When we last left this topic we had gotten up to the post-World War II boom and the fact that the top income tax rate was locked at 91% until 1964. However this outlook ignores a few key cultural pieces of information, specifically a minor modification to tax rates in 1944, as shown in the Tax Foundation tables on the subject. If you look you’ll notice that starting in 1948 the tax rate for an individuals gross income was reduced if they were “Married Filing Jointly” – with reconfigured rates that reduced tax exposure for married couples. Now in the modern era people think of that in terms of “well both spouses are working and earning” but 1948 did not see a huge surge in women entering the workforce, in fact after World War II the number of women in the workforce fell and remained low through the 1950s.
So if you were an average American working or middle class man who had a married wife at home, from 1947 to 1948 you saw your actual tax rate dip sharply by indirect manipulation of the tax code while keeping the illusion of high tax rates in place.
The stability and economic growth of the 1950s and the 1960s was due to a huge assortment of factors, expanding populations, the Green Revolution and a sudden explosion in global food production, governments in Western Europe and the United States paying down owed debt at low interest rates which caused a surge in consumer spending, and it was all anchored by a new system of tariff free trade combined with stabilized currency through the Bretton Woods system which had been established in 1944. (In short, it created the World Bank, the IMF, and pegged all currencies to the United States dollar which was in turn pegged to gold.)
It was a golden, magical time, fueled by a series of different economic forces that started to come apart even as the world economy surged.
The Revenue Act of 1964 cut the top tax rates significantly, dropping them from 91% on the highest earning levels down to 70% and cutting corporate income tax rates as well. The reason for this was stagnating consumer demand from the early 1960s. Despite this Johnson still had sufficient revenue to undertake his major policy initiatives to challenge poverty in the United States, his Great Society initiatives. Which I would argue is the fly in the soup of this golden age of capitalism in the United States, mainly that the prosperity of the 1950s and early 1960s rested solidly upon a section of the working class forced by racism into the bottom-most economic rungs. Urban and rural poverty among African-Americans, as well as other racial groups during this period, vigorously enforced through custom and law, helped bolster the United States competitively, in potentially a similar manner to how maintained colonial empires provided the economic edge to assist Western Europe’s boom.
Income tax rates stayed capped at 70% until it all began to really come apart in the 1970s.
The mid-1960s onwards saw the Civil Rights movement in the United States, decolonization, new demands for a higher standard of consumer goods which bled into the 1970s and the counter-push against the ideas espoused by the 1960s youth. Cynically put the hippies of the 1960s grew up and got jobs, more accurately the idealistic twenty-somethings of the mid to late 1960s got into power and changed the laws and culture of the United States, but also approached the economy from a position of demanding more.
The Bretton Woods system collapsed in the mid-1970s as unsustainable, President Nixon ended gold convertibility and the world entered a period of free-currency flow, which both sparked the current boom of global trade and also further eroded United States trade strength. Combine that with the oil shock under President Carter, rapidly rising inflation and stagnation under both President Ford and President Carter, and you ended up with a United States caught in an odd economic problem of “stagflation.”
Stagflation, in short, combines economic stagnation (minimal growth of the Gross Domestic Product [GDP]) with inflation that erodes increased government spending without adding to the economy. The causes of stagflation are still up for debate but it appears most likely it was a combination of mandatory contractual pay increases to match cost of living increases in union contracts, combined with supply shocks due to oil shortages absorbing federal spending.
In essence when the government spent money it was simply siphoned up into maintaining the standard of living and paying for increasingly expensive raw materials to meet current demand, not into expanding production or new technologies.
But let’s look at the beast at the end, Ronald Reagan, the doom cutter, destroyer of government spending and crusher of the above factoids argument of an era of solid economic prosperity.
Regan did indeed cut the top income tax rate, from 70% to 50% in 1982. If you examine the adjusted GDP table found here you’ll notice it did grow after the tax cut. The late 1970s through the 1980s is a tough period to tease out individual economic factors, you have the falling income tax rates, deregulation, loosening of financial laws, the opening of the stock market to private investors with lower income levels, a series of economic booms and busts, and decreased government spending on social services and support. But if you look at income tax levels you’ll note that under Reagan they feel to an all-time low of 28% from 1988 through 1991, when they then rose to 31% under the first President Bush. President Clinton got them raised to 39.6% in 1994 and they stayed at that amazing peak level till 2003 when they fell, under the second President Bush, to an all time low of 35%.
In 2013 they rose again to 39.6% under President Obama.
Now, if a 4% dip and rise in the tax rate is the secret to the difference between economic boom times and economic collapse, then either our economy is incredibly sensitive to minor shifts in revenue or vast amounts of wealth are stored in the earned income of the top earners in the United States. (Pro Tip – it is not.)
As a friend said – macro-economic and micro-economic factors are complicated, interlinked, and often require a deep understanding of a wide array of fields to fully tease out.
So when you see a factoid like this consider, it is probably more about stirring up your blood than about actually explaining real solutions to economic challenges.
Sources: Tax Foundation information, Wikipedia entries on the economic history of the United States, the Bretton Woods system, post-World War II economic expansion, the Revenue Act of 1964, Richard Nixon’s presidency, Federal Bureau of Labor Statistics article on labor trends