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MktNeutral.com (http://mktneutral.com) seeks to promote market neutral arbitrage trading strategies by offering data services, analytical tools, educational resources, and social networking to traders and investors who would like to better manage their risk through market neutral trading.
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  • Nostalgiac for the 50s and 60s: The Era of High Taxes in America and High Economic Growth 1 comment
    Aug 15, 2011 8:13 PM
     I have just finished reviewing the slides of a presentation on the history of taxation in America and I am going to note some of my thoughts and observations on the high marginal tax rates that existed during the 1950's and 60s. You can view the presentation at the link below.
     
     
    The authors of this presentation seem to claim that high taxes can be good for economic growth and they point to the 50s and 60s as evidence to prove their claim. While I recognize that the US economy grew rapidly during the 50s and 60s in spite of the high marginal tax rates of 91% and 70% for the top earners, I don't think we can expect that such high marginal rates would produce the same type of economic growth now as they did during that period. 
     
    First, by 1950 the US had racked up an enormous debt compared to its GDP, which was used to fund primarily three things: 1) the large infrastructure projects of the New Deal during the Great Depression, 2) the second world war effort, and 3) the reconstruction efforts in Japan and Western Europe immediately after the war. The nation had taken on huge amounts of debt, but unlike today, most of that debt was held by individuals and firms inside of the United States and not by foreigners. The high tax rates were used to pay back the debt, but the payments on the debt went right back into the US economy as most of the debt was held within the United States. If the US were to implement high tax rates today in order to pay down the debt, it's hard to see how those higher tax rates would benefit the US economy internally as such a large portion of that money would be leaving the country to pay foreign creditors.
     
    As the debt was paid down, the tax rates remained high, but the economy continued growing rapidly. The federal government remained a large part of US GDP, but as the 50s and 60s roared on, the government embarked on a spending campaign driven by the cold war. The government spent billions (trillions if we adjust for inflation) on infrastructure and research and development projects. The interstate highway system was built, water works were constructed, nuclear power plants were erected, airports were built, etc.
     
    The technology that evolved from this era was nothing short of revolutionary: civilian nuclear energy, advanced jet engines that enabled civilian aviation, intercontinental ballistic missiles (ICBMs), the transistor and semiconductor technology, computer languages, satellites, advanced radar, and ultimately space exploration, which culminated with one of America's proudest moments with the moon landing in 1969. I don't believe that the private sector could have successfully funded these kinds of R&D projects that require decades of work without the federal government's assistance and the motivation and fear of communism created by the cold war. 

    If the US were to embark on this kind of R&D spending campaign today, I do believe that more revolutionary technology could result from such spending, but unfortunately, I don't see that in the cards at this point given the cognress' focus on cutting spending. The deep cuts to our space program (NASA), which was once the technological envy of the solar system, confirm my view.
     
    The demographic difference between the baby boom era and now cannot be ignored. The population growth rate of the USA peaked in 1963 at about 2.2% and has now fallen to about 0.9%. People were having lots of children in the 50s and 60s and we cannot forget about the constant in flow of immigrants that our country has seen throughout most of its history. The median age was about 27 and has now risen to 37 and is on pace to continue rising as the population ages. The result will be that any excess federal spending is more likely to go to pay for entitlement programs including social security and medicare than it is likely to fund infrastructure and R&D spending.
     
    If America were to implement higher marginal tax rates such as those that were in place during the 1950s and 60s, it is hard to see how that would lead to rapid economic growth given the differences between the two periods. Perhaps, it could lead to something of a renaissance in health and medical sciences as the demand for improved medicine would rise as the population got older, but I am still unsure how it would lead to rapid economic growth given the demographic change that is underway.
     
     
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  • n0thing
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    I think this is a very important discussion in the context of how a developed economy should adapt to the 21st century economy. It appears that there are generally two approaches:

     

    1) Damage the economy until people are willing to work for wages that are competitive with developing nations. This seems to be the path we're on.

     

    2) A progressive tax system in which rates increase dramatically as income increases (e.g. brackets should not stop at ~375k, but go to 750k, 1.5m, 3m, 5m, 10m). This would mitigate distortions due to income being far removed from actual value provided (e.g. are the guys making 50m a year actually providing society with that much benefit?). The primary side-effect of that is that the government revenue could be used to invest in technology and innovation (e.g. a modern space program, most likely for energy production and distribution). This would, like NASA did, employ middle class Americans and be a brain drain on the rest of the world.
    16 Sep 2011, 12:22 PM Reply Like
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