Even President Hoover had to relent, and the Revenue Act of was enacted. Tax increases continued under FDR, but with greater emphasis on progressive taxes on income and wealth, rather than regressive consumption sales taxes [4]. The only major exception was the Social Security tax on wages, starting in The Revenue Act of raised income taxes on the wealthy and reduced them for lower income groups; it also raised estate taxes on the wealthy and closed corporate tax loopholes [5]. The Revenue Act of taxed undistributed corporate profits and the Revenue Act of aimed to clamp down on corporate tax avoidance [7].
Some commentators have argued that increased taxation on high incomes and wealth during the New Deal era were not overly successful in raising additional revenue [9]. Nevertheless, in its report on fiscal year FY , the U. Yet Romer and Romer , among others, argue that massive increases in numerous income and excise taxes in —36 had no ill effects on the U. But that would be an unduly broad conclusion to base on such narrow evidence. The Romer and Romer ETI estimates deal exclusively with only one relatively small federal tax the personal income tax accounted for only In , real investment in business equipment fell Growth theory and real business cycle theory might suggest that collapse of fixed investment was at least aggravated by greatly increased corporate and personal tax rates on expected future returns from investment.
Even within that narrative, however, Figure 3 shows that increases in total federal tax revenues in the s were dominated by payroll and excise taxes. Yet to dismiss huge movements in investment as merely cyclical—or to obscure such movements with trend adjustments—tends to minimize possibly damaging effects of tax changes on business and household investment.
Marginal excise tax rates were greatly increased in and The effective corporate tax rate was increased from 11 percent in to The tax law involved raising the top tax rate from 25 percent to 63 percent, quadrupling the lowest rate from 1.
It is important to realize that federal excise and state sales tax rates also affect marginal rates on factor incomes, and both rose in the s. Those increased excise taxes as well as the infamous tariffs of ultimately fell on factor incomes. To focus exclusively on marginal tax rates on only personal income and at only the federal level, clearly understates the increases in marginal tax rates on income and sales at the federal, state, and local levels.
In fact, to focus only on the economic impact of the federal tax on individual incomes in —40 is to leave out In , federal income tax rates were roughly doubled at all income levels, with larger increases at the lowest and highest incomes. In , the federal income tax on individuals accounted for From to , by contrast, the federal income tax accounted for an average of If the objective of high marginal tax rates on personal income from labor and capital was to maximize revenue, regardless of any adverse impact on growth of the economy and therefore growth of taxable income , the Hoover and Roosevelt plans to fix the Depression with higher taxes in —36 were a total failure.
By discouraging asset trading, high tax rates on realized gains 47 percent after two years reduced realizations and tax receipts. Falling tax receipts, in turn, makes those higher tax rates look unimportant in terms of static bookkeeping and Keynesian macroeconomics.
Yet falling revenue from higher tax rates illustrates the high cost of punitive marginal tax rates with no offsetting benefits. Despite large increases in many such distortive federal and state marginal tax rates on what people earn and on how they spend those earnings, Mulligan nonetheless relies only the federal tax on individual labor income to agree with Cole and Ohanian that new taxes on labor and capital were trivial and insignificant in —33 and Mulligan includes — He remarks that.
Cole and Ohanian suggest that … taxes on factor incomes might help explain some of the Depression economy. Mulligan emphasizes only the labor tax wedge without mentioning the payroll tax while neglecting marginal tax rates on capital incomes: higher corporate tax rates, surtaxes on undistributed profits, higher individual tax rates on partnerships and small enterprises, higher tax rates on capital gains in —37, on dividends in , and raising the top tax on estates from 20 percent in to 70 percent Wright : estimates the average U.
Mulligan cites similar estimates from Barro and Sahasakul Yet, Barro and Sahasakul were highly critical of the income tax rate increases of and , which they explained in detail.
Barro and Sahasakul ibid. They also apologized for excluding excise taxes. Yet it is also true that relatively few people start new businesses, employ many people, or supply capital to those who do. If the increases in rates were not completely unexpected [Hoover announced them in December ], these households would have foreseen large declines in future gross returns on investments … even before when major changes were enacted.
