Low Taxes Don't Cause Recessions: Part I

There are some things that are just not worth bothering to answer. But sometimes I get goaded into it, because of timing, or exasperation.

I, like you too, probably, have people on Facebook I’m connected to, but not because of politics, and yet we tolerate their posts for the sake of other reasons. There’s one of these in particular whose life I want to keep up with, but whose politics—especially the steady stream of everything put out by the Obama campaign website for minions to pass along—just causes a roll of the eyes.

Among the continual propaganda (alongside my care not to let politics be intrusive on my wall), this post came a few days ago:

It is apparently a characteristic of Obama minions that they have a moat and beam problem (and probably aren’t even familiar with the source of that imagery: Matthew 7:3-5).

The steady stream of posts has continued since that one a few days ago. This one came on Monday, with the comment, "Very sad. We need to fix this."

So, let’s see if I catch the message: low tax rates cause recessions and depressions. If only government would confiscate more money, then businesses would hire more workers and create more wealth. I’m not imagining that message, am I?

And the data verifies it, right? Well, not exactly. There is data shown here that implies a cause/effect relationship, but there are some really big gaps in the data as well as the surrounding history—which you have to be ignorant of in order to believe this implication. It is similar to noticing that 95% of obese people eat tomatoes either frequently or occasionally; ergo, eating tomatoes causes obesity. Well, not really. Even if the data is true, there’s a whole lot of data missing that would give a better picture of the causes of obesity. With the additional data we might find not only that eating tomatoes does not cause obesity, but we might find it’s a good food to help avoid obesity. So to give the limited data with the causal implication is pretty much—a lie.

One thing noticeable on the Obama-provided chart is a lack of data for the Great Depression. No problem; I can Google. I easily found the Historical Highest Marginal Income Tax Rates from 1913 (the first year they were imposed) through 2012.

Here’s a little history. When the income tax was proposed, it was pressed through as the 16^th Amendment over more than half a decade, based on the promise that the rate would never rise above 7% and would only be imposed on the very wealthy. That held for three years. Then in 1916 it more than doubled to 15%. But that wasn’t sufficient for Woodrow Wilson; he more than quadrupled it in a year to 67%, and the following year to 77%. Good for the economy? Not really. But there was a world war on, so maybe  there was a temporary need? But it was maintained at 73% for the next three post-war years.

Then in 1921 there was a stock market crash—every bit as severe as the 1929 crash. But government didn’t interfere, and the market corrected. According to the historical chart, one change from 1921 to 1922 was a decrease in the marginal tax rate. And those rates continued to be lowered down to a steady 25% for the rest of the decade. The Roaring 20s. A prosperous decade.

Yes, those rates were still low when the stock market crashed. Was that the cause? Most people look at overspeculation during the inflationary policies caused by the Federal Reserve failing to return to the gold standard following WWI. Related to the top marginal tax rate, there was a belief that rates would stay low, or even drop lower, up through 1929, when it had been dropped to 24%. But then, in 1929 the rise back up to 25% was passed. Those speculating because of reliably low rates would see that as a signal to get out of the market. After the legislation was passed to slightly raise the rate, but before the rise shows up on the historical chart, the 1929 crash happened. Was that change in rates the cause? Not enough data here, and this certainly isn’t the full picture. You have to include artificially low interest rates manipulated by the Fed. But we can be pretty sure it wasn’t the lower rate voted for in 1928 that caused the crash in October 1929.

Following the crash, the market began to recover, signaled by significant return growth in employment—until the government started interfering. That was Hoover, a Republican, but a "progressive," not a conservative. The interference halted the nascent recovery, and every interference caused further hindrance. Then, in 1932 the rate is drastically raised to 63%. Did this lead to an increase in employment? Of course not. It did lead to Hoover being voted out of office, and rightly so.

Unfortunately, the alternative was the even more “progressive” FDR. He held the rates at 63%, while interfering in various other government intrusions, though 1935. Then in 1936 he jumped the top tax rate to 79%. Coincidentally, 1936-1937 was a serious downturn in the economy. That’s when the word “recession” was invented, because it sounded less dire than “depression.”

But wait! There’s more! We’re only a third of the way through the timeline. So the rest of this will have to be continued in Part II in a couple of days.