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Why Did America Have A 90% Income Tax Under Eisenhower?

Michael Hudson is interviewed on the Real News Network. He reviews the reasoning behind income tax policy in the 20th century, a good lesson in financial history. Interestingly, he says that data show tax cuts have been followed by slow growth in the US. He also says that "every recovery since World War II has taken place with a larger and larger proportion of debt to income."

Another interesting tidbit: the average holding period for a stock on the New York Stock Exchange has increased from 20 to 22 seconds in the past year. High frequency trading anyone?

Also see: Taxation history of the United States – Wikipedia

Michael Hudson

About 

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003). Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law. He gives presentations on various topics at conferences and meetings.

13 Comments

  1. Anal_yst says:

    What data show conclusively that tax cuts cause slower growth and/or that raising taxes on “the rich” causes (faster) growth, preytell? IRS, BEA, etc data I’ve looked at and compared suggests neither are necessarily true and that there is a slight correlation with lower (within limits) taxes on “the rich” and economic growth.

    • I would like to see the data showing LOWER taxes correlates to slower growth. Until I see the data I remain sceptical. On the whole, though, Hudson does a great job on the historical narrative.

      • Anal_yst says:

        What many critics of lower taxes (tax cuts for “the rich” etc) seem to miss is that old causation v. correlation thing. The vast, vast majority of arguments for raising taxes on “the rich” are based upon correlation, not causation (much, much harder to prove).

        • Anonymous says:

          If your going to make a very tired argument, please at least try to gussy it up to look special. The problem with your weak reasoning (that higher taxes are just correlation) is that there are many serious suggestions as to why the higher marginal tax rates help economic growth. The arguments for lowering taxes on the highest earners on the other hand, tend towards thinking of the economy as simply mechanical. The arguments for raising taxes on the ultra-rich often note that the state is already unduly concerned with protecting their interests (i.e. they have the best access to politicians, something I know very well) and if they are going to do that, it might actually make sense to charge them for that.

          One other thing, I’d recommend your clichéd crew dig as deeply as possible on this issue. There are a plethora of countries in the world and many of the worst performing economically feature very low taxes on the rich. My favorite example is Pakistan, a country that embodies the party-line of the U.S. right-wing and their most loyal followers. Not only does the state count itself as protecting the interests of a select few, it does that by taxing the vulnerable, such as merchants, while protecting the ultra-rich.

          Think of this lesson another way: if the tax structure is designed to keep a little clique rich much of the way it does that is by burdening another group, typically anyone who would threaten the status quo, including entrepreneurs. Reducing the entrepreneurs relative tax burden would empower them and create more dynamism. Keeping the ultra-rich that way leads to your country looking like…Pakistan.

    • beowulf says:

      The positive relationship between the top marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president…. Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.
      http://www.presimetrics.com/blog/?p=253

  2. Anal_yst says:

    What data show conclusively that tax cuts cause slower growth and/or that raising taxes on “the rich” causes (faster) growth, preytell? IRS, BEA, etc data I’ve looked at and compared suggests neither are necessarily true and that there is a slight correlation with lower (within limits) taxes on “the rich” and economic growth.

    • I would like to see the data showing LOWER taxes correlates to slower growth. Until I see the data I remain sceptical. On the whole, though, Hudson does a great job on the historical narrative.

      • Anal_yst says:

        What many critics of lower taxes (tax cuts for “the rich” etc) seem to miss is that old causation v. correlation thing. The vast, vast majority of arguments for raising taxes on “the rich” are based upon correlation, not causation (much, much harder to prove).

        • Anonymous says:

          If your going to make a very tired argument, please at least try to gussy it up to look special. The problem with your weak reasoning (that higher taxes are just correlation) is that there are many serious suggestions as to why the higher marginal tax rates help economic growth. The arguments for lowering taxes on the highest earners on the other hand, tend towards thinking of the economy as simply mechanical. The arguments for raising taxes on the ultra-rich often note that the state is already unduly concerned with protecting their interests (i.e. they have the best access to politicians, something I know very well) and if they are going to do that, it might actually make sense to charge them for that.

          One other thing, I’d recommend your clichéd crew dig as deeply as possible on this issue. There are a plethora of countries in the world and many of the worst performing economically feature very low taxes on the rich. My favorite example is Pakistan, a country that embodies the party-line of the U.S. right-wing and their most loyal followers. Not only does the state count itself as protecting the interests of a select few, it does that by taxing the vulnerable, such as merchants, while protecting the ultra-rich.

          Think of this lesson another way: if the tax structure is designed to keep a little clique rich much of the way it does that is by burdening another group, typically anyone who would threaten the status quo, including entrepreneurs. Reducing the entrepreneurs relative tax burden would empower them and create more dynamism. Keeping the ultra-rich that way leads to your country looking like…Pakistan.

