Unemployment has a chain reaction effect that first brings financial ruin to its victims which leads to the forced sale of their homes. These forced sales lower housing prices for everyone, which results in reduced bank lending because of declining collateral values. Why haven't we been able to bounce back from The Great Recession like we did from all other recessions since WWII? Because changes in tax policies have allowed the same income and property hoarding (where one percent of households receives approximately 24% of the nation's income) that existed before and during most of the Great Depression. We must return to a very progressive but steep income tax so such income hoarding becomes difficult, the taxed money is circulated by a government that spends it, the middle class grows rather than shrinks, and that top one percent of household's share falls to a more manageable 10% of national income (as it was under Kennedy/Johnson.)
I propose re-adoption of the income tax code of 1965 with its many tax brackets which went as high as 70% (down from 1963's 91%) and its many deductions. This would entail upward adjustments for the inflation that has occurred since 1965, and this upward adjustment would apply to all brackets, exemptions, and the lifetime residence exclusion. I propose using the Dept. of Labor inflation multiplier, and I am estimating that multiplier at 7.8 for 2013. I am also proposing two additional taxable income brackets : a 75% bracket for $25-$50 million income and an 80% bracket for income above $50 million. Another proposal is an INCOME TAX CREDIT FOR SOC. SECURITY TAX INCREASES SINCE 1965. That tax credit would apply to an increase I propose here : raising the Social Security tax ceiling from $106,800 to $180,000. This ceiling increase will prevent reduction in social security benefits and preserve current age eligibility levels.
Here's the goal I seek : THAT EACH 2013 TAXPAYER PAY--IN INCOME AND SOCIAL SECURITY TAXES--THE SAME PERCENTAGE OF HIS INCOME AS WAS PAID BY 1965 TAXPAYERS. Obviously, all figures have to be adjusted for inflation. For explanation and examples, see below. Since lowering of social security taxes is out of the question, the just stated goal may not be achievable for those on the lowest rungs of the income ladder. Nevertheless, that group benefits the most from social security at retirement time. Those with taxable income over $25 million will pay more than their 1965 counterparts. The reasons behind these proposals are stated below.
First of all, BECAUSE IT'S FAIR. The more you make, the more you pay. Long term capital gains status was attained in 1965 with a six month holding period (as opposed to today's one year requirement), and on that long term gain you got to exclude half the gain before applying your ordinary income tax rate. The maximum rate on capital gains was 25%. There was a large lifetime exemption for sale of residence. Social Security benefits were not taxes.
Over the years tax rates have been reduced and huge loopholes have been created for dividends, capital gains, and home sales to the extent that our tax system has lost its "progressivity"--meaning that the more you make the same or less you pay. As a taxpayer's taxable income increases, he pays the rate for each bracket on that bracket's income only. Before calculating tax a taxpayers subtracts his deductions and exemptions. A family of four filing a joint return in 2013 would have approximately $18,720 in exemptions which is the 1965 $600 per person exemption times the 7.8 estimated multiplier. The 19% tax rate that applied to 1965 joint taxable income between $4,000 to $8,000, would in 2013 apply to joint taxable income of $31,200 to $62,400. The 32%/50%/60% rates would apply respectively to the following joint brackets in 2013: $156,000 to $187,000/ $343,000 to $405,000/ $686,000 to $780,000. The 70% rate that applied to all 1965 taxable joint income over $200,000 would in 2013 apply to joint taxable income between $1,560,000 and $25,000,000. Single taxpayers brackets were and would be half the joint brackets.
Second, the revenues from these taxes are spent rather than being hoarded. And that means lots of hiring by government contractors. From the beginning of 1940 (when sharp tax increased were imposed) through the end of 1942 the unemployment rate dropped from 14% to 2%. Much of the proposed revenue will be spent on much needed infrastructure improvements (water, sewer, roads, bridges,rail transport) which is something President Obama has talked about doing but is powerless to accomplish without the cash to pay for it.
Third, the proposed taxes would stop and reverse the ongoing destruction of the middle class as government contract work is well paid work. Without it we return to the era before 1939 with its much smaller middle class and the remainder of our population either on easy street...or just scraping by. It is the shrinkage of the middle class, many with earnings between $55,000 and $105,000, which has created shortfalls in expected social security tax collections. That in turn has led to talk of raising social security age requirements and /or cutting benefits. It was growth of the middle class that was expected and planned for when social security taxes were increased under President Reagan.
