Yet another difference between the Great Depression and today: the Revenue Act of 1932
A lot can be learned by studying history and not repeating mistakes that were made in the past. Earlier this week I wrote about how the Federal Reserve exacerbated the economic slowdown that caused the Great Depression by shrinking instead of growing the money supply (see post: One huge difference between the Great Depression and today).
Here's another major mistake that was made during the great depression, the government raised taxes instead of lowering them, or at least leaving them alone. In June of 1932 with the national unemployment rate hovering around 17%, then President Herbert Hoover became convinced that unless the United States had a balanced budget (huh, what's that?) foreign countries and banks would lose confidence in the U.S. dollar and its value would fall significantly.
In an effort to prevent this from happening, Hoover successfully lobbied Congress to raise taxes and the Revenue Act of 1932 was passed. While this act did not impact everyone's taxes, the concept of a national income tax was still new at the time and it was levied only on wealthy individuals, it hit the rich particularly hard. It raised the top income tax rate from the mid-20% range to an astonishing 63%! The maximum top rate when the concept of income tax was introduced twenty years earlier was only 7%!
This astonishingly ill-timed act didn't just target individual income tax. It also raised corporate taxes by almost 15% and doubled the estate tax.
So at a time when the economy needed every single dollar possible put to work, the government took dollars away from its citizens. Similarly, this new tax made removed much of the incentive for individuals to start new businesses or to expand existing ones by hiring new employees at a time when the unemployment was unbearably high.
Whether you like President-elect Obama or not, one thing that he seems to be willing to do is listen to others and compromise. While he talked about raising taxes early in his campaign, he has backed off of that now that everyone realizes the terrible state that the economy is in. He seems to realize that raising taxes is one of the worst possible things that the government could do during a massive recession. He has similarly backed off of his NATO / Trade bashing rhetoric would be disastrously Smoot-Hawley-like.
No where is this change of heart more evident than in the new stimulus plan that the Democrats are now pushing: Obama's $825B stimulus plan includes spending, tax cuts. The bill as it currently stands includes $275 billion in tax cuts, including a payroll tax credit of $500 per person, a $2,500 college tax credit, and a $7,500 first-time home buyer's credit (hmmmm, I would have liked that one when I bought my first place, grumble, grumble, grumble).
One thing's for darn sure, the government certainly is not focused on balancing the budget. This could cause its own, different set of problems at some point down the road but we seem determined not to repeat the mistakes that created the Great Depression.
I'm not saying that things are all peaches and cream right now. The economy is in rough shape and it could be that way for a long time, but as I said at the end of my last piece on this subject anyone who thinks that the unemployment rate is headed north of 20% like it was During the Great Depression is dead wrong. The alarmists who are talking about figures like 30% and 50% unemployment and saying that such an event would be a healthy purging of the system are complete nuts. If the unemployment rate rose to that level society as we know it would completely break down and we'd all be running around hunting wild boars with spears and living in caves.
Note some of the data in this post was obtained from the book The Forgotten Man by Amity Shlaes