    • beowulf says:

      The positive relationship between the top marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president…. Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.
      http://www.presimetrics.com/blog/?p=253

  3. Nathan Tankus says:

    Hudson confuses here the argument for taxing rentier income and the argument for taxing. taxing rentier income less will surely cause growth to slow as rentiers essentially are private tax collectors. the best argument that explains how low marginal income taxes slow growth is the small business (and to lesser extent corporate management) argument. essentially when small business owners (or partners/ corporate managers) have high marginal tax rates they get little from paying themselves more and will benefit more from growing their business (capital formation) and then selling it for a bunch of money later. with low marginal tax rates they are much more likely to pay themselves a bunch of money and get out while the getting is good and the business falls apart. the argument also goes for corporate managers but is a little more muddled because they can raid there company in ways that make there stock options more valuable even with high marginal tax rates.

  4. Nathan Tankus says:

    Hudson confuses here the argument for taxing rentier income and the argument for taxing. taxing rentier income less will surely cause growth to slow as rentiers essentially are private tax collectors. the best argument that explains how low marginal income taxes slow growth is the small business (and to lesser extent corporate management) argument. essentially when small business owners (or partners/ corporate managers) have high marginal tax rates they get little from paying themselves more and will benefit more from growing their business (capital formation) and then selling it for a bunch of money later. with low marginal tax rates they are much more likely to pay themselves a bunch of money and get out while the getting is good and the business falls apart. the argument also goes for corporate managers but is a little more muddled because they can raid there company in ways that make there stock options more valuable even with high marginal tax rates.

  5. David says:

    The reason higher income tax rates correlate with growth is that income is then more even distributed. So people who actually spend money have more of it, driving growth. If the super-wealthy are allowed to keep all that they “earn,” that just takes a huge amount of spending power out of the economy, reducing demand, which reduces growth. Taxes act to redistribute resources. If you want growth, tax the rich, but eliminate taxes on business. When regular people have more money to spend, and business are unencumbered by onerous taxes, growth is much more likely. (Not saying that business shouldn’t be regulated, just not taxed to any great extent.)

    • Anonymous says:

      How do you tax the rich but not businesses? Who do you think owns them? If you want people to spend more money just allow people to keep more of there money. Them=n they ether spend it, save it, invest it, or give it away, all of which grows the economy.

      • Khalil Bey says:

        Companies are legal persons, with their own tax rates. They really aren’t intended to be proxies for rich people.

        You can cut taxes on them, but raise taxes on the rich people who take dividends or capital gains on the proceeds of the corporation’s (i.e. its employees’) work. The company is left with more resources to invest (in infrastructure or more productive workers) and fulfill whatever business/societal niche it was made to serve.

  6. David says:

    The reason higher income tax rates correlate with growth is that income is then more even distributed. So people who actually spend money have more of it, driving growth. If the super-wealthy are allowed to keep all that they “earn,” that just takes a huge amount of spending power out of the economy, reducing demand, which reduces growth. Taxes act to redistribute resources. If you want growth, tax the rich, but eliminate taxes on business. When regular people have more money to spend, and business are unencumbered by onerous taxes, growth is much more likely. (Not saying that business shouldn’t be regulated, just not taxed to any great extent.)

  7. tk says:

    no, bunch of bunk. Talking about junk economics. It was, as it is now, all about wealth distribution, not about higher wages and such. And all the debt, the speculation, the financial industry, and the loss of manufacturing economy is a direct result of fiat currency and not because of the removal of taxes. With currency created from debt, over time, real wealth and opportunity become replace by debt and inflation, which is the real reason why the loss of prosperity.

    • While I agree with your sentiments on fiat currency, you make an absolute
      statement that is unsubstantiated. The entire world is on fiat currencies,
      not just the US. And Japan, Germany, Switzerland and a number of other
      countries have seen large revaluations to the USD since 1971.

      Right now Brazil, Chile and other emerging markets are fighting against
      OVERvalued fiat currencies.

      So it is not the fiat currency in and of itself but the economic policies.

  8. Anonymous says:

    no, bunch of bunk. Talking about junk economics. It was, as it is now, all about wealth distribution, not about higher wages and such. And all the debt, the speculation, the financial industry, and the loss of manufacturing economy is a direct result of fiat currency and not because of the removal of taxes. With currency created from debt, over time, real wealth and opportunity become replace by debt and inflation, which is the real reason why the loss of prosperity.

    • While I agree with your sentiments on fiat currency, you make an absolute
      statement that is unsubstantiated. The entire world is on fiat currencies,
      not just the US. And Japan, Germany, Switzerland and a number of other
      countries have seen large revaluations to the USD since 1971.

      Right now Brazil, Chile and other emerging markets are fighting against
      OVERvalued fiat currencies.

      So it is not the fiat currency in and of itself but the economic policies.

  9. Trevonk says:

    How do you tax the rich but not businesses? Who do you think owns them? If you want people to spend more money just allow people to keep more of there money. Them=n they ether spend it, save it, invest it, or give it away, all of which grows the economy.

    • Khalil Bey says:

      Companies are legal persons, with their own tax rates. So you cut taxes on them,
      but raise taxes on individuals who take dividends or capital gains on the proceeds of the corporation’s (i.e. its employees’) work.

      Such a change might also remind the corporation that it has reasons for being far more important (from a “personal” and societal standpoint) than validating shareholders.