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Friday, January 4, 2019

Not Remembering History

The always-ready-to-tout-the-latest-nonsense Alexandria Ocasio Cortez is now pushing raising the top in come tax rate to something like 70% (from the current 37%).  She says it would be like the rates that prevailed from the 1930s to the 1970s.  She also says it is necessary to combat climate change.

It's amazing that someone like AOC has made it into Congress.  She has no idea what she is talking about.  In the 1930s through the 70's there were high marginal rates, but there was one big difference from today:  there were huge deductions that could be taken to reduce taxable income.  If you paid interest on your credit card, it was deductible.  In certain years, f you invested in certain kinds of items, you got an investment tax credit of 10% of the cost.  If your income went way up in just one year, you got to average five years together to bring the level down.  You could deduct all medical expenses from dollar one, not only those above 7.5% of income like now.  There was accelerated depreciation and depletion allowances that let certain things like investments in oil drilling result in a tax deduction 4 or 5 times the amount invested.  There were also many other additional deductions that are long gone.  In the 1980s, the tax rates were cut in exchange for doing away with most deductions.  That same method was used when the recent tax cuts were passed.  As a result, there are very few deductions left.  What that means is that many years ago, a rich person might pay 70% on his or her top bracket income, but the total was first reduced by 30 or 40% due to deductions.  Ocasio Cortez wants to put the rate back up to 70% but not restore the deductions.  That would make it the highest tax level ever seen in the USA by far.

Worse than that, Ocasio Cortez obviously doesn't remember that the high tax rates used to keep the USA with a stagnant economy.  Many economists think that by putting in high tax rates in the 1930s, Roosevelt and the Democrats prolonged the Great Depression.  It took World War II and the huge spending on arms and the military to pull the country out of the Depression.  After the War, there was five years of pent up demand for purchases not made while the war was on (like cars and homes) that propelled the economy through the 50s.  Then in the early 60s, John F Kennedy recognized that the high taxes were choking off economic growth, and Congress cut the rates substantially.  In the 1970s, growth was again slowing; Reagan led the fight for further major tax cuts.  The result was an economic growth spurt that kept the economy growing through the 90s and much of the 2000's.  A big tax increase like the one AOC is pushing would almost certainly result in a major recession in 2 or 3 years, if not sooner.

This is not rocket science.  It is basic economic history.  It is amazing to me that a person in Congress would actually push for something that would so clearly cause a major disaster for the American economy.

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