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.

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.


20 Responses to The Great Recovery Starts With Strong Progressive Taxation

  1. Wingnut December 21, 2010 at 1:07 am

    And look, the Columbian Freemason pyramid scheme symbol from the back of the District of Columbia-printed herd control coupons… is right there at the bottom of THIS very page. Maybe you should revisit THAT while your “freedom” country forces a few thousand more 18 year olds to join the Freemarketeers or starve. Nice extortion! FELONY! Speaking of felonies, seeing any “pay up or lose your wellbeing” in the flavor of Chicago mobs prior to Elliot Ness… happening in YOUR pyramid scheme? Duh? Wake up, friend. You’ve signed aboard (and apparently bought-into) a herd control system. But please, quit saying its OUR this and WE that… because MY group of WE (American Christian communalists) don’t want anything to do with YOUR pyramid scheme. All pyramids collapse, just like the ones YOU failed-at in the playgrounds as kids. Child crushers. Now YOUR capitalist society is doing the same. Say it with me. KY-BOOM! WHY, do tell, would you join such a con/sham? Force in or volunteer? I’d love to know. Leveling the playing field? Oh, it will go level, but there will be no more competitive game playing. Competition is NOT healthy and never was. Only cooperation is healthy, but NOT cooperation with the pyramid scheme called capitalism.

  2. Pingback: The Great Recovery Starts With Strong Progressive Taxation

  3. Dan December 21, 2010 at 9:24 am

    I propose a linear formula not brackets.

    Highest earning pays 50.0000000000%
    Lowest earning pays 1.0000000000%

    Highest earning is highest reported in previous year
    Lowest earning is federal minimum wage for one year working 40 hours a week.

  4. Joe December 21, 2010 at 9:39 am

    Its Ironic you quote, “All men were created equal” yet you push for not taxing all men EQUALLY. Quite a hypocrisy if you ask me.

    I am the son of poor immigrants. I was the first in my family to go to college, paid my own way and evetually earned a Master’s degree at night school. I have never worked less than 50 hours (usually more) in a week since I was 17 years old. I now have a good job and recently bought my first apartment building. Please explain to me why I should have a larger percentage of my income taken from me than the average person from my neighrborhood who did not chose to take advantage of the same opportunities we were all given. Or who chose not to work or sacrifice as much as I did?

    You claim to be a “progressive,” but if everyone receives the same income regardless of the amount that they actually produce, there would be no progress whatsoever. They tried that in the Soviet Union, and it FAILED. If at 17 years old I knew ahead of time that I would be taxed 90% (as you advocate) if I started businesses, created jobs, and became wealthy, I never would have done it in the first place. After all, I could just sit there and collect my unemployment check and make just as much money without the headache.

    I recommend you study game theory and incentive-based decision making.

    Go ask Castro how well the progressive-based tax system worked out for him. And how much wealth it “created.”

    • Stig December 21, 2010 at 10:40 am

      Well said. You’re the only person making sense among the rest of the garbage on this page.

    • beans December 21, 2010 at 10:53 am

      Thank you. If only everyone could answer ‘Who is John Galt?’ they would understand the importance of competition.

    • anonymous December 21, 2010 at 11:33 am

      If you look at the way tax brackets work, you get taxed the same amount as the average American on the same amount of money. If you decided to take advantage of your opportunities and make more of yourself and in turn make more money then you fall into different tax brackets. You only pay more in taxes on the money that falls into the higher tax brackets. So if you made 1 million for the year you would only pay, in the example in this article, 39.5% on the 750,000 btwn 250,000 and 1 million. It’s equality because every person that makes the same amount of money pays the same amount in taxes.

      • andre December 21, 2010 at 11:49 am

        First off income tax is a form of enslavement and that is what the author is after, everyone to be slaves to the government. Progressive taxation is right out of the communist manifesto, Krugmen is a communist that’s why they don’t have any common sense or logic. We have not had true capitalism in the US in over 100 years. The communist took over around the time of the creation of the federal reserve. All the data in this piece is showing how the communisim take over of america has come in dribs and drabs and now is taking hold fully. Look at all the body searches and scans going on now we are worst than RED Russia and these a-holes want to tax everyone to death and enslave. Resist where you can before there is another civil war.

        • Julio December 26, 2010 at 3:35 pm

          Enslavement? Seriously?

