The Transformation of American from the Revolution to the Present, Part IV
The income tax, the Roaring 20s, and the Great Depression
Note: If you become an annual paid subscriber, you will receive an autographed copy of my memoir. Please send me your address and I will mail you my book.
Robert Wright’s review of my book captures the essence of my journey in America.
“There is a right way and a wrong way, always choose the right way.” Abraham Sabrin (1914-2001)
In his 1954 book The Income Tax: The Root of All Evil, writer and author, Frank Chodorov argues that the 16thAmendment income giving the power of the federal government to tax incomes effectively “overturned” the principles of the American Revolution, and “violates the doctrine of natural rights, set down in the Declaration of Independence.” Chodorov also argues that the income tax is “evil,” because “A people who are intent on getting something for-nothing from government cannot cavil over the infringement of their rights by that government” (emphasis in the original). Chodorov, however, argues that an income tax is only justified to pay for national defense—the primary function of the federal government.
The Constitution was amended granting the federal government power to tax incomes because the Supreme Court ruled (1895) that an income tax bill passed by the Congress in 1893 was unconstitutional. This was an era when the Constitution was respected as the Supreme Law of the Land. In other words, if the Constitution did not authorize a power to the federal government, the founding document had to be amended. That’s why Prohibition was enacted with the 18th amendment. There was no authority in the Constitution to ban the manufacture and sale of alcoholic beverages until the 18th Amendment gave the federal government that power.
One of the reasons an income tax was popular at the time was that 98 percent of the American people did not have to pay it. The tax rates began at one percent and topped out at 7 percent for the highest income earners in the country. Individuals and families who were subject to the income tax could complete the return in a few minutes. How things have changed!
After the US entered World War I, even though most Americans still did not pay the income tax, rates were raised substantially with the top rate skyrocketing to 77 percent. War is expensive and destructive.
Another impetus to impose a federal income tax was the opposition to the relatively high tariff that was the primary revenue source for Uncle Sam. The political horse trading that occurred was to reduce tariffs and have the “rich” fund the federal government with an income tax. Well, after the election of Republican Warren Harding in 1920, a tariff bill was passed in 1922 restoring “the high protective tariff of pre-income-tax days.” In other words, the income tax was a “trojan horse,” promising lower tariffs, which then were raised several years later to previous high levels. However, income tax rates were lowered from the 77 percent top rate to 25 precent, helping the economy grow during the Roaring 20s. American prosperity seemed endless…until the October 1929 stock market crash.
An economic downturn began in the summer of 1929, a few months after Herbert Hoover, who served as Commerce Secretary in the 1920s, was inaugurated president. Why the economic downturn? Simply, the Federal Reserve was pumping money into the economy fueling speculation in real estate and the stock market. Because prices were relatively stable during the decade virtually all economists believed there was no inflation problem.
As the chart below reveals inventions and innovation helped improve the lives of Americans as the price of automobiles were falling as productivity and competition in the auto industry made motor vehicles affordable for the masses.
Instead of letting the economic and financial “excesses” work themselves out, Hoover intervened massively in the economy and the country plunged into the Great Depression. Contrary to what we all learned in school; Hoover was not a “do nothing” president. He increased taxes, spending and regulations. In fact, in 1930 he signed the Smoot-Hawley tariff raising tariffs to the highest levels since the Civil War. Other nations retaliated and world trade declined precipitously, setting the stage for what some analysts claimed at the time—and since-to have been one of the causes of World War II.
As production plummeted and unemployment rose to 25 percent, FDR easily defeated Hoover in the 1932 presidential election. FDR campaigned on a fiscal conservative platform criticizing Hoover’s profligate spending and high tax policies. Once in office, FDR continued Hoover’s policies of high spending and taxes and confiscated the people’s gold in the early days of his administration and devalued the dollar from 1/20 of an ounce of gold to 1/35 of an ounce of gold. In short, FDR continued Hoover’s “New Deal” polices.
One of the transformative pieces of FDR’s economic program was the creation of Social Security. Despite the almost universal support now for this intergeneration chain letter or Ponzi scheme, Social Security was criticized by some members of Congress and analysts as an overreach by the federal government that would not be “sustainable.” As John Attarian explains in his monograph, “The Roots of the Social Security Myth,” the FDR administration lied to members of Congress, the public and ultimately to the Supreme Court about the structure and nature of the taxpayer/employer funded retirement program. In short, the Constitution does not authorize the federal government to create such a program.
But never mind, the unemployment crisis led the Supreme Court to support most of FDR’s agenda to no avail. On the eve of World War II, the unemployment rate was still in double digit levels, unprecedented in American history, a depression lasting more than a decade.
In 1940 FDR ran for a third term as World War II was raging in Europe and Asia promising not to enter the war. This is the second time—and not the last time-an incumbent president ran for reelection campaigning on a “peace” platform.
In the final installment, I will review the major events since the end of World War II that cemented the welfare-warfare state in America.
***********************************************************************
Nice note from talk show host Ed Bonderenka after I was a guest on his July 15 Michigan radio talk show.
Hi Murray,,,
Thanks again. As I feared, there was a lot more topic than time.
Lots of kudos from listeners.
Here's a link to the Spotify.
I hope we can do it again some time.
Yours,
Ed
**************************************************************************
My latest piece on the economy was published in Fortune, https://fortune.com/2023/03/27/recession-2023-layoffs-tech-finance-unemployment-outlook-fed-rates-murray-sabrin/ This is an update of my 2021 forecast, https://fortune.com/2021/12/09/next-recession-heres-everything-bubble-markets-2021-2022-covid-murray-sabrin/
Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle. Sabrin's autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022.