they do this, the more they get and the more they influence government policy. The more they get the more they hoard resources and the less there is for others. The less the masses have, the less they can participate in decision-making and the more powerless they become in the society. Eventually the gulf between the haves and have-nots becomes so wide that the have-nots have nothing to lose so they rise up, revolt and take back resources. In doing so, the wealth equilibrium gets restored somewhat and society rebuilds again for a time, before it starts all over again. Think of feudal England, think of the French revolution, there are many examples.
A more recent example is The Great Depression.
During World War 1, US federal spending grew three times larger than tax collections. In 1920 the government cut back spending to balance budgets and prompted a severe recession. A heavy investment in manufacturing during the war lead to huge gains in productivity: more output could be achieved with fewer workers. Unemployment rose and organized labour lost bargaining power. The American Federation of Labour saw its membership fall some 33% between 1920 and 1929. In 1925, the wealthy succeeded in having the top tax rate lowered to 25%. By 1929, the richest 1% of the population possessed 40% of the nation’s wealth. The bottom 93% of the population saw a 4% drop in real disposable income. Unemployment rose year after year from 3% in 1920 to 25% by 1933. The economy continued to contract, as exports fell and domestic demand waned from an ever weakening consumer base.
The have-nots had so little that they could not support growth in their own economy.
In 1932, Congress passed the Federal Home Loan Bank Act and the Glass-Steagall Act to help rein in excesses in the banking sector which had contributed to the collapse. And they increased the top tax rate from 25 to 63% as Roosevelt’s government proposed a plan to re-distribute wealth from the very rich to the poor. (In response a group of millionaire businessmen led by DuPont and JP Morgan attempt to overthrow the government in a military coup which was later foiled!) The government re-routed the increased tax revenues into infrastructure spending aimed at job creation. The Gross National Product which has been in a free fall for years started to firm.
In 1935 Congress passed the Banking Act, the National Labour Relations Act, and the Social Security Act. The economy began to grow again. In 1936 they raised the top tax rate from 63 to 79%. The US invested heavily to build its armed forces in preparation for anticipated hostilities in Europe and the economy rebounded.
By 1945 the top tax rate was increased from 79 to 91%! It stayed above 88% until 1963 when it was lowered to 70% and stayed there until the Regan administration lowered it to 50% in the 80’s. The early 80’s saw the start of a 17 year period of above average gains in the economy and the stock market as the nation enjoyed falling interest rates and falling inflation. It also saw falling taxation rates all the way to the present where the top rate is 35%.
It is important to understand however that the US saw a long period of prosperity in the 80’s and ‘90’s was not because of lower tax rates then, but rather because the country had paid much higher taxes for decades. During that period, wealth that had been horribly misallocated in the '20's, was successfully redistributed and re-invested in the American people and infrastructure. The personal savings rate recovered to nearly 20% by 1980; the average person had accumulated some savings and equity in reserve which they then used to help buoy domestic demand for the next 20 years.
Those that had the most had to ‘give,’ in the form of less wealth left in their hands, in order to ‘get’ a vibrant economy with a thriving middle class that could support its own economy.
We have come full circle again today. We need higher tax rates, smaller governments and more reinvestment of tax revenues into people and infrastructure now in order to get a strong economy and nation again in the future.
We need to stop the childish whining about tax rates being too high (they clearly are not) and get on with rebuilding the western world.
Here is a segment on the latest US wealth stats.
Cory’s Chart Corner
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