The Great Recovery Starts With Strong Progressive Taxation

Once upon a time in America, the top tax rates were very high and the gulf between the rich and poor shrank. Fiscal conservative policy that has dominated since Reagan has reversed this trend, and American society is increasingly polarized between the haves and have nots. Despite the capitulation by Obama in extending tax cuts for the rich, it is time to revisit the notion of a truly progressive income tax.

Top tax rates have been as high as 94% in the United States. Although this was only in place for two years (1944 and 1945), and only for income in excess of $200,000 per year (2,431,144 adjusted for inflation in 2010 dollars), it was representative of a strong progressive code of taxation that was prevalent for 40 years. Between 1936 and 1980, the average top tax rate was over 81%.

This time was known as the Great Compression. It ended the domination of the wealthy industrialists and robber barons whose greed culminated in the Great Depression when the gulf between the rich and poor was staggering. Preceding Black Friday, the top 1% was raking in 23.9% of the total wealth created by working men in America. After dropping to 9% in 1976, today that figure is back up to 23.5%

Paul Krugman explains:

The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s, with the rich losing ground while working Americans saw unprecedented gains… It was a society without extremes of wealth or poverty, a society of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality.

Now it becomes necessary to define a few basic precepts here. Many of my critics often argue that “all taxation is theft”, and that America would be a better place if that damned government would just stop “stealing our money”. This ignores the fundamental principle that the government often acts as the only force that can stop the theft that is inherent when a laissez-faire (let it be) economy turns into a caveat-emptor (let the buyer beware) form of predatory capitalism that impoverishes everyone except a select few at the top.

Look at it this way. Imagine the olden days when everyone was relatively self-reliant. You were dependent on the fruits of your own labor to forge your own material existence in the wilderness, and your quality of life (generically speaking) depended on your own hard work and foresight. Those who chopped down 100 trees in the forest (to build their cabin and trade for goods) got to keep all 100. A local government might assert it’s authority and claim 25 of these, but that would still leave you with 75 trees. In today’s system, you work for a large, multinational company that takes 96 of every 100 trees you cut down, and the government claims ¼ of what you have left (1 tree), leaving you with only 3. To blame the government for the fact that you only get to keep 3 trees out of 100 ignores the fact that your corporate masters are stealing 96 of them; it misses the point entirely.

All wealth is created by labor, by working men and women who actually build and maintain things. The portion of the wealth they create that they get to keep is getting less and less, and how hard they sacrifice for work is getting more and more since fiscal conservatism became dominant in 1980. An increasing portion of their labor is getting extracted by the wealthy and extreme wealthy.

From 1980 to 2005, more than 80 percent of total increase in Americans’ income went to the top 1 percent.

–Slate

Huge tax cuts for the rich were instituted as well as massive deregulation and many of the policies that brought about middle class prosperity in the decades before. Unlike the Great Compression, the wealth disparity began to rise to epic levels. The Great Divergence had begun, and there is a direct correlation between the two.

The balanced income growth by quintile during the Great Compression had been replaced by a huge imbalance where the wealthy absorbed the vast majority of every economic expansion. Even before the Great Recession struck in 2007, (culminating in the August crash in 2008), there were income declines for every group except those near the top over the last decade. The severe loss of jobs that followed has recovered slightly, but unemployment still hovers near 10% with 10 applicants for every position.

It is in this period of extreme wealth consolidation at the top, where banking execs are getting lavish bonuses and while everyone else is expected to work harder for less that Obama and non-progressive Democrats ignored a proposal to play political hardball with the fiscal conservatives in the GOP and break from the failed tax policies of the Great Divergence. A “compromise” tax deal larger than the ARRA stimulus bill was passed that extends and expands even greater tax cuts for the rich by ballooning the deficit.

The Age of Corporate Barons

The Great Depression

The Great Compression

The Great Divergence

The Great Recession

The Great Recovery

As I reminded my readers two weeks ago:

The rich have reaped the vast majority of every economic expansion over the last 30 years, including the top 1% gaining two thirds of it in recent years. The top 0.1% have seen a 94% income growth since 2002. The richest of them all (the top 400) have seen an astounding 476% increase since 1992. The richest 74 people made as much as the 19 million lowest-paid people in America.

The situation during the Great Recession today is eerily similar to the Great Depression 70 years ago, and as Gilbert Mercier asks, “When Will The 98% Tell The 2%, Enough Is Enough?” It stands to reason that if we want to restore the good old days of the Great Compression, we should use the same policies that worked then (strong unions, busting up monopolies, a regulated economy, separating banking and investment, and most of all, strong progressive taxation codes).

The American Dream

Life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement, regardless of social class or circumstances of birth. The idea of the American Dream is rooted in the second sentence of the United States Declaration of Independence which states that all men are created equal and that they are endowed with certain inalienable Rights including Life, Liberty and the pursuit of Happiness

As demonstrated in the chart below, the top marginal tax rates have traditionally been very high in the US, averaging 61.4% since 1917. As already mentioned, during the Great Compression the average top tax rate was over 81%. Today it stands at 35%, which is 27% below the historical average, 46% below the average during the Great Compression, and 59% below it’s highest rate.

While it is too late to prevent TARP II (Tax Assistance for Rich People), and restore the tax rates to pre-Bush levels until at least 2012, it is a good time to start having a discussion about the future of a tax policy that can bring back a leveling of the playing field to give everyone opportunity.

This is what I propose, a progressive tax code that creates new brackets for the wealthy and ultra wealthy. Restore tax rates to 39.5% for those with an income between $250,000-$1 million per year. Add new brackets that increases the level to 49.5% for anyone with an annual income between $1 million to $10 million, 59.5% for $10-50 million, 69.5% for $50-100 million, 79.5% for $100 million to $1 billion, and 89.5% for anyone over $1,000,000,000 per year.

Tax Rate Income Bracket

39.5% $250,000-$1 million

49.5% $1 million-$10 million

59.5% $10 million-50 million

69.5% $50 million-100 million

79.5% $100 million-1 billion

89.5% $1 billion and above

This of course will not solve the all the problems created by our current policy that favors wealth consolidation at the top, and must be backed up by other measures including a complete overhaul of the tax code that allows so many loopholes and overseas tax havens, but it will be a step in the right direction in both reducing the deficit and leveling the playing field for the wealth creators (the working men and women in America).

The Great Compression saved America from the Great Depression with a strong middle class. The Great Divergence reversed these policies and borrowed the vast majority of our national debt to give tax cuts for the rich. Now that fiscal conservative policies have once again landed us the Great Recession, it is time to fight for higher top tax rates to fix America, and set the course for the Great Recovery.