Lessons from the Great Depression and One of the Biggest Tax Hikes in U.S. History

The chart above shows the highest marginal individual income tax rates from 1925 to 1945, using data from the IRS. The highest income tax rate was increased from 25% in the early 1930s, to 63% in 1932, and then to 79% in 1936. If you want to turn a recession into a depression with perverse fiscal policy, there's probably no better, more effective way to accomplish that outcome than by more than tripling marginal tax rates from 25% to 79% in the face of an economic slowdown. Talk about an "economic buzzkill"....

Perhaps the new administration and Congress should seriously reconsider whether 2009 would really be a good time to raise taxes. If you want to turn an economic slowdown into a recession, or an average recession into a severe recession, or a severe recession into a depression, raising taxes would surely help make that happen. It surely helped turned the recession of 1929-1933 into the Great Depression.

The chart above shows the increases in the lowest marginal tax bracket between 1929 and 1940, which for all years applied to taxable income between $0 and $4,000. Starting from .375% in 1929, the lowest rate tripled to 1.125% in 1930, and then increased again by more than 3.5 times to 4% in 1932, for a total increase of more than 10 times.

In dollars, the income taxes payable on $4,000 of income increased from $15 to $160 between 1929 and 1932, a 10.667 time increase. In today's dollars that would be like a tax increase of more than $2,315, from $240 in 1929 to $2,555 in 1932, on income in today's dollars of about $64,000 (using the BLS Inflation Calculator here).

The increase in the lowest individual income tax rate from 1.125% in 1931 to 4% in 1932 would be equivalent to a $1,837 annual increase in today's dollars for someone reporting $4,000 of income in 1932 (equivalent to $64,000 today), from $718 in 1931 to $2,555 in 1932, whopping 255% tax increase in just one year! Even for someone reporting taxable income of only $1,000 in 1932 (equivalent to $16,000 today), the increase in tax liability would have been 255% in just one year.

Comments

[David Martin:]

Back taxes on the bonuses paid to bankers whose companies are currently dependent on the Government would seem to be the way to go.
Since they are busy stealing $70 billion of the funds that are given in the form of bonuses, in recognition of their fine services in bankrupting the economy, a rate of, say, 95% of bonuses paid, retrospective for 5 years, would seem more just than burdening the taxpayers who did not create this mess.

2008 Nov 10 09:15 AM

[John Lounsbury:]

According to the Tax Policy Center, the Obama tax plan would raise the taxes on a couple with two children making $1,000,000 by 3.8% (and if making $2,000,000, 5.5%). It is disingenuous to compare this to the tax increases you cite for the 1930’s and 1940’s, especially when couples making less than $200,000 get a tax cut under the same plan.

2008 Nov 10 10:05 AM

[Kennedykid:]

As I understand it, Obama's tax plan is to allow higher marginal tax rates to revert to those under Clinton, when we saw remarkable economic expansion, the end of federal deficit spending and the creation of an almost $2 trillion government surplus. It is deceptive to suggest that Obama's tax plan compares with FDRs. What important national objective of economic recovery does your deception serve?

The last thing in the world I want our government to do now is give a "buzz" to the thieves and liars who robbed us blind and threatened our kids' future. A buzzkill for them is a good start. Some smart government regulation and hard time for the perpetrators of all this is more what I had in mind. But Mr. Martin's prescription above is a good start, as is President Elect Obama's.

2008 Nov 10 10:59 AM

[Paul Killinger:]

Mark,

You're right of course. And it appears we're headed that way. Like a wag once said, When was the last time a poor person ever hired anyone?

The best way to reinvigorate our economy would be to suspend capital gains taxes entirely, and slash corporate income taxes, which are now the highest in the Western world.

Unfortunately, we're going to do just the opposite. The only thing predictable about that is the outcome. Get out some more of your '30's charts, my friend. We're going to need them to track the next 4 years.

2008 Nov 10 11:11 AM

[jack kreg:]

So many points,
-yes, Obama only wants to raise taxes on the high earners, income, social security, cap gains and dividends, these folks are looking at more than just income tax hikes,
-yes, FDR raised taxes more, both plans are seriously flawed, particularly since Obama has the benefit of knowing how flawed the FDR tax hikes were,
-most voted for the massive bailout, $700B, actually more Dems than Repubs, get over that last years bonuses are being paid, abeit at much lower levels.

Excellent article, history is important it isnot always exactly repeated but the lessons are obvious, raising taxes in a strong recession is a very bad idea.

2008 Nov 10 12:01 PM

[jack kreg:]

Mark Perry, I commonly think very far outside the box, if all ideas seem flawed, then turn the box inside out, invert the playing field. Here's mine conclusion;
Global income tax cuts on workers and employers.
This is Obama's opportunity to really lead. Just imagine, a coordinated tax cut in all the western economy's, UK, EU, USA and Asia. Leave peoples money in their pockets, give the worker a boost. Let corporations keep more of their profits, they just might pay down some debt, or even hire somebody.
I cant imagine a corporation looking at increased taxes and deciding to enter a worker hiring program.
The solution to the global down turn is tax cuts on workers and employers, it worked for JFK, Reagan and Bush to exit economic slowdowns, and the opposition, raising taxes, clearly failed for FDR.
The only question left, is has Obama learned his history??

2008 Nov 10 12:08 PM

[CLH:]

Jack---Im sorry but Obama does not understand history or he wouldnt be a socialist. Your idea is right on the mark, but there is no way Obama is smart enugh to carry it out esp. with a democratic congress.

2008 Nov 10 01:04 PM

[john s. gordon:]

david m - right on.

the 1930 depression began when the federal reserve shrank the money supply. without any grease the wheels of commerce locked up. the analog today is banks refusing to make loans to credit-worthy borrowers (i.e., hoarding cash).

'cut the capital-gains tax' - this is irrelevant since no one has any capital gains in this market, only capital pains/
> jack

2008 Nov 10 04:16 PM

[xander:]

few have capital gains on recent purchases, but some have long term gains that they could sell if rates stay low thereby freeing up funds for investments or discretionary purchases they would not otherwise make.

2008 Nov 10 11:06 PM