It has remarked by president Obama that the Great Recession (2008-10) is the greatest economic recession since the Great Depression. It is fascinating to use marginal tax rate for different regimes in order to explain what happened in each of these periods. From the table on the highest marginal tax rates, the top marginal rates for the four-year period prior to the Great Depression was relatively low with a highest of 25 percent in 1932. The major cause of the depression is attributable to the fiscal policies employed by the federal government. After keeping the interest rates artificially low in the 1920s, the Federal Reserve raised the interest rates in an attempt to check the boom. In addition to this, President Hoover passed into law Smoot-Hawley Tariff, which negatively affected trade and American exports throughout 1930s. Hover finally signed a large tax increase into law in 1932, which greatly affected entrepreneurship. Before to the Great Depression, the avarage income fo the top 0-01percent soared to 892 times the average income of the bottom majority constituting 90 percent. This growth followed a tax drop on top capital gains. Home prices greatly decreased between 1928 and 1933 due to reduced demand and high tax rates.
During the Great Depression, the government raised both excise and income tax and in 1935, the top marginal tax rate reached a high of 79 percent. Only few were able to pay since majority of Americans were in the 50 percent bracket. This forced entrepreneurs to part with more than half of their revenue to pay taxes. Most investors got discouraged and started looking for alternatives such as investing in foreign companies and tax-exempt bonds. The result of this was less wealth going into the creation of jobs, and so the persistent high unemployment rates. The US government made increase to marginal tax rates in 1939 following the start of World War II (Romer, 2012). This was necessary for the US government to fund its military and research endeavors. Following the Great Depression, the government increased its spending in order to help its economy recover. The US gained a lot in some sectors of the economy such as manufacturing and increased employment due to people getting in to the army. The top marginal tax rates however, dropped following the end of World War II in 1945, but this was only to last up to 1950.
The 1950s saw a decade characterized by high taxes and high economic activity and growth. In theory, higher taxes would generate more revenue to finance new social programs in order to reduce inequality or reduce finance deficits. This period defied the odds by posting the highest period of productivity for the United States despite high interest rates. This is attributable to factors including the strong international position that the U.S received after the World War. Some studies reported that the US was the dominant industrial producer after World War II following the destruction of industrial capacity of Europe, United Kingdom, and Japan. In addition, the real tax rates were lower since only a small portion of people remitted tax.
According to Romer, politicians often introduce lower rates in order to stimulate economic growth (2012). However, careful studies show that such strategies do not work. This makes it important for governments to approach tax reform policies based on facts rather than held assumptions. The truth of the matter is that if governments take smaller portion earned, a family gets the incentive to earn more. Investors may choose to expand or invest in new enterprises. Charging lower marginal rates also discourages people from evading taxes on their income through legal and illegal means. The concern is whether such cuts on marginal rates have a remarkable effect.
Work cited:
Romer, Christina. That wishful thinking about tax. New York Times. Web. 17 March 2012.
