Democrats' Tax Increases Will Doom Recovery

As I wrote here last week, an increase in taxes on anyone during troubled economic times is a prescription for disaster.

The very last thing the Congress and the new President need to do in order to address the current market anxiety and the troubles in the housing and banking industries is to raise taxes.

Herbert Hoover and the Congress made that very mistake in 1932 in an attempt to address a severe recession that was on the brink of becoming a depression.

The top tax rate for the wealthiest Americans was raised from 25% to 63%. Immediately the nation's economic woes vastly worsened. Unemployment skyrocketed to nearly 25%, the money supply dried up, and GNP only continued to plunge.

1932 and 1933 were the worst years during the horrid economic times of the 1930s...a full 4 years after the stock market crash.

The only major economic policy change that occurred prior to the 2 worst years of the Depression was the tax increase on the wealthy.

Thus, the tax increase only served to make a bad situation worse, a survivable hardship dire.

A reader asked if I had the specific figures to back up my assertions. Here is what I wrote in response:

'Recession' and 'depression' are relative terms based upon comparisons. As you will see from the facts, what occurred from 1929 until Hoover's massive tax increases early in 1932 was nothing compared to what took place following that fateful mistake.

When the stock market crashed in 1929 the country was already in the midst of a recession. That recession became severe following the crash. But it was not until late in 1930 that the first 'run on the banks' occurred, followed by a wave of bankruptcies.

But even by the end of 1930, fully a year after the market crash, unemployment was at 8.7%--roughly the same as with other severe recessions the nation has experienced since then, such as during the 1970s.

In the Spring of 1931, there was a second run on the banks resulting in more panic. By the end of the year unemployment had risen to 15.9%--very high to be sure.

But what happened in 1932 was the proverbial straw that broke the camel's back. The President and the Congress approved raising the top income tax rate from 25% to a whopping 63%. Unemployment then skyrocketed from 15.9% to a massive 23.6%.

1933 was even worse. Unemployment rose from 23.6% to 25%, and the nation was firmly in the death grip of low wages, low profits, a greatly diminished money supply, and a GNP that fell yet another 2.1% following the free-fall of the years between 1929 and 1932.

Thus, history shows that the nation's hard economic times were at their peak, that is, at their very worst, in the years 1932 and 1933--immediately after Hoover and Congress raised taxes significantly on the wealthiest Americans.

Even FDR's New Deal did not end the Great Depression. While unemployment fell to 21.7% in 1934--FDR's 2nd year in office--the unemployment rate by the end of 1938 was still a whopping 19%--a full 6 years into FDR's presidency.

Only when the nation began to make preparations for our entry into WWII did the Great Depression end. That was in 1939--the year FDR began to vastly expand the military. From 1939 until 1941, the nation gradually pulled out of the Depression, thanks to the build-up of goods and hardware in anticipation of entering WWII.

So, you tell me, based on the evidence of history, available in any history textbook or other works on the period, what other major economic policy changed between 1931 and 1932-33, other than the massive tax increase?

There was none. The tax increase on the wealthiest Americans plunged the nation into the 2 worst years of the crisis, 1932-33.

Hope that helps. But do your own research, and keep an open mind.

Thus, the absolute worst thing Obama and the Democrats could do in this troubled economic climate is to raise taxes. Yet this is precisely what they plan to do in order to give '95% of Americans a tax cut,' 45 million of whom do not even pay taxes to begin with.

And we have yet to find out just what exactly constitutes 'the wealthy' in the minds of our newly chosen ones. First, it was $250,000, then $200,000, then $150,000, and then just prior to the election it was stated to be $120,000.

Raising taxes on this income level may well be the final straw that pushes our economy over the edge into the next Great Depression.

And don't forget that this is on top of the massive tax increase that will hit ALL Americans when the Democrats and Obama allow the Bush tax cuts to expire in 2010.

Remember you heard it right here first, folks. We will have economic hell to pay if these policies are implemented.