          Even if the government took 75% of your income, you’d still be in the top 10% of wealthiest people in the world. If you don’t like paying taxes, move to Somalia.

      • Me December 21, 2010 at 12:57 pm

        That is not equality, it is theft. By your own logic, if you have a nicer house than your neighbor, he should be able to come and take parts of your house away, after all, it is more than he has so you should have it taken away. Silly and bad (mis-)use of logic.

      • Joe December 21, 2010 at 3:57 pm

        My $1 should be taxed the same as your $1, regardless of wheter it is my first $1 or my millionth $1.

        I just fail to see the logic in creating a disincentive for success. In effect this system literally punishes people for working hard and earning a lot of money. And It rewards people who do nothing. Now how in the world will the ideology make our country a better place?

        Saying that wealth and achievement in this country are dependant on family upbringing/background/wealth is just a cope out- take it from the child of a penniless immigrant from the ghetto.

        • Julio December 26, 2010 at 3:41 pm

          You’re delusional if you think that higher taxes will ever deter someone from making more money. I’m sure you sit around all day and think, “Man, I wish I made less money so I wouldn’t have to pay more taxes.” That’s just absurd.

          Guess what – if you’re paying $1 million in taxes, YOU’RE STILL A MILLIONAIRE! Are you seriously going to complain about being a millionaire? Yes, paying taxes sucks but no sane person would ever not work just so they wouldn’t pay taxes.

          Also, the assumption that people that make less or are unemployed “do nothing” is complete BS. They’ve either replaced every manufacturing job with a robot or exported it to China so that some rich stock owners can get richer. You can’t blame the workers for not wanting to work if there are no jobs to be had.

    • Ole Ole Olson December 21, 2010 at 9:29 pm

      Thank you for your story Joe.

      I have to say though as someone who has sacrificed and worked hard his whole life as well, do you think it is right for one human being to live off the labor of another human being? Because that is what absentee landlord societies become.

      Further, though you may have worked hard (not sure how you managed to save up enough for an apartment complex by the fruits of your labor alone however), most landowners are born into it, and those without have very little opportunity to become landowners.

      The American Dream works best when there is opportunity, and by leveling the playing field, everyone does have opportunity. In the absence of a strong progressive taxation code, the rich and corporations are free to run amok and rob everyone blind, just like the robber baron days.

      Finally, you are mistaken if you think a progressive taxation code results in “everyone receives the same income regardless of the amount that they actually produce”. It actually allows folks to keep a larger percentage of the wealth they create by their labor by reigning in greedy corporations and exploitation by the rich.

      Why do you think the gap between rich and poor is so large in so many 3rd world dictatorships? The rich and powerful are free to exploit at will, there are no regulations or safety nets to prevent it.

      • Joe December 22, 2010 at 8:32 pm

        The majority of your post is about corporations, and I agree with you on that point (see my post below). It doesn’t really apply to taxing individuals’ earned income though.

        I studied finance and investments in school and worked my A$$ off, that is how I saved enough. And I have seen many from my background do the same. Saying that you are a victim of your circumstance is a flat out cop out. ESPECIALLY in this country.

        I think you really need to do some research on the difference between corporate taxes and individual income taxes.

        And I have lived in Venezuela for a time, and can tell you first hand that their gap is due to this exact mentality. When you over tax the rich, suddenly, miraculously, their stated income drops dramatically (sarcasm: the reason this happens is because they are avoiding paying taxes). Then huge black markets are created and goods are traded in cash only (everything from toasters to autos). Every single increase in taxes was excused by the fact that it would “create equality.” In reality all it did was lower production rate, thereby increasing prices, and as a result punishing the poor even more by making them pay higher prices.

        I recommend you wikipedia the “Laffer curve”

        Your understanding of the 3rd world is not correct. The reason the rich and powerful are able to exploit is because they are in bed with the government (ie, entire industries are “nationalized”) This merger of state and corporation is indeed very dangerous and is also exactly what is happening here in the Auto Industry, Banking Industry, Health Care Industry, Insurance Industry, etc.

