Created the Wealthiest Country the World Has Ever Known
Day after day, I hear commentators and pundits discussing the woes of the economy, foreclosures, and unemployment. Time after time, I shake my head, astounded that these discussions never mention the historical reason for America’s phenomenal past success: The 90 percent top marginal tax rate.
For the 50 years prior to Ronald Reagan, the average top marginal tax rate was 77.4 percent. For sixteen of those years — including all through the 1950s — it was 90 to 94 percent. Those were the years that created McDonald’s, K-Mart, and Wal Mart, and hundreds of other American titans of industry. Most Americans, astounded, will ask, “But how did confiscating all that money from entrepreneurs not kill all of those companies?”
The answer: While most people think of a “tax” as a government taking money, a tax can also be a tool — as was the case with the 90 percent top marginal (on income ABOVE $3.2 million in today’s money). In this case, when facing a 90 percent tax, individuals and corporations will do anything to avoid paying that tax. But how? By investing in things that can be written off as a business expense: buying new equipment, stocking up inventory, opening a new factory floor, refurbishing an old one or by HIRING new employees. All of that creates jobs, stimulates manufacturing, and provides workers with income that they then spend — continuing the cycle of consumption and economic growth. It’s good for the worker; it’s good for the company. It’s good for America.
For the past 30 years, though, the top marginal tax has been 27 to 39 percent — or effectively 15 percent after loopholes. And the tax on very risky investments – securities, hedge funds and derivatives, the instruments responsible for the housing meltdown — is set at 15 percent …but only if the investor sells them (capital gains tax). Otherwise, these pieces of paper, which is where the very wealthy keep 80 percent of their money, isn’t taxed at all. They also produce nothing, manufacture nothing, and employ no one. They merely create bubbles in the economy. Bubbles inevitably explode.
There is a philosophy today, actually more of a religion, that supposes that any sort of tax is “stealing” from the subject of the tax. This is the exact opposite of the truth. We The People, through our Congress, authorize the printing of money, and the lending of it to businesses. In doing so, we say, “Okay, you may use this at a very low interest rate, and you may make 10 percent, or 100 percent, or 1000 percent profit — just keep it circulating in ways that benefit our economy.”
A 90 percent top marginal tax rate is merely We The People saying, “NO, you can’t keep $400 million under your mattress. You can buy a house, you can buy a yacht, you can invest in a bank. You can invest in diamond-studded automatic can openers that you sell on QVC; we don’t care. Just keep it circulating, and you can write it all off. And if you want to invest in a hedge fund, that’s fine, too — but you can’t write THAT off.”
That’s the history. But the larger question is “why won’t anyone mention this history?” Bill Clinton did recently on the David Letterman Show; but that’s a rare, rare thing. You would think in an economic crisis, every option would be on the table. Why do we have constant discussions about tax cuts — which have, with the exception of the Home-Buyers Tax Credit, failed miserably — while discussing raising the top marginal rate — which created the largest, wealthiest middle class that the world has ever known — is virtually absent from discussion?