JFK and the History of the Graduated Income Tax

[W. Niederhut]

       Joseph Stiglitz and other progressive economists are talking about the possible end of "Trickle Down" economics in the Biden era.  We witnessed major "supply side" tax cuts in the Reagan years, then a slight increase in the top income tax rates at the beginning of Clinton's administration, (1993) followed by the Bush-Cheney tax cuts of 2001 and 2003, and Trump's cuts in December of 2017.  Interestingly, the most robust U.S. GDP growth of the past 30 years happened after Clinton and the Democrats increased the top tax rate in the 90s (by a 51-50 Senate vote, with Vice President Al Gore breaking the tie.)

      Woodrow Wilson and the Progressives launched the era of substantial graduated income tax rates in the early 20th century.  Harding and Coolidge reduced them significantly in the 1920s, and FDR brought them back during the Great Depression -- increasing the top rate above 90% at the height of WWII.  Top rates remained at 90% during the Eisenhower years, until JFK reduced them quite substantially to 70%.  There they remained until Reagan's "Trickle Down" revolution, plunging down to Roaring '20s levels (below 30%) by 1988.

      The French economist Thomas Piketty has documented quite convincingly that the marginal increase in U.S. GDP since 1980 has gone almost entirely to the wealthiest 1%.

      And wealth inequality in the U.S. is at 1929 levels.

      The correlation between U.S. GDP growth and income tax rates has been low, and my own belief is that tax cuts for the rich have not necessarily stimulated growth or employment in the U.S.  For one thing, "supply side" investors can simply invest overseas in cheaper labor markets.   For another, the tax cuts may even create a drag on economic growth by sequestering wealth in a smaller percentage of the population, reducing broad-based consumer demand.

      Is there an optimal income tax rate for stimulating economic growth?  And what is it?

 

 

Edited March 16, 2021 by W. Niederhut

[Kirk Gallaway]

Right on W! I've read excerpts of Picketty's Capital. It does make sense that money will more likely percolate through the economy when given to people who need it for their existence.

W. said: Is there an optimal income tax rate for stimulating economic growth?  And what is it?

Is that a rhetorical question? What is the answer?

[Greg Doudna]

I believe Piketty had an argument that about 65% was the maximum right number for taxation at the top end, whether of income or of the argument of Piketty that I found of much interest, "Inheritance for All". Inheritance for All would be a tax on inheritances which starts at a certain (high) level at a low percentage and rises to 65% at the highest wealth level. That tax would not go into general revenue of the government for current spending but instead would pass-through into a dedicated fund which would pay out of that fund a lump-sum amount to every citizen on their 21st birthday, the amount to be determined each year on the basis of how much was in the fund. Piketty had an argument that a one-time lump sum on the 21st birthday was preferable to the alternative of having it paid out annually in the form of a guaranteed annual income supplement, between those two alternatives (both regarded as good, but a lump-sum at age 21 he argued was better). Piketty also had an argument--he gave reasons though I do not remember what they were--why tax rates should not go higher than 65% at the top end.  

[W. Niederhut]

Yes, Greg.  JFK got it about right with his 70% top rate, which endured for roughly 20 years.

But here is another macro-economic graph that is relevant to the history of U.S. Presidents and tax rates-- U.S. military spending by year.

Notice the disconnect between tax rates and massive increases in military spending by the U.S. champions of Trickle Down economics-- Ronald Reagan, George W. Bush, and Dick Cheney.  (Military spending also surged after JFK's assassination.)

Our current massive national debt is largely a result of; 1) "trickle down" tax cuts in 2001, 2003, and 2017, and 2) massive military spending in Afghanistan and Iraq.

Edited March 16, 2021 by W. Niederhut

[Kirk Gallaway]

Greg said:I believe Piketty had an argument that about 65% was the maximum right number for taxation at the top end,

Really interesting, Greg, I wonder if that dedicated fund to go out at  21 is his projection for just France or all the G7 or what? Putting 2 ideas together, if you took Andrew Yang's $1000 a year and projected it for 21 years, a person might get $21k at 21. That's a nice chunk. I wonder what his attitude would be about such a chunk in U.S.? It would seem, he might suggest it be  directed to one's education. In France that might be a good idea, but what kind of education could you buy in the U.S. for 21k?  Of course maybe it's that hopelessness in the U.S. that's make it more likely that people here are going to have to rethink their ideas about education.