That includes new taxes on retained earnings and higher taxes on dividends in , plus high tax rates on most realized capital gains from until early Calomiris and Hubbard also find the —37 surtax on undistributed corporate profits was particularly harmful to the working capital and plant and equipment outlays of smaller, rapidly growing firms.
Large corporations could avoid the tax by paying more dividends reported as taxable income on individual income tax returns , but this was not a viable option for smaller growth companies with limited access to external funds and therefore dependent on retained earnings to reinvest for expansion.
On the contrary, excise taxes that were added and increased in and were neither few in number, small in size, nor modestly changed see Figure 3. Treasury : From to , individual income taxes averaged less than 1 percent of GDP, but excise taxes were 2. News about abrupt changes in government taxes or regulatory distortions may create a policy shock forcing the people to respond to new incentives. Few economic historians who have written about causes of the Great Depression have assigned much importance to tax changes, and many entire books on the subject do not even mention tax policy.
This article reviews more recent and very different studies that assert or imply that tax rate shocks in the s and s had no discernible impact on activity that generates growth. Figure 1 , by contrast, shows high incomes always moved inversely with marginal tax rates except in —38 suggesting elasticity of taxable income ETI was high.
Romer and Romer conclude otherwise, as does Goolsbee for s. They claim ETI was so low in —38 that top tax rates of 73—84 percent would have been revenue maximizing. Yet raising the top tax rate from 25 percent in —31 to 63—79 percent in later years produced individual income tax revenues no higher in than they had been in Goolsbee and I agree that the ETI was high when such tax rates were greatly reduced in — But where I find substantial qualitative response after tax rates rose sharply in , and Romer and Romer find a middling ETI of 0.
He also finds the highest incomes rose to , which he interprets as zero response to higher tax rates in But I show that was because capital gains realizations collapsed in when the capital gains tax was greatly increased then surged in as that tax was cut to 15 percent. That exercise is inherently incomplete because it 1 includes only about 25, taxpayers and 2 excludes major changes in excise taxes and in tax rates on dividends in , capital gains in —37, and undistributed corporate profits in — I argue that what happened to those widely ignored taxes largely explains the brief anomaly of high incomes and top tax rates moving up together in —38 e.
Cole and Ohanian and Mulligan do not merely claim higher tax rates were harmless as Romer and Romer do but claim there were no significant changes in marginal tax rates on labor or capital in or Far from proving weak response to high tax rates, vanishing high incomes illustrates the opposite i. To focus on the federal tax on individual incomes alone, as all these studies do, misses a much bigger picture. Federal taxes were a small fraction of total government revenues By , the individual income tax accounted for only This review of prewar ETI estimates finds them equally understated and also too constricted—dealing with only a tiny fraction of many federal and state taxes on labor and capital.
That is too strong a conclusion to be supported by such weak evidence. Akcigit, U. Barro, R. Brown, E. Calomiris, C. Cole, H. Washington: Cato Institute. Diamond, P. Eggertsson, G. Frenze, C. Goolsbee, A. Gwartney, J. Henderson ed. Indianapolis: Liberty Fund. Haas, G. Treasury Department Staff Memo March Available at www. Hausman J. Johnston, L. Tax liability according to these rates was reduced by 5 percent, and the maximum effective tax rate on net income was Last law to change rates was the Revenue Act Code of The maximum effective tax rate on net income was 90 percent.
Last law to change rates was the Individual Income Tax Act of Defense tax of 10 percent of normal tax and surtax limited to 10 percent of excess of net income over sum of normal tax and surtax. Tax liability reduced by 1 percent by Joint Resolution of Congress, No. Last law to change rates was the Tariff Act of October 3, This decision stood until the ratification of the 16th Amendment in Declared unconstitutional by the Supreme Court in in Pollock v.
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Tags Tax Brackets. Related Research. Pursuant to the Economic Recovery Tax Act of , for tax years beginning after December 31, , each tax bracket is adjusted for inflation except in the first year after a new law changes it.
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