In a discussion of raising marginal tax rates, reader DJ wrote:
Interestingly enough, raising taxes on the rich does not result in prosperity either, it only serves to drive the economic activity out of the country derived from the holdings of the rich. The 90% tax rate in the depression only served to drive milliona[i]res out of the country.
Note here, that on the basis of his comments, DJ knows what he’s talking about and has a good grasp of the facts.
The fact that he made this comment is an indication of the truth of the old Mark Twain quote, “A lie can travel half way around the world while the truth is putting on its shoes.“
DJ has assumed that self serving statements from people who don’t want their taxes raised actually have a basis in reality.
The myth that rich people did, and will again, “go Gault,” is just that, a myth.
First, and most importantly, the 90+% tax rate was not implemented until 1944-1945 (and then again in 1951-63, not times of slow GDP growth).
Second, there is no evidence that millionaire’s fled the country during the depression. The case is generally made that the recession of 1937 was caused by this, but only by people like Amity Shlaes (who is not to be trusted, see below) in her execrable book The Forgotten Man.
They suggest that because Roosevelt pursued tax evaders, it triggered the recession of 1937, because they went “Gault” and withdrew their money from the economy and put it in their mattresses.
Of course, the fact that neither Keynes, who blamed the tightening of fiscal policy by the government (which did include a tax hike) nor Friedman who blamed the tightening of monetary policy by the Fed, viewed this argument with anything but scorn, and this is the alpha to omega of honest economic thought.
Additionally, in order for people to flee the US income tax (after the first $91,400) you have to renounce your citizenship, which also precludes the ability to make campaign donations, which makes the regulatory arbitrage that generates this income, particularly in finance, which is where most of the tax rates increase would fall.
Essentially, if they leave the country and renounce their citizenship, the government guaranteed infinite ATM that they have goes away, because the Congress will no longer feel compelled to do their bidding.
I would also note that while the top 1% of earners account for 23.5% of income (2007), they account for less than 20% of spending (2008, they do quintiles, so it’s an approximation, and I don’t want to tease it out any further), so a dollar going to a rich pig™ is much less stimulative than a dollar going to a dollar going to someone in the bottom 4/5 of the population.
There is a legitimate question as to whether or not we should raise taxes on the rich today because we are still in a depressed economy, though I favor it.
That being said, many of our long-term structural problems come from the fact that income distribution is increasingly unequal, and the the use of high marginal tax rates is one of the best ways to change this.
I would also note that if the “geniuses” at Lehman, Bear Stearns, and Citi withhold their ideas for “financial innovation” as a result, we are all the better for that.
As to Amity Shlaes, who is typical of the people supporting the “going Gault” hypothesis, and arguably one of the most prominent proponents:
- She has no background in economics (degree in English)
- She is in idiot who lets her ideology dictate the facts (she was fired by the Financial Times for repeatedly submitting stories about the heroism and competence of Bush and His Evil Minions™ during Katrina).
- In order for her to justify her conclusions about 1937, she states as fact things that are unequivocally false.
Thank you for confronting these power-worshiping lies head on. The idea that we are all dependent on the "economic activity" of the rich is obscene.
Matt, thank you for your observations, it is evident you are well read on the subject and have given it a great deal of thought, it is refreshing to find. You are absolutely correct regarding the income tax scenario, and, combined with Sortition's comment, I think we may need a clarification of the definition of "the rich".
Particularly with the recent interpretations regarding corporate campaign donations, "the rich" I look at are not simply spoiled, arrogant individuals with oversized wallets, but the entire corporate structures, especially those in the financial "industry". These are the groups that move massive amounts of "money" around the world, looking for profit, some of which is derived from tax evasion.
One needs to look at the increasing percentage of the GDP made up from financial activities to see the direction this is going, as opposed to engineering and manufacturing, which actually produces real wealth. The Goldman JP groups, who now hold an even larger portion of the worlds banking, have no issues in siphoning off capital and directing it anywhere there is an advantage. The bottom line is, these "rich" actually do make us dependent on their econonmic activity, as evidenced by the "give us a trillion dollars or else the world ends" threat we were so recently subjected to.
> The bottom line is, these "rich" actually do make us dependent on their econonmic activity, as evidenced by the "give us a trillion dollars or else the world ends" threat we were so recently subjected to.
That threat has zero credibility. It would not be difficult to create a public banking system that would function much better than the current one. This is the same story as with the private health insurers and healthcare providers.
The financiers and the health industry got the money not because we are dependent on them but because the people who made the decision to give them the money are their friends.
Sortition, you are absolutely correct, the only truly sustainable system of banking/credit was that used by the private sector, successfuly for hundreds of years. Credit must be destroyed on the expiration date, not rolled over with an extra helping on top, expecting us, the tax paying public to pick up the tab down the road, pretending it wasn't a big deal because the inflation makes it look smaller than it actually is. And you are absolutely correct that the banksters got the money because of their friends in washington. The government people are the banksters, it's a revolving door to graft and corruption.
A quick fix would be to eliminate the tax deductibility of credit, which has the effect of subsidising speculation.
A great suggestion where the normal business world is concerned, unfortunately the real velociraptor in the room is the 600 trillion plus derivative market, naked shorting and so on. Tax deductability is not relevant to this group, and this is where the upcoming credit collapse will originate.
> Credit must be destroyed on the expiration date, not rolled over with an extra helping on top
This makes sense for investment credit or mortgages, but for consumer credit revolving credit is the essence of the business. With consumer credit, the creditor attempts to hold the borrower in a permanent debtor status. It is in some ways quite similar to indentured servitude.
Like indentured servitude, I think a good case for eliminating consumer credit altogether can be made. It is not clear to me that consumer credit serves any useful purpose in society.
By the way, the Real New Network has an interesting interview with Bill Black on the matter of banking regulation – part 1, part 2. Black emphasizes that the profits of the banks are simply a matter of fraud.
It is true that todays credit depends on rolling over, from consumers to treasuries. Your point on indenture is spot on. The only hope for consumers is to pay off all credit, but that has been rendered all but impossible for most.
Tying that in to banks, and the frauds they are, consider attempts to cancel credit cards. If you have never tried that, it is a most interesting experience. The reason they don't wish to allow you to cancel is the way they are using YOUR cedit. When you receive a card, the credit limit goes on the banks books as "reserve". Due to fractional reserve banking, that allows the company to count that as 300-400%, and operate their financial activities at a fradulent level. Interesting, huh? Black is correct, they profit from fraud, and the scope is incredibly large.
I don't disagree.
In that area, making derivatives like insurance, where you must have an interest in the continued existance of an asset, would be a good start.
So would a tobin tax of 50 basis points or so, where the tax would apply on each step of the derivative.
So for example, if you short a stock, you pay 1/2% when you borrow the stock, you pay 1/2% when you sell it, you pay 1/2% when you buy it later, and you pay 1/2% when you return the stock.
It makes a quick speculative deal much less attractive.