 

W.  Yes, Greg.  JFK got it about right with his 70% top rate, which endured for roughly 20 years.

I know JFK lowered rates, but it does show a lag, the rates start lowering around 1967 to the Reagan tax cuts in 1983. JFK got it right, if you could consider Picettys projections to be gospel. It would be interesting to see the Defense outlays adjusted for inflation for the last 3 years. 

[W. Niederhut]

2 hours ago, Kirk Gallaway said:

Greg said:I believe Piketty had an argument that about 65% was the maximum right number for taxation at the top end,

Really interesting, Greg, I wonder if that dedicated fund to go out at  21 is his projection for just France or all the G7 or what? Putting 2 ideas together, if you took Andrew Yang's $1000 a year and projected it for 21 years, a person might get $21k at 21. That's a nice chunk. I wonder what his attitude would be about such a chunk in U.S.? It would seem, he might suggest it be  directed to one's education. In France that might be a good idea, but what kind of education could you buy in the U.S. for 21k?  Of course maybe it's that hopelessness in the U.S. that's make it more likely that people here are going to have to rethink their ideas about education.

 

W.  Yes, Greg.  JFK got it about right with his 70% top rate, which endured for roughly 20 years.

I know JFK lowered rates, but it does show a lag, the rates start lowering around 1967 to the Reagan tax cuts in 1983. JFK got it right, if you could consider Picettys projections to be gospel. It would be interesting to see the Defense outlays adjusted for inflation for the last 3 years. 

Kirk,

Trump increased inflation-adjusted defense spending, slightly, in order to "rebuild our country's depleted military."  🤪

US election 2020: Has Trump kept his promises on the military? - BBC News

Edited March 16, 2021 by W. Niederhut

[Kirk Gallaway]

Right on W.!   Graph looks pretty much as I thought it would be. I knew Trump increased Defense spending but was wondering about inflation.

You and Greg might like this interview I saw with  Paul Krugman a while back about Piketty's book. Psst. Don't tell Jim it's from Bill Moyers!  Krugman has said recently he's very pleased at the covid relief package.

https://youtu.be/QzQYA9Qjsi0

 

Edited March 16, 2021 by Kirk Gallaway

[W. Niederhut]

Obviously, there are multiple, complex determinants of U.S. GDP growth but, ceteris paribus, history has not been kind to GOP "supply side" tax cut ideology.

[W. Niederhut]

Addendum:  If you study the above GDP graph, the last time that cutting the top income tax rate resulted in a significant increase in U.S. GDP growth was when JFK cut the top rate from 90% to 70% in the 1960s.

[James DiEugenio]

What I find so interesting about the graph is this:  FDR invested a lot of money, I mean a lot of money, in both the New Deal and World War II.  Many economists refer to this as Keynesian economics.

Kennedy got a good performance before he ever got to that. He asked Heller what would be the quickest way to get a boost into the economy. Heller told him a tax cut which was geared to the middle class and lower class, because they spend the money. Kennedy said OK, we will pass the capital improvements part later.

But I also think it was Kennedy's man in banking, James Saxon, who also helped.  Man that guy has been hidden for so long.  Malcolm Blunt talks about him in the new book The Devil is in the Details. I am convinced now that Saxon was Kennedy's gladiator sent to duel with the Fed in order to make credit more available. 

BTW, does anyone today really think that trickle down was ever anything more than a hoax to transfer money upwards from the lower to the upper classes?  The only two people I know of who called this out in public when it happened were Stockman and Moynihan.

PS I should add that Galbraith did not agree with Heller on the tax cut.

Edited March 17, 2021 by James DiEugenio

[W. Niederhut]

1 hour ago, James DiEugenio said:

What I find so interesting about the graph is this:  FDR invested a lot of money, I mean a lot of money, in both the New Deal and World War II.  Many economists refer to this as Keynesian economics.

