Politics and Your Money: Do Taxes create Prosperity?

August 26, 2020

My Dear Reader,

With the coming monetary crisis and the need to solve it, it almost seems as though high taxation is inevitable, but is it all that bad?  In fact, returning to a high taxation environment is not the table for some political movements in the United States. It may seem to violate our philosophical premises of government, but if it helps more people than it hurts, how wrong can it be?  The argument for taxation in the modern era often stems back to the 1950s.  A decade in which America prospered like none other. In fact, the top tax bracket was a whopping 94%. We had roads and schools and some minor welfare programs, but collectively we remember the 1950s for the big cars and the emergence of rock ‘n’ roll. America had truly become the number one power in the world, and the cultural center for the West. So for those who are proponents of extreme taxation rates, this time period seems to be the perfect model. However if we want to understand the growth of the 1950s and its relation to taxation rates, can we agree that we should first examine how taxes in that era were calculated? If there were any other factors that played into American growth, could we begin to question this premise?

Taxes, even today, are calculated by different brackets. For example in 2018, the top tax bracket for those who were married filing jointly and made over $400,000 in 2018 paid 37% of that value to the IRS. Roughly 6% of the United States population fits into this top category. In 1951, if you made over $200,000 per year you were taxed at 91% of your income. In today’s equivalent that taxation rate would only apply to those making $1,981,984. If we use this new number, to account for inflation, then the 1950s era tax rates would only apply to about 2.5% of the total US population today. I bring up the percent of United States citizens paying the top tax rate because it shows that even though the rate dropped the amount of people paying into the top bracket went up, which would mean that the government would not lose nearly as much revenue if they had just dropped the percentage rate. Another thing to note is the fact that in the 1950s, the amount of tax deductions that were available to the average citizen and the wealthy were far more plentiful than they are today. Experts have calculated that the 1950s era top bracket paid an effective tax rate of 45%. This is a massive drop from the 91% number that could cause us to question our Lockean backed position. So if the tax rates were only a slightly higher percentage points on incomes, that today are four times as high, the government actually collected less revenue in the 1950s from the top bracket than they do in modern times. But was it just the top bracket that contributed to the boom of the 1950s? We must not forget the global events that were occurring at that time.

The 1950s and 1953 United States was involved in the Korean War. In both World War II and the Korean War, our domestic factories sprung to life creating everything from machine parts to the newfangled plastic that drove the United States war machine. Between 1954 and 1960, Europe was also rebuilding. World War II had destroyed everything from London to Leningrad and  Western Europe, now allies of the United States, needed to quickly reconstruct their decimated cities. This required building materials, manpower, and even increased food and grain production.  This created a great demand for workers and labor through the decade. In the late 1940s, the G.I. Bill helped many returning veterans afford homes all across the United States and so the housing market and everything connected to it was in a massive boom. In terms of real estate the United States was on sale, and so for the wealthiest it was a massive investment opportunity.  The post war United States economy was unique, and fueled more so by global economic changes than simply high taxation rates.

What emerged in the 1950s, was the same phenomenon that had emerged just after World War I, before the Great Depression ravaged the post war boom. In both cases, a middle class emerged in both economies. This class is unique to free devolved nations, because the labor required to achieve a middle class income is somewhat specialized.  It’s the type of labor that is required to run modern economies based in technology and production over raw land power.  The story of the idolized early 20th century United States was a story of a movement away from an agrarian society into a modern industrialized economy.  I believe we can all agree that with more production, comes more products which raises the standard of living.  But if we are going to extract a universal truth from our collective past, can we agree that we should examine more than just the positive examples of the roaring 1920s and 1950s?  If so, we are going to have to revisit the tumultuous 1960s and 1970s.

When America used to build her own automobiles, they were constructed in the Michigan city known as Detroit. Rubber would be shipped in from Ohio along rail lines that were constructed with Pennsylvania iron and steel. This created separate and unique economies in different northeastern and Midwestern cities and states. Because of the availability of labor jobs that did not require a college degree, many families could be supported by a single income and live in a relatively safe neighborhood. But the factory owners and those who were wealthiest typically lived in neighborhoods that were much more noticeably well-off. This in of itself did not create resentment among the American public, but it did add a new wrinkle to the urban American political game. Crafty Politicians of the early 1960s began to run on the platform that the companies and those at the top of the factory food chain were making too much, and taking too much from those at the bottom. A similar philosophy to the Rousseauian angle we examined in our first book. By 1961, Detroit had elected its first mayor whose campaign was almost exclusively a campaign for Rousseauian high taxation rates. The plan was to use the money collected from increased tax rates on the wealthy to fund schools and education as well as road networks and welfare programs for the city. By the mid-1970s taxation on not only the wealthiest but the corporate structures within the cities had become too high, which caused a rise in production costs and selling price.  Given the rapid Globalization of the time, larger car companies like Ford, GM, and Chrysler decided to divest and decentralize from Detroit. An interesting book from 2004 titled “From Motor City to Motor Metropolis: How the Automobile Industry Reshaped Urban America” explained the exact problem very concisely:

“This [union power] led Ford to be concerned about the vulnerability of its huge, flagship Rouge River plant to labor unrest. The workers at this plant were “among the industry’s most well-organized, racially and ethnically diverse, and militant.” A strike at this key plant could bring the company’s manufacturing operations as a whole to a halt. Ford therefore decentralized operations from this plant, to soften union power (and to introduce new technologies in new plants, and expand to new markets). Ford often built up parallel production facilities, making the same products, so that the effect of a strike at any one facility would be lessened. The results for the River Rouge plant are striking. From its peak labor force of 90,000 around 1930, the number of workers there declined to 30,000 by 1960 and only about 6,000 by 1990.”

Based on numbers alone, we can clearly see the hollowing out effect taking place over many years in one of America’s greatest cities.  The hollowing out effect is the inverse of what we discussed in the 1950s.  Where a strong Real Estate market and wealthy investments creates jobs and a stronger middle class, which brings in more companies and jobs to an urban area.  In all of this, it may seem as though we are getting into dicey political territory.  However I believe that it is wrong to blame one side or the other for the hollowing out effect, and here’s why.  If I could show you that both the political right and left have raised taxes more than they have lowered them, could we agree once and for all that the solution to high taxation must be a personal one, and not a political one?

To Your Creation and Potential,

Kevin Prendiville