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03 October 2009

Taxes and Depression

Arthur B. Laffer wrote an excellent opinion piece for The Wall Street Journal on 22 September, which I have been meaning to summarize for some time now. He discusses some of the important causes of the Great Depression. He concentrates on the large tax increases that contributed so much to the depression and I want this as background for several other entries I will be making here. I have previously noted other important causes of the Great Depression, such as the terrible uncertainties the FDR anti-business and anti-capitalism regime caused for businesses with price controls, anti-trust, limits on production, fostering union violence, and regulations. I have also discussed the tax increases, though Laffer's account on taxes is more thorough.

He notes that the policy of the Federal Reserve played a role in the Great Depression, but it was a secondary role. The following tax increases were most important.
  • Smoot-Hawley tariff of June 1930, the largest tax increase on trade in peacetime
  • In 1930-31, slight increase in tax rates on personal income in lowest and highest brackets and the corporate tax rate was increased from 11% to 12%
  • In 1932, the personal income tax lowest rate was raised from less than 0.5% to 4% and the highest rate was raised from 25% to 63%, the corporate rate was raised to 13.75%
  • Also in 1932, many, many excise taxes were increased, the highest death tax rate was increased from 20% to 45%, and the gift tax was brought back with the highest rate set at 33.5%
  • In 1934, the highest death tax was raised from 45% to 60% and the highest gift tax rate was raised from 33.5% to 45%
  • In 1935, the highest death tax was raised from 60% to 70% and the highest gift tax rate was raised from 45% to 52.5%
  • In 1936, the highest corporate tax rate was increased to 15% and a surtax of up to 27% was placed on undistributed profits; the highest personal income rate was raised from 63% to 79% (a 216% increase in just 4 years)
  • In 1937, a 1% employer and a 1% employee tax was instituted on all wages up to $3,000.
State and local taxes were also greatly increased. In 1929, they summed to 7.2% of GDP, but from there they went up each year. In 1930, state and local taxes were 8.5% of GDP, in 1931 they were 9.7%, and in 1932 they were 12.3%. This was a walloping 71% increase in 4 years!

The federal government also forced everyone to sell them their gold at $20.67 an ounce, but then set the price of gold at $35 per ounce in Jaunary 1934 about a year after requiring everyone to turn in their gold. This was a devaluation of the dollar by 59%, which was a huge tax, though in the evilly cunning way of government, it was not called a tax.

Laffer then points out that this 1933-1934 devaluation of the dollar resulted in a 60% increase in the money supply from April 1933 to March 1937. The monetary base grew by more than 35% and adjusted reserves by about 100%. Despite very high unemployment, the consumer price index increased by 15% from early 1933 through mid-1937.

Now in light of this, we must give some thought to the many tax increases Obama has made or is planning to make. Of course many of these tax increases are also not identified as taxes, for Obama is no less cunningly evil than was FDR. We should also think about the many tax increases others will say we must make in order to pay down the huge deficits we already have and those which are coming. The main issue is the growth of the government sector and the stranglehold on the private sector, then and now.

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