Kennedy got a good performance before he ever got to that. He asked Heller what would be the quickest way to get a boost into the economy. Heller told him a tax cut which was geared to the middle class and lower class, because they spend the money. Kennedy said OK, we will pass the capital improvements part later.

But I also think it was Kennedy's man in banking, James Saxon, who also helped.  Man that guy has been hidden for so long.  Malcolm Blunt talks about him in the new book The Devil is in the Details. I am convinced now that Saxon was Kennedy's gladiator sent to duel with the Fed in order to make credit more available. 

BTW, does anyone today really think that trickle down was ever anything more than a hoax to transfer money upwards from the lower to the upper classes?  The only two people I know of who called this out in public when it happened were Stockman and Moynihan.

PS I should add that Galbraith did not agree with Heller on the tax cut.

       In retrospect, JFK may have "accidentally" hit upon a near optimal top income tax rate of 70% (as an economic stimulus.)  Milton Friedman's "supply side" theory later posited that additional tax cuts for wealthy "investors" would further increase investment and GDP growth.  But the ensuing "Reaganomic" tax cuts did not result in sustained increases in U.S. GDP-- perhaps because of globalization and increased investment in low cost overseas labor markets.

       In fact, U.S. GDP growth actually increased in the 1990s after Bill Clinton and the Democrats increased the top rates in 1993, then slowed after Bush and Cheney cut the top tax rates in 2001 and 2003.  Trump's huge December 2017 tax cuts for corporations had no discernible effect on U.S. GDP growth, even before the 2020 COVID pandemic struck home.  If you look at the quarterly GDP numbers, there was never a "Trump bump" for the U.S. economy-- but there was an increase in stock prices after the Trump tax cuts, partly because of corporate stock buybacks.

Edited March 18, 2021 by W. Niederhut

[James DiEugenio]

Yes, those were the results.  As many claimed it was reverse Robin Hood.

IMO, Keynes was the greatest economist of the 20th century.

[W. Niederhut]

22 hours ago, James DiEugenio said:

Yes, those were the results.  As many claimed it was reverse Robin Hood.

IMO, Keynes was the greatest economist of the 20th century.

Keynes was an intellectual prodigy.  My favorite John Maynard Keynes quote...

[James DiEugenio]

LOL, priceless.

John Rockefeller Sr turned into  Jeff Bezos.

Neither guy wants any part of organized labor.

[Kirk Gallaway]

Jim said:BTW, does anyone today really think that trickle down was ever anything more than a hoax to transfer money upwards from the lower to the upper classes?  The only two people I know of who called this out in public when it happened were Stockman and Moynihan.

Jim, you've praised David Stockman before for no other reason than he said supply side  economics don't work. The history behind that, is that Stockman's sour grapes because he lost the battle in the Reagan administration to supply sider Arthur Laffer. In reality Laffer, as bad as he is was much more preferable to David Stockman, who ended up being too radical for even Reagan, because he wanted to destroy any remnants of the New Deal,or organized labor,  and employ such Draconian government cuts, that would have decimated the economy under this naive belief that it would be rescued from the ashes by tax cuts to the super wealthy, who could then start a new economic cycle under their dominion.

He's made his money since through a hedge fund, and while always critical of supply side economics, is rather crafty in not telling you what a young ideologue he was. He was the precursor to Banon's aim to dismantle the administrative state". Keynes would be much more friendly to Laffer, who didn't want a wholesale dismantling of the administrative state, though it is a question to ask if after decades that that might have  been the inevitable result anyway, but at least there would have been time to stop it..

W., That graph was a bit surprising in parts to me W. Is that derived from a government source?

W. said: In retrospect, JFK may have "accidentally" hit upon a near optimal top income tax rate of 70% (as an economic stimulus.)

Whew!,Thank you W!,  Do we have to make JFK a superhero guy with the perfect solution about everything?!. Though it is a good pretext for the thread!

 

 

wink wink!

Edited March 19, 2021 by Kirk Gallaway