01.14.2011
Lessons from the Great Depression
original article written by Net Advisor™
The above image isn’t from a 1929 government Cash for Clunkers program, it’s an example of what can happen to things that were once deemed valuable such as the above luxury car, or a home or an investment. During down economic times, values can drop, and drop and drop. But in the case of U.S. government history, taxes rarely drop.
Tax Hikes Coming Near You
Treasury Secretary Timothy Geithner and the Obama Administration are thinking up ways on how to increase taxes as opposed to making real change in cutting government spending. The government tax ideas are said to be “revenue neutral” however if you are taking away money from one area and increasing it in another did you create more revenue? Answer: No. All one did is shuffle the burden more on one party than another. That strategy won’t solve the federal budget crisis.
Errors From the Great Depression
One of the worst things a government can do is raise taxes in a recession. This was the strategy government used during the Great Depression. During the Great Depression personal income fell nearly 52% from $87.8 billion to $42.5 billion between 1929 and 1932 (Source: Tax.org). Keep in mind were are talking about 1932 dollars.
Government was facing huge deficits and looking for ways to get more revenue. The Federal Government passed what was called, The Revenue Act of 1932 where federal income taxes doubled in some cases or went even higher in other cases. For example, individuals earning $32,000 a year had a base tax of 8.00% then add a surtax of 16% with a net of 24% federal income tax – a 300% increase [Source: wikipedia.org (chart)].
If higher income taxes weren’t enough after massive job losses, government went a step further. The 1932 Revenue Act included a tax on all property (Source: Hartford Courant – June 12, 1932). Record foreclosures occurred during this time due in large part to the massive unemployment rate (chart above). The residential foreclosure rate hit nearly 13% by 1933 (Source: Federal Reserve Bank of St. Louis Review, Nov./Dec. 2008, P571 (chart Figure 1 below).
Cities carried much of the burden attempting to support the unemployed and homeless. Cities also found themselves near bankruptcy by 1932. In Chicago, Illinois police, fire-fighters, and teachers had not been paid in 8 months and subsequently fired (Source: NPS.gov).
Just like we hear from political talking points today, government thought that taxing the rich would solve their debt problems.
“The tax, Mills emphasized, would still be confined to a narrow slice of American society.”
“There would be only some 3,600,000 Federal taxpayers in a Nation of 120,000,000 people, and of this number less than 300,000 would contribute 90 percent of the tax.”
— U.S. Deputy Treasury Secretary Ogden Mills (1932), Source: Tax.org
The tax hike plan failed and kept the U.S. in Depression for nearly another 10 years.
Today
Illinois still has not learned its lesson from the Great Depression. In 2011, a new law passed for the biggest tax increase for individual and corporate taxes in the state’s history.
Separately, President Obama sought to end the “Bush Tax Cuts” that were created to get the U.S. out of the last recession (2000-2002), which worked (article). After voter rage over government out-of-control spending (PDF) and unpopular policies (PDF), there was a political sweep in government in the November 2010 elections. President Obama changed his stance to keep tax rates the same for everyone for at least 2 more years as they were since 2001.
The question is, will government learn the lessons from the Great Depression and not repeat the same incorrect policy decisions that kept the U.S. in depression for a decade?
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