A Tale of Two Economies

Charles Dickens wrote “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”

Dickens’s musing captures the essence of the divide in America today across the political, economic, social, and racial spectrum.  Dickens’s words, slightly modified, sound eerily similar to Obama’s presidential campaign message.  The sage Obama on the eve of a political epoch, the spring of hope and change, transforming America, rescuing America from the dark and foolish days under President Bush.

Dickens’s contrast between the cities of London and Paris is not dissimilar to America’s contrasting economic experiences over the past one hundred years.  The economic contrast is stark.  On one hand, Americans have enjoyed many years of economic prosperity with low unemployment, low inflation, and low tax rates.  Likewise, Americans have suffered for many years with high unemployment, government expansion, and high tax rates. 

As Woodrow Wilson’s presidency came to a close in 1920 tax rates for the highest income bracket was 77%.  Wilson raised tax rates from a low of 7% in 1913, after the ratification of the sixteenth amendment, to 77% in 1920.  Unemployment soared to 20%.  The country elected William Harding as its next president.  Harding and his successor Calvin Coolidge cut tax rates three times from 1921 to 1926.  By 1928 the top tax rate was 25% and was again reduced to 24% in 1929.  Harding and Coolidge cut government spending by $2 to $3.3 billion during the 1920s. 

Americans economic prosperity was unprecedented.  Unemployment was 20% in 1921 and for the remainder of the 1920s averaged a paltry 3.3%.  The Gross National Product grew at an annual rate of 7% from 1924 to 1929.  The national debt was reduced by one-third due to the increased tax revenues generated from the Harding-Coolidge economic policies.

Contrast the Harding-Coolidge economic policies with those of Presidents Herbert Hoover and Franklin Roosevelt.  In 1930, the Smoot-Hawley Tariff Act was enacted which increased import tariffs on thousands of items with the intent to persuade Americans to buy products made in America.  Other countries retaliated and increased tariffs on American imports resulting in less trade and a worsening economy. Hoover, in an act of desperation, increased the tax rate from 24% to 63%, increased the corporate tax rate, doubled the estate tax, and instituted a two cent check tax.  By the close of 1932, unemployment was 24.9%, federal revenues fell, thousands of banks failed. Homelessness was rampant.

Franklin Roosevelt campaigned on promises to reduce taxes and spending, and a balanced budget.  Roosevelt never fulfilled any of those campaign promises in his twelve year presidency.  In fact, unemployment never dropped below 10%, hovered near 20% in 1938, and averaged 17% for the decade.  Roosevelt’s economic policies and programs expanded government at a bewildering and unprecedented pace.  In 1939, Roosevelt’s Treasury Secretary Henry Morgenthau lamented on the Roosevelt administration’s failed economic policies:

We have tried spending money. We are spending more than we have ever spent before and it does not work…I say after eight years of this Administration we have just as much unemployment as when we started…. And an enormous debt to boot!  [Emphasis added.]

Social Security was instituted under FDR.  The highest tax rates reached 90% under FDR.  In 1933, Roosevelt took the United States off the domestic gold standard which resulted in a fiat currency.  Dollars were no longer backed by anything of intrinsic value rather dollars were simply paper money backed by the promise of repayment by the U.S. government.  The combination of the Federal Reserve, the ratification of the sixteenth amendment, andRoosevelt’s fiat currency set the stage for what we know as deficit spending.  The federal government borrows money by selling Treasury securities to fund government expansion and programs. 

According to the Tax Foundation report titled Comparing the Kennedy, Reagan, and Bush Tax Cuts, The Kennedy tax cuts (Revenue Act of 1964) were the single largest post WWII tax cuts.  The report concluded:

Comparing the size of these tax cuts with the federal budget shows that the Kennedy’s tax cuts represented 8.8 percent of the budget. In 1981, Reagan’s tax cuts represented 5.3 percent of the budget. Each of Bush’s tax cuts are smaller than Reagan’s—EGTRRA (3.8 percent), JCWA (2.5 percent) and the 2003 Tax Cut (1.8 percent). When the Bush tax cuts are combined (8.1 percent), they would be larger than Reagan’s tax cut, yet smaller than Kennedy’s tax cut.

President John Kennedy pushed for tax cuts to stimulate the economy where private sector investment and personal consumption spurred economic growth and prosperity.  Much to the dismay of modern-day liberal Democrats, Kennedy vigorously promoted tax cuts throughout his Presidency.  Throughout 1963 Kennedy addressed tax cuts in his annual message to congress and in radio and television addresses.  These quotes from President Kennedy, reported by World Net Daily, are from the book An Interesting History of Income Tax by William Federer.

It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.

Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.

The largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of federal income taxes on private purchasing power, initiative and incentive.

The Bush tax cuts targeted for the so-called “rich” are lies perpetrated by the liberal media and the Obama administration.  The top 20% of all taxpayers saw their share of the tax liability increase from 78.7% before the Bush tax cuts to 81% after the Bush tax cuts.  Likewise, the bottom 20% of all taxpayers saw their share of the tax liability decrease from .50% before the Bush tax cuts to .30% after the Bush tax cuts. 

Economic growth, prosperity, and job creation is dependent on economic policy and is independent of political party affiliation.  Republican and Democrat administrations that cut tax rates created private-sector jobs, decreased unemployment, and increased federal tax receipts.  Likewise, Republican and Democrat administrations that raised tax rates stifled private-sector job creation, increased unemployment, and reduced federal tax receipts.

The Bush tax cuts were extended late last year after the Republicans took control of the House of Representative.  However, the Democrats and their syncophants in the main stream media are again espousing increasing taxes on the so-called “rich”.   The historical, empirical data on the effects of tax increases and tax cuts is undisputable.  The evidence is clear and unambiguous. 

A cornerstone of the Obama re-election campaign will be “increase taxes on the rich”.  To expect anything less is naive.  The DC’vers will engage in demagoguery to convince voters the solution to trillion dollar deficits is to tax the rich.  To expect facts, truth, and open debate is foolhearty. 

Perhaps Americans should rejoice in the current economic environment.  If Obama and the Democrats have their way, and taxes on the rich are increased, 2012 will bring about a stark reality that Dickens aptly described as the age of foolishness, the epoch of incredulity, the season of Darkness, and the winter of despair.

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