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  • Hoover, FDR and Clinton Tax Increases: A Brief Historical Lesson

    The obvious reason to prevent a tax hike by extending current tax rates is that doing so will prevent further economic harm to an already flat economy. How do we know that tax increases will cause economic harm? Three examples: 1932, 1937 and 1993.

    After the 1929 stock market crash, the Smoot-Hawley tariff of 1930 raised import prices and more importantly threw a bucket of cold water on global trade flows, helping send the economy into deep depression. The economy had very little chance to recover. Along with gross and ongoing monetary policy mismanagement, President Hoover raised taxes in 1932. The consequences were devastating. As Alan Reynolds points out:

    President Herbert Hoover asked for a temporary tax increase…in June 1932, raising the top income tax rate from 25% to 63% and quadrupling the lowest tax rate from 1.1% to 4%. That didn’t help confidence or the Treasury. Revenue from the individual income tax dropped from $834 million in 1931 to $427 million in 1932 and $353 million in 1933.

    This caused a “double-dip” recession, sky-rocketing the unemployment rate to well above 20 percent. After 1933, the economy showed glimmers of recovery: unemployment dropped from near 25 percent in 1934 to under 15 percent in 1937, and economic activity was picking up. Contrary to Keynesian conventional wisdom, however, the recovery didn’t come as a result of New Deal spending. Christina Romer, former chief economic advisor to President Obama, makes clear: “Fiscal policy played a relatively small role in stimulating recovery in the United States.” Rather, the initial recovery happened largely because of monetary expansion, the “money supply increased nearly 42 percent between 1933 and 1937,” according to Ms. Romer.

    Unfortunately, President Roosevelt made the same crucial mistake President Hoover made 5 years earlier, so the recovery didn’t last. FDR raised taxes sharply in 1937 in an attempt to balance the budget. Once tax increases took effect, the economy collapsed into another recession – the second stage of the double-dip which lasted into WWII.

    Late in 1945 under President Truman’s leadership, Congress cut marginal tax rates and rather than sliding back into recession as many had feared, the economy soared toward full-employment.

    As Burt Fulsom writes:

    Congress reduced taxes. Income tax rates were cut across the board. FDR’s top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

    Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945….By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.

    The disastrous mistakes from Presidents Hoover and Roosevelt underscore the importance that Washington not raise taxes in a weak economy. But that doesn’t stop the Left from advancing the notion. They point to Clinton’s record as proof. After all, Congress pushed through a big tax increase under President Clinton, and the economy boomed, right?

    Well, the truth is that the real boom didn’t happen until after 1997, the year Clinton cut taxes. From 1993-1996, a time when the economy was recovering from recession so expected growth should be strong, real economic growth averaged 3.2 percent and 11.2 million jobs were added. During the period 1997-2000 real economic growth averaged 4.2 percent and employment increased by 11.5 million jobs.

    Heritage senior fellow JD Foster adds:

    The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase.

    In summary, coming out of a recession into a period when the economy should grow relatively rapidly, President Clinton signed a major tax increase. The average growth rate over his first term was a solid 3.2 percent. In 1997, at a time when the expansion was well along and economic growth should have slowed, Congress passed a modest net tax cut. The economy grew by a full percentage point-per-year faster over his second term than over Clinton’s first term.”

    The evidence is in: tax increases are damaging to economic growth and job creation no matter what point of the business cycle. In a weak economy, like ours today, tax increases are especially ill advised, as Presidents Hoover and Roosevelt discovered. But even in a bustling economy tax hikes hurt growth and prosperity, as they did in the 1990s under President Clinton. That we’re having a national debate about this from an economic standpoint at a time of instability and weakness is a sign of deliberate disregard of historical precedence and favor of ideological righteousness over economic concern.

    Posted in Economics [slideshow_deploy]

    19 Responses to Hoover, FDR and Clinton Tax Increases: A Brief Historical Lesson

    1. Richard Wells says:

      When will the left learn from history rather than fantasy??

      Of course do they care about helping the country or is it really just about getting more control over the people and weakening Constitution freedoms?

      • Peter says:

        This is BS! We've been through a very long period of low taxation, ESPECIALLY for the wealthy, in this economic downturn, and the economy is not recovering at all, or at least YOU Republicans don't think it is. so you're contradicting YOURSELVES and blowing smoke out of your ass.

        • Drew says:

          Funny part Peter, is that they say the lowering taxes made a world of difference. 95 to 85 percent! :) So that means we should raise taxes to 85% for the millionaires and billionaires. Seize all off shore accounts and watch all of them cry like babies!