Fourth, the proposed taxes would severely restrict the hoarding that is detrimental to our economy. Today, one percent of households receives 24% of the nation's income. while in 1965 that same one percent received 10% of our nation's income. Under present tax law a hypothetical taxpayer making $100 million (believe me, there are a bunch of them) will get to keep over $70 million of it because of the following five special rates : a 15% rate on his long term capital gains, a 15% rate on his dividends, the 0% tax on the sale of his primary residence, and a 28% rate on his preference income, and a 35% rate on his salary. To spend the $70 million he has left after taxes, this hypothetical taxpayer would have to purchase goods and services worth almost $270,000 each weekday for a year. That's not just hard to do, it's impossible. So an awful lot of our hypothetical taxpayer's income gets taken out of the spending economy and put into mostly blue chip stocks where it earns dividends taxed at a 15% rate. This money hoarding harms the economy by stunting its growth and making high unemployment inevitable.
Fifth, we had substantial economic growth in 1965 and the years that followed. The 1965 tax changes constituted a substantial tax cut when enacted. Since the U. S. had economic growth before with this tax structure, there's no reason to believe we can't or won't have it again.
Sixth, a return to full and unrestricted deductions provided for in the 1965 tax code would increase spending as taxpayers spend to enlarge their deductions and reduce their taxes. That in turn will stimulate the economy as well as prevent hoarding. Deductions (as well as the exemptions that would increase from 2010 rates of $3,650 per person to approximately $4,680 per person) are particularly important to the prosperity of the middle class.
Seventh, we need to pay down the national debt to prevent American taxpayers from becoming enslaved to paying the interest on that debt.
Marriner Eccles was Chairman of the Federal Reserve Board from 1934 to 1948. Robert B. Reich reports on Eccles' writings in his book Aftershock (A Borzoi Book published by Alfred A. Knopf, a division of Random House, New York, 2010.) Born in Logan Utah, Eccles was at age 20 a Morman missionary to Scotland, returning two years later to head the family bank. Reich reports (on page 11-12): "...by forty he was a tycoon--director of railroad, hotel, and insurance companies; head of a bank holding company controlling twenty-six banks; and president of lumber, milk, sugar, and construction companies spanning the Rockies to the Sierra Nevadas." When the depression hit, Eccles is quoted : "I saw for the first time that though I'd been active in the world of finance and production for seventeen years and knew its techniques, I knew less than nothing about its economic and social effects."
But he studied, he learned, and in the month before Roosevelt was inaugurated he testified before a senate committee seeking answers to the ongoing economic crisis. That testimony is summarized on pages 14-15 of Aftershock, and I'll quote portions of it here : "He advised senators on ways to get more money into the hands of the beleaguered middle class....His proposed program included relief for the unemployed, government spending on public works, government refinancing of mortgages, a federal minimum wage, federally supported old-age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation."
Eccles retired to Utah in 1950 where he wrote the following about the causes of the depression (pages 17-18 of Aftershock ) : "As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth--not of existing wealth, but of wealth as it is currently produced--to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."
Henry Ford recognized this phenomenon when in 1914 he doubled his workers pay to $5 a day--twice the going rate. His fellow capitalists were incensed and cried : "Socialism!" But Ford was shrewd enough to recognize that, while doubling his workers' pay was going to hurt his pocketbook short term, what he really needed long term was customers who could afford his cars. And that's exactly what he got.
When World War II ended, it was assumed by most Americans that high taxes would end too--just like they did after World War I. Republicans swept into power in the House of Representatives in the 1946 election and appeared poised to seize the White House in 1948. 1948--what a race that was! The Republicans for all intents and purposes were running the type of race they always run. Their philosophy then and now is as simple as pie : collect just enough revenue to provide minimal services and get the government out of the way of what its all about -- the acquisition and accumulation of private wealth. Harry Truman saw what Eccles saw, and he fought for the people's interests over the special interests. His victory in that watershed election led to decades of low unemployment, rising home values, ample bank lending, and a STEEP AND PROGRESSIVE INCOME TAX THAT KEPT MONEY HOARDING TO A MINIMUM AND ALLOWED THE MIDDLE CLASS TO PROSPER.