THE BLOG
01/02/2013 10:01 am ET | Updated Jan 23, 2014

Taxes and Prosperity

The Republican Party is fighting to make the country prosperous. A noble goal; who could oppose that? Obviously only a socialist/anarchist, or someone committed to the downfall of our Republic.

Their problem, however, is that they have only one method for achieving that goal: lower taxes. The GOP has settled on a simple formula with no subtlety: Lower tax rates create prosperity. Higher tax rates at best hinder the coming of good times, at worst destroy the prospects for such largesse forever. This happens always. No exceptions. Just ask Grover.

So let's see how the equation holds up in historical terms.

In the 1920s the country was booming. Radio sales jumped 1400 percent from 1923 to 1928. The top tax rate was at a historic low, 25 percent, courtesy of Secretary of the Treasury Andrew Mellon, one of the richest men in the country and the foremost tax cutter in our nation's history. So far, so good.

Then in 1929 the stock market crashed. The Great Depression did not follow automatically (a Crash is not the same as a Depression; the later only follows when fundamental economic problems are exposed by a Wall Street debacle).

At first economists and the public thought it was another cyclical downturn. Income tax rates stayed the same.

By 1932 the horrible truth was clear. This was something unprecedented, and dire. No tax change.

In 1932, however, the political system voted in new rates, shooting from 25 percent to 63 percent. Let me repeat this: 25 percent to 63 percent; this is the largest tax hike in our history.

But it also predated the New Deal. The tax increase was passed on June 6, 1932. At that time the Republicans controlled the three major levers of tax policy: the House (218-216 majority), the Senate (48-47 majority), and the Executive Branch. President Herbert Hoover signed the legislation into law.

So how did this remarkable tax increase do? By the winter of 1932-1933 we sank deeper, into the nadir of the Great Depression.

In 1933 Franklin Roosevelt took office, and in a little more than one hundred days, the New Deal began. Most economists agree that under this program conditions improved, strongly, if not definitively.

Yet for the first New Deal, during FDR's initial term in office, tax rates stayed the same, at 63 percent. It would seem that it was economic policy, rather than tax rates, that made all the difference.

In 1936 top rates went up to 79 percent. Roosevelt also cut back on spending drastically, embracing cost-cutting. In 1937 a major downturn followed both these moves.

The next increase was a small one; faced with the prospects of war, Congress upped the rate to 81 percent.

Wars cost money. World War II cost an enormous amount of money, and by December 1942 we were all in.

Incredible prosperity followed, the unbelievable war time boom that finally made the Depression a sick memory.

Nevertheless, at the peak of that gigantic burst of rampant capitalism, of titanic prosperity, in 1944, the top tax actually became 94 percent. If Gérard Depardieu lived here, he would have left for Canada.

As for post-war prosperity, in 1946, recognizing the new economic reality, Congress lowered the maximum rate: only three points, to 91 percent. Yet it stayed at this remarkable rate throughout Republican Dwight Eisenhower's presidency. All Americans are familiar with that period: the good years of tranquility and wealth that Newt Gingrich praises so highly. In 1964 Democrats lowered top rates to 77 percent.

Astute conservatives will point out all kinds of complications with the analysis just presented, to show how much more complicated economic reality is.

But that's really the point, isn't it? Maybe those critics are right. Maybe not. But either way, they betray the recipe that Republicans have wholeheartedly embraced. Lower taxes do not automatically guarantee economic largesse, nor do higher ones prevent it. The story is far more complex than that; our analysis and our policies should mirror and respond to that reality. It is long past time for the Grand Old Party to develop economic ideas that eschew easy formulas, and instead offer prescriptions for success in the real world. If they did, their fortunes at the polls might improve as well.

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