From Thom Hartmann Blog
The countries of the world that have the most stable economies and that suffer from the smallest boom and bust cycles are the countries with the highest tax rates on the very, very wealthy. The reason for that is that the government is functioning essentially as a stabilizer, so capitalist economies, there's just a fundamental truth about them. This is not a knock on capitalism, it's just the way it is.
Capitalist economies go in cycles of boom and bust. There are big cycles -- what's referred to as the 80-year cycle of major boom and bust -- and then there are smaller cycles which are sometimes referred to as the eight- to 10- year cycle of recession. Every roughly eight to 10 years there's a consequential recession.
And so when those depressions and recessions happen, a government that is well-funded -- in other words it has a broad enough and high enough tax base that the government has resources -- that government can spend money into the recession. They could build new roads, they can do new construction projects, they can build new sewer systems, they can build out high-speed Internet infrastructure.
The reason our government was doing that was because capitalism was in one of its cyclical failures, one of its cyclical crash modes. And government at that point needs to step in and stimulate the economy by putting as much money as possible at the bottom of the economy into the pockets of working people, which is exactly what FDR did, and it's how we got out of the Great Depression, between that and World War Two, which was the largest government stimulus in the history of the United States.
Wars are stimulative. It's not a good way to stimulate the economy because it's not long-term. If you build a hospital it stimulates the economy and continues for the next 50 years as a great revenue source and healing source. You build a bomb and it might cost the same as the hospital, but once you drop that bomb it's gone. The money is gone and the bomb is gone.
But my point is that those high tax rates -- and we haven't seen high tax rates since the 1980s -- I'm talking about over 50% on income over three million dollars a year, which is what we had in 1920. It's what we had in 1940, 1950, 1960, 1970 and 1980 and we no longer had after 1982.
Top tax rates over 50 percent stabilize the economy. They reduce the impact of recessions. And sure enough, in 1921 Warren Harding ran on a campaign of dropping the top tax rate on the richest in America from 91% down to 25%. He won the election and he dropped the top tax rate.
And what did it do? It started a bubble. It kicked off what we refer to as the roaring 20s, which was pure bubble fueled by rich people. It was a speculative stock and real estate bubble and that bubble burst. It started bursting in Florida in early 1928 and by the end of 1929 that property bubble had reached all the way to New York City and it took down the stock market.
And it was all fueled by the tax cut of 1921. So we saw that happening and for the next 30 years, literally for the next 30 years -- arguably the next 40 years -- no Republican was stupid enough to say, "we need to do what Harding did, let's create another Great Depression" until Reagan came along.
And Reagan passed two big tax cuts in '82 and '86 -- the first one dropped the top tax rate from 74% to 50%, the second one dropped it from 50% down to 25% and those two tax cuts then led to, in 1987, the biggest crash in the history of the stock market with the single exception of 1929.
The other thing that happened was that the growth of the middle class -- the bottom 60 percent of Americans in terms of wages and wealth -- was faster in the 40s, 50s, 60s and 70s than any time in the history of America, and the growth of the middle class was growing in wealth and income faster in the 50s 60s 70s up until the 1980s than the top 40%.