  5. ernest December 21, 2010 at 9:58 am

    One problem with this article – yes,the government should,as Lincoln said, “Do for the people,what they can’t do for themselves”,which is to watch out for ‘corrupt corporations’ etc. (of course, they don’t do this to well either, Look at the BAILOUT!!!) but when Mr. Krugman talks about how a business takes so much money, and the government ‘only’ takes x amount,well, a government IS NOT A BUSINESS!
    Actually,if you look at the tax code,and Supreme Court cases etc. involving the Federal income tax – the tax IS NOT TO BE LAID ON PRIVATE EARNINGS!
    It is a DIRECT TAX which is PROHIBITED by the Constitution!
    Look up Brushaber etc.
    The Supreme Court said that the 16th amendment DID NOT GIVE CONGRESS NEW TAXING POWER!!! The 16th amendment was only to clearly classify certain ‘income’ into it’s proper category.
    If you do not understand words and the tax code try asking any IRS employee where is law that says a private individual owes a tax – they can’t/won’t tell you! The IRS, judges,lawyers etc. DO NOT know the law – read it for yourself.
    So, Mr. Krugman – you started wrong, and ergo,ended wrong!

  6. Joe December 21, 2010 at 10:02 am

    The real problem is not socialism, or fascism, or communism as the right tries to claim. The real probelm is corporatism. I mean seriously is there one person Obama has appointed that was not a lobbyist or GoldmanSachs Alum? He lets Lehman Fail but bails out Goldman, virutally creating a monopoly. I mean how much more obvious could it be?

    We are spending $1 Trillion per year maintaining out empire abroad. Bringing all of our troops home would would allow us all to keep everything that we make. But no, we are still subsidising the military industrial complex, even under Obama. He has lied about so many things its mindboggling. Remember the one about keeping all bills on the net for 5 days before he signs them? He broke that in the first few weeks when he threatened marshall law if we did not pass the bank bailout. Then instead of closing guantanamo he blackmails smaller countries into taking our prisoners that have never been charged or tried. Then he renews Bush’s evil Patriot Act with even more absurd powers. Then he triples the troop count in Afghanistan. And now he is shoving down this new Internet sensoring legislation. When will “progressives” stop kidding themselves and start calling him out for his true actions insead of his rederic.

    ps Ron Paul is more Socially Progressive than anyone in the left if you look at his actual voting record (against all wars, for privacy, for habeus corpus, for govt transparency, for civil liberties, etc).

  7. December 21, 2010 at 11:16 am

    First of all, all those social policies failed and catapulted the unemployment rate to 20%. See Spain.
    Second, what got us out of the great Depression was a combination of lowering the top rates and this big little thing called WORLD WAR II!!!. Remember at the end of WWII, Europe and Asia’s industrial base was GONE. We were the only place in the world that still had a manufacturing base.
    When you think about it, logically, your argument makes absolutely no sense at all.
    Let’s say I’m poor. I start a business which does well. I make millions, I then take my millions and make a giant business out of it and create many more millionaires by growing and INVESTING in my company. What you would do is take away 90% of what I make, thereby reducing the available cash that I have to re-invest.
    In the 1920’s the world marvelled at the United States and how we had the highest standard of living in the world. It was all brought about because Harding had a vision, a vision of the free market ending unemployment and his vision came true. He not only slashed top rates from 75% to 25%, but he also cut Government spending by 25%, and then another 25% the following year, thereby ending deficits and ending the competition for capital that it creates.
    No, confiscating the wealth of the job creators has been tried and it’s never worked.

  8. Brad December 21, 2010 at 3:05 pm

    You quote Gilbert Mercier as saying, “When Will The 98% Tell The 2%, Enough Is Enough?

    Democracy is not two wolves and a lamb deciding what to have for dinner.

    Why is it some people just love to hate the so-called “rich?”

    Rich is a relative term. Either way, even with a flat tax rate, people that earn more pay more in taxes, and with the progressive income tax rates we have, they pay even more.

    Get a life and stop looking at what everybody else makes!

  9. Rosanne December 21, 2010 at 3:22 pm

    The Spirit Level by Wilkinson says the same thing in research that covers 30 years across all of the major industrial countries. Inequity is the root of all evil and causes suffering, poverty, mental illness, and death.

  10. 708ugg December 22, 2010 at 3:36 am

    Excellent blog! I genuinely love how it’s easy on my eyes and also the facts are well written. I am wondering how I might be notified whenever a new post has been made. I have subscribed to your rss feed which ought to do the trick! Have a nice day!

You must be logged in to post a comment Login