    2. Don Harper says:

      Does this surprize anyone? Candidate Obama defended raising capital gains taxes as being "fair" despite admitting that it might result in lower revenue to the gov't. The Progressive agenda is designed to produce move government control over our lives. It is anti-freedom, anti-individual, and frankly, anti-American.

    3. Brad, Detroit, MI says:

      Part of the Clinton "bubble" in the late 90's that most liberals fail to include is the big push towards home ownership – even for those "underprivileged" that really couldn't afford the home. Boy, were they ever getting creative with financing back then – 5% down, 3 year ARMs, interest only loans, . . . It took more than a decade for that bubble to pop, but is NEVER included in their view of history. Oh, yeah, and the other omission – who controlled the budget during the majority of Clinton's presidency ?- yes – the Republicans. And, oh yeah, who has controlled the budget since Jan. 2007 ? – yes – the Democrats . . . I just wish Bush was more liberal with his VETO power . . .

    4. Ken Kansas says:

      Why is it that the liberals don't get history. That history shows us where we were and because of this we can learn where we don't want to go. Why is it that they are always talking about change and almost every economical change they make goes back to hurt the Nation. Why is history seem to scare Democrats. Is it that it point to mistakes in our country that we can learn from. The biggest tax we ever got and didn't know it is when the Democrats decided we needed to rebuild America, and so banks were force to make loans that anyone could tell could not be paid back. They also pass into law the right for banks to tie risky loans to good loans so that their creation of Freddie Mac, Freddie Mae could get rid of bad loans. Then they have the audacity to blame it on Bush. What seems real evident to most anyone (unless you are Democrat) is that the two last years of Bush's term the Democrats were in control of the Budget and the committees overlooking things like housing, financial markets. During this time many Republicans were saying that both of these areas of our economy were heading for failure. Did the Democrats do anything about it? No. Did they take responsibility for it after it happened? No. So we all pay the price for this failure but in the end we don't hold anyone responsible for it and we haven't recognized why it happen so we don't repeat it again. Just as now we seem to want to repeat what socialism is to a nation and it's people. Can we as a nation just look back a see our mistakes please.

    5. and2therepublic, ill says:

      Is it wise to continue to tax the incomes of only the most productive 47% of our society, and let 53% get a free ride? Progressive income taxes are Marxist in origin. They should be eliminated, and replaced with a federal sales tax that all must pay, even those who receive welfare assistance.

      "History affords us many instances of the ruin of states, by the prosecution of measures ill-suited to the temper and genius of their people. The ordaining of laws in favor of one part of the nation, to the prejudice and oppression of another, is cetainly the most erroneous and mistaken policy. These measures never fail to create great and violent jealousies and animosities between the people favored and the people oppressed; whence a total separation of affections, interests, political obligations, and all manner of connections, by which the whole state is weakened." – Benjamin Franklin – Emblimatic Representations – 1774.

      Income is the property of those who earned it.

      "The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If 'Thou shalt not covet' and 'Thou shalt not steal' were not the commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free." – John Adams – A Defense of the American Constitutions – 1787.

      "In defense of our persons and properties under actual violation, we took up arms. When that violence shall be removed, when hostilities shall cease on the part of the aggressors, hostilities shall cease on our part also." – Thomas Jefferson.

      "Government is instituted to protect property of every sort; as well as that which lies in the various rights of individuals, as that which the term particularly expresses. this being the end of government, that alone is a just government which impartially secures to every man whatever is his own." – James Madison – Essay on Property – March 29, 1792.

      "To take from one, because it is thought his own industry and that of his father's has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it." – Thomas Jefferson – letter to Joseph Milligan – April 6, 1816.

    6. Randy 131 from Flori says:

      The worse the economy gets the more federal entitlements are necessary. Entitlements and social programs are the drug the Democrats want to keep feeding the American public to create an addiction. Like a drug pusher, they tell the user, the American public, that if they don't elect them to office then they'll lose their FIX that they need so desperately, for the Republicans will make them go cold turkey. Addicts, if they can't break their dependency on drugs, will die sooner than later, like this country and its economy will die if we don't stop the pushing of entitlements and social programs, we just can't afford them. So if they can hold the economy down in the name of fairness, or any other excuse, then they keep the public hooked on entitlements and social programs which they think keeps them in power forever, but sometimes the addicts see the light and self rehabilitate. Hopefully thats the case in the 2010 elections and hope it carries through to the 2012 elections.

    7. Johnnygard Coleville says:

      Stop confusing liberals with facts!

