TAX CUTS…HELPFUL OR NOT?

Will Rogers once said: “The difference between death and taxes is death doesn’t get worse every time Congress meets.”

From the beginning of the United States, taxation was a huge issue for new Americans and one of the reasons for the revolution. And taxes continue to be a controversial topic for our country!  Amazingly, in young America, citizens were not taxed at all for many, many years!    America managed to live financially from other forms of income, like tariffs.

Who would have guessed that it was war that pushed us back into taxation?  Of course, it is hard to remember many years when we have not been at war.   President Lincoln, in need of more revenue to fight the Civil War, pushed the first income tax through Congress in 1862.  At that time income over $500 was taxed at only 3%, and those over $10,000 paid a mere 5%.

And as you might suspect, immediately a fight ensued to reduce those taxes.  It was decreased in 1867, and repealed entirely in 1872 some ten years later.  The Supreme Court actually ruled in 1895 in a 5-4 decision that it was unconstitutional for the Federal government to levy a ‘direct tax’ without dispersing the revenue among the states.

It wasn’t until 1913 when President Woodrow Wilson signed the modern Income Tax law that taxes were reinstituted and made permanent with the 16th Amendment to the Constitution.  This established Congress’s right to impose a Federal Income tax. At that time a couple making over $4000 paid only 1%; and the top tax was a mere 7% (for those making over $500,000 which is equivalent today to $11 million).  Of course, fighting a war was expensive, and in 1916 Congress passed the 1916 Revenue Act and then the Ware Revenue Act of 1917 making the highest tax rate increase from 15% in 1916 to 67%, and then to 77% in 1918.  It was dropped to 25% from 1925 to 1931.

During the Gilded Age, the robber barons such as Rockefeller, Carnegie, Vanderbilt and J.P. Morgan were all making fortunes, yet paying no taxes.  Names and fact sound familiar?  Times haven’t changed much, in fact, I would assert that we are in a second gilded age (especially the gold decorum of the current President).  From the very beginning, tax rates were graduated or progressive meaning those who make more pay more.  From 1913 to the 1980’s the super-wealthy averaged a 70% tax rate!  For seven decades those tax rates (and some as high as 90%) helped our country fund wars and social programs that came about in the 1930’s.

President Hoover’s slogan in his 1928 campaign was ‘a chicken in every pot, a car in every garage.’  In 1932 during the Great Depression taxes increased from 25 to 63% on top earners. Of course, along came another war which had to be paid for and in 1944, the top rate was 94% (those making over $200K). Imagine two terms of Republican President Dwight Eisenhower with tax rates exceeding 90%!

During 1944-1945 the tax rate was at its highest of 94% and our nation enjoyed the most equality and prosperity in our history.  The common thought was that it was a fair contribution to make a free and fair society.  During three decades from 1950-1970’s the tax rate remained high, never below 70%. Perhaps this is why the 1950’s were such good years for families. Most often, only men needed to work to support their households and families enjoyed growing prosperity, unions thrived, and many baby boomers were born including me.

In 1980 that changed with President Reagan’s theories causing the beginning of financial woes that   that has continually increased wealth inequality since. Reagan felt the need to reward his rich friends with a huge tax cut.  So, Tip O’Neil and Reagan passed the Economic Tax Act of 1982 slashing rates from 70 to 50%.  Next, the Tax Reform Act of 1986 took the top tax rate down to 28% as well as decreasing the deductions you could take (this one I remember as we lost the interest deduction).  They thought this rate would continue forever but it only lasted three years.

Since then, the wealthy have worked hard to elect those who would reduce taxes even more and for the most part they have been fairly successful.  However, in 1993, President Clinton was able to raise it a bit to 39.6% but then Bush moved it back to 35% from 2003- 2010.  Then President Obama moved it back to 39.6% in 2012 where it stood until the recent slashing in the tax cut.  This top tax rate is still about half it was for many decades!  One thing we can tell for sure is that tax laws change, and often increase in times of war.  Recently real median household incomes just surpassed 1999 earnings. It took 17 years, during which time food prices increased about 50% and college tuition over 100%. In 1999, most families had one bread winner, now most have two working in order to earn a bit more than the same $59K median income to merely get by.

