What Happens When We Raise Tax Rates on the Rich?

by Burt on September 29, 2011

“Raise my taxes,” is the cry from Warren Buffett, who is playing the straight man for President Obama. But Buffett’s request poses a question: What has happened in the past when we raised tax rates on the rich? Answer: Often revenue into the federal government goes down.

One example: In 1929, we had a top marginal tax rate of 24% on all income over $100,000. And, according to The Historical Statistics of the United States, the federal government took in $1.096 billion that year. In 1935, after FDR successfully enacted a 79% tax on multimillionaires, the federal revenue declined to $527 million. In other words, when the top tax rate was 24% we took in more than twice as much as when the tax rate spiked to 79%. Granted, we were in a Great Depression in 1935, but that is in part because we were steadily adding new taxes and raising taxes from 1929 to 1935, and those rate hikes helped cause and perpetuate the Great Depression. Why should entrepreneurs invest and take risks when they have to turn more than half of what they might make over to the government? The safer move is to avoid investment and expansion, sit on your capital, and wait for better times. Thus, millions of Americans were unemployed because FDR wanted to tax the rich and “make them pay their fair share.”

If rich people refused to invest, then where did FDR get the money to spend on his New Deal programs? He got it from middle class and poorer Americans. By 1935, Presidents Hoover and Roosevelt had added new excise taxes to generate revenue no longer being collected from rich people. Americans had new taxes on cars, tires, telephone calls, bank checks, movie tickets, and alcohol. And a 15 cent pack of cigarettes now carried a six cent tax. Thus, smokers, car drivers, and movie goers were paying farmers not to produce (FDR’s AAA program) and building roads in key swing states for the 1936 presidential election (the WPA program). And we had ten million Americans out of work because entrepreneurs were taxed too heavily to invest.

Some American businessmen begged FDR to stop. Donald W. Baker, a retailer from Battle Creek, Michigan, wrote the president in 1937: “There are hundreds of thousands of men just like me. . . . These people, Mr. Roosevelt, object to the stirring up of class hatred. It is the last thing we could ever want in this country!” (New Deal or Raw Deal? p. 137) But FDR had discovered that dividing Americans into classes would win him more votes than he would lose. Rich Americans resented FDR, but the larger numbers of poorer Americans welcomed the government programs FDR was providing with his increased excise tax revenue.

Raymond Moley, a speechwriter for FDR, argued with the president, but to no avail. In 1936, Moley wrote in his diary: FDR “launched into a denunciation of bankers and businessmen and said that every time they made an attack on him, as they did in the Chamber of Commerce of the U.S., he gained votes and that, the result of carrying on his sort of warfare was to bring the people to his support.” (New Deal or Raw Deal? p. 134)

President Obama admires FDR and seems to hope that following the strategy of class warfare will win more votes than it will lose. Whether President Obama is right or wrong, it is sad to watch Americans divide because some people have more wealth than others. The Tenth Commandment reveals much wisdom when it tells us not to envy and not to covet our neighbors’ possessions. A prosperous America will include citizens at all economic levels.

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