    8. Pingback: The Coming Fight

    9. Jerry, CA says:

      I understand where the author is coming from, but I don't fully agree. There has been an economic shift in our country. There are two reasons for this. The first is technology. What once took 1000 people to do now only takes 100, with a total of 900 jobs lost. Technological advances have put a lot of people out fo work. The second one is globalization. Corporations shift jobs over seas to make more money. There is no reason for them to pay 8 dollars an hour for one worker when they can get 40 for just as much. Unless the American people are willing to work 20 cents an hour or less, those jobs aren't coming back. The only jobs left here are the ones that require immense amount of education. There is a general agreement that school is essential for enhancing quality of life. In order to go to school, you need money. To do that, you need to work, but since jobs are shipped over seas and investmenst are made in technology all for the purpose of bigger profit, what can somebody who is unfortunate do? Really nothing. A company's job, whether big or small, is to protect profit – not people. We raise taxes on fortunate people to simply provide equal opportunity.

      • Robert says:

        They also dont see that those increases actually brought us out of something worse than it became. They also forget that Ike a republican taxed the rich at 91% and on average the rich were taxed at 76% for all the years that America Flourished. 1 person in a household could work and make ends meet easily. Then banks and big business started getting greedy and the cost of living started to go up but not wages. Even in the 60s 1 person could work and be ok wasnt until the 80s, when Reagan cut taxes from that 76% to 35% did it really start getting rough and both parents had to start working to make ends meet. They also forget he raise spending by 500% Now the upper paid people in corporations pay went up over 10,000 times and the common worker doubled. The cost of living has more than quadrupled. I see a problem here with numbers. I cant see why a republican cant add this way its simple math.

    10. Mr. Potato Head says:

      It's difficult to square this comment
      "….By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. " with the following chart:

    11. Hi Folks says:

      OK, so let's raise the top income tax rate to 94% for a while and then cut it to 86%. I'm completely fine with that, and the economy will boom.

    12. Pingback: Potential Causes of the Great Depression Discussed | Great Depression History

    13. What most of these people don't understand is that the taxes raised in 1932 and 1937 were on the poor and middle class people as well as the rich.When taxes are raised on the poor and middle class they take buying power out of the economy and that buying power is what makes the economy function ,not only for the general public but also for the producers.The big mistakes that have been made over and over in our economy is that the producers have taken more than their share of the proceeds and left the buyers with too little to fuel the economy.Then they exacerbate the problem by reducing work force and wages that further reduces buying power for the real producers.This is self destructive but it happens over and over because of GREED!!!!!!!!Signed WWII Vet, Raised in the Depression

    14. Your numbers are suspect. One number that does not lie is the INCOME DOUBLING of a country. In 2005 constant dollars the GDP of America was $5808.77 in 1932. By 1942 that income had more than double to $11,999.11. One of the SHORTEST income doubling period in Americas history. This should be look at against the background that during the NO INCOME TAXES YEARS it took 56 YEARS before America doubled its income. From $1024.87 in 1790 to $2083.89 in 1846. FIFTY-SIX years when nobody paid income taxes. It took ONLY 10 YEARS when taxes were piled on by Hoover and Roosevelt. Which country would you rather live in?

    15. Peter says:

      This is BS! We've been in a situation of low taxation ever since the recession, ESPECIALLY for the wealthy who have never had it so good (and Nitmitt wants to cut taxes to the wealthy even MORE, and yet you Republicans yourselves are the loudest to complain that we're not coming out of the economic downturn. So much for low taxes helping us out…GOP joker Bush 2 inherited a surplus from Clinton, and then erased it with the Bushy boys' neocons and the GOP tax cut in 2001 just when a senseless and costly war in Iraq was on the horizon, along with housing and financial deregulation, that brought about the recession. You NEVER cut taxes when a war is on. And now you think that decreasing taxes MORE for the wealthy will bring us out of the sluggish economy? And what do you think will happen to the debt?? Btw, we will eventually recover from this economic downturn NO MATTER WHAT the politicos do. If Obama is allowed more time and taxes are allowed to be RESTORED to the wealthy, our economy will recover faster than Romney's plan of cutting taxes and allowing legal tax evasion loopholes even MORE for the wealthy.

    16. Jimmy Rustler says:

      There is a wonderful thing called the echo chamber effect where people are only hearing views put out by people who they agree with. In turn they become less accepting of the opposing view even if they are right. I think before anyone should say a thing about liberals or conservatives being blind eyed fact denying people, they should look at both sides of the argument and maybe a bit on economic theory rather than shout how stupid someone is. We are adults, not children…

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