President George W. Bush authorized another tax cut called the Economic Growth and Tax relief reconciliation Act of 2001 which stimulated the economy a bit during the 2001 recession but it increased the debt by $1.35 trillion in 10 years (which is another discussion).  To further add to tax cuts, in 2003, he signed the Jobs and Growth Tax Relief Reconciliation Act which again benefited the top 1 percent of households and phased out the estate tax.  These two tax cuts reduced the top marginal tax rates from 39.6% to 35%.  The facts suggest that those tax cuts for the rich did not improve economic growth, nor pay for themselves, but indeed increased deficits and the debt and most importantly, contributed to further income inequality. Between 2001-2007 the overall growth was mediocre.

The Republican Party continues to push for lower taxes and even went so far as to create a written pledge that they would never increase taxes not even a penny.  At one point 95% signed on to this and also were willing to slash programs that affect the most vulnerable of society who need assistance like food stamps, Medicaid, low income housing assistance, and unemployment benefits.  Many, like Paul Ryan, are still willing to do that so that the 1% can enjoy and increase their riches.

Do tax cuts really work or help people?  In most cases, not the average worker, but usually do for the already wealthy.  Also, I would argue that history shows most tax cuts are followed by recessions or depressions.  The more prosperous times happened when tax rates were the highest, when people paid their fair share.   Back in 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, who was a very rich man, pushed through a huge tax cut that ultimately contributed as one of the causes of the Great Depression.  The Revenue Act of 1926 reduced the individual tax rate from 40% to 25%.  Of course, like the cronies that recently vote for tax cuts, Mellon greatly benefited from this tax cut. And too, recent tax cuts will greatly benefit the Koch brothers, Mercers, Adelson, the Cabinet members and much of Congress, as well as the President himself and the very wealthy.  Paul Ryan thinks that working people should appreciate $1.50 more in their paychecks!

Nearly 100 years ago, the Republicans controlled the federal government favoring trickle-down policies, tax cuts, and moving the wealth to the 1%, which was promptly followed by the crash of 1929.  In the 20’s business was worshiped and the marketplace has been the Republican religion since then. Reagan even praised Coolidge for cutting taxes four times but he didn’t say anything about the outcome of those cuts, a depression.  For the past 30 years, most of the Republican President’s (following the three Santa Clause theory) have increased the debt, spent like drunken sailors and lowered taxes. Then a   Democratic President follows and has  to clean up after them and stimulate the economy, and are told they should cut programs to pay for economic situation that was created by the prior administration.  Didn’t Clinton leave a balanced budget?  And didn’t Obama dig us out of the great recession by saving the auto industry and banks from default?  I am willing to debate whether we should have dug out the banks, but at least we should have stopped them from continuing their harmful policies.

FDR stated that we should try new things and learn from our mistakes.  He helped pull us out of the depression by creating job programs.  President Kennedy pushed for tax cuts in 1962 which went into effect after his death.   Since then, bigger tax cuts have happened about every 20 years under Reagan, Bush and Obama. Reagan was the last President to advance true tax reform in 1986, cutting taxes and consolidating brackets and simplifying the tax code.   Interestingly, during the 1990’s Clinton years, job growth and GDP growth along with tax increases actually produced better expansion.

Is it a coincidence that recessions happen about every 10 years?  It appears they often follow tax cuts within a few years.  The last great recession of 2008, came about for many reasons but also (ironically) followed tax cuts twice by Bush.  It was also caused by financial institutions being deregulated. Do you realize that those same banks are doing some of the same things and many of the regulations and restrictions that would prevent future ‘bailouts’ have never been put in place or have been rescinded?

Occasionally tax cuts help a struggling economy, or help us to avoid catastrophes, yet our more prosperous days were when tax rates were the highest.  And  in times of prosperity like we have seen recently, there is absolutely no need for tax cuts and increasing the national debt. This will likely lead to the worsening of the economy and a recession within a few years, or worse. Mark my words. History repeats itself and we don’t seem to learn our lessons. Perhaps due to the dumbing down of the nation? That’s another discussion for another time.

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