The Tide May Be Turning (Slightly)

Two weeks ago I wrote an article saying that Obama won re-election primarily because people are hurting much more than Republican politicians realize -  from the effects of the housing crash and from the incredible and dangerously unfair distributions of wealth and income now taking place in America. Obama won because he articulated this unfairness while leading Republicans kept saying that they will never raise taxes on the wealthy, and Mitt Romney never came to grips with the issue.

When 1% of our population has 37% of America’s private wealth, while 40% of the population has only 3/10 of 1% of the wealth, something is very wrong – even to a conservative Republican like me. To his discredit, President Obama never explained the situation, never worked to change it, and instead used class warfare to batter Republicans.

All of a sudden, due to the fiscal cliff that faces us, some Republicans, at least 16, are indicating a willingness to raise income tax rates on wealthier Americans, not because of the unfairness issue, but because of the deficit and the need to make some compromises to get Obama to agree to some spending cuts. There are two dangers facing Republicans: 1. one is that the cuts will be future cuts that, as usual, will never materialize, and 2. recent polls indicate that Republicans will be blamed if a real bargain is not reached. As discussed here, rates on higher incomes need considerable upwards adjustments. This has nothing to do with the needs of the federal budget, but obviously will help in the efforts to balance it.

I’ve gotten some angry e-mails from readers who tend to be conservatives since my posts are usually very conservative in nature. These readers are of two schools: 1. that what I am saying is socialism, or 2. that raising rates on earned and investment incomes will cause an economic slowdown since lowering rates has often caused an upturn.

As to point 1. my answer is that when something is wrong, it should be corrected, and I don’t care what it is called. On point 2., unless rates are increased to levels in effect from 1932 to 1981, I don’t believe raising them will have much effect on economic activity.

History of income tax rates adjusted for inflation
---------Top ----- Top -------- In 2011
Year -- Rate --- Bracket ----  Dollars -- Comment
1913 --- 7% ---- $500,000 -- $11.3M First income tax

1917 -- 67% -- $2,000,000 -- $35M World War I financing

1925 -- 25% ---- $100,000 -- $1.28M Post war reductions

1932 -- 63% -- $1,000,000 -- $16.4M Depression era

1936 -- 79% -- $5,000,000 -- $80.7M

1941 -- 81% -- $5,000,000 -- $76.3M World War II

1942 -- 88% ---- $200,000 --- $2.75M Revenue Act of 1942

1944 -- 94% ---- $200,000 --- $2.54M Tax Act of 1944

1946 -- 91% ---- $200,000 --- $2.30M

1964 -- 77% ---- $400,000 --- $2.85M

1965 -- 70% ---- $200,000 --- $1.42M

1981 -- 70% ---- $212,000 ---- $532k Reagan tax cuts

1982 -- 50% ---- $106,000 ---- $199k Reagan tax cuts

1987 -- 38.5% -- $90,000 ----- $178k Reagan tax cuts

1988 -- 28% ---- $29,750 ----- $56k Reagan tax cuts

1991 -- 31% ---- $82,150 ---- $135k

1993 -- 39.6% - $250,000 --- $388k
2003 -- 35% ---- $311,950 --- $380k Bush tax cuts

2011 -- 35% ---- $379,150 --- $379k