Monday, April 12

Fulsom: Supply Side Economics Not New Deal Broke Depression

Well worth the read.

Congress—both chambers with Democratic majorities—responded by just
saying "no." No to the whole New Deal revival: no federal program for
health care, no full-employment act, only limited federal housing, and
no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the
board. FDR's top marginal rate, 94% on all income over $200,000, was
cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a
change in the amount of income exempt from taxation an estimated 12
million Americans were eliminated from the tax rolls entirely.

Corporate tax rates were trimmed and FDR's "excess profits" tax was
repealed, which meant that top marginal corporate tax rates effectively
went to 38% from 90% after 1945.

Georgia Sen. Walter George, chairman of the Senate Finance Committee,
defended the Revenue Act of 1945 with arguments that today we would
call "supply-side economics." If the tax bill "has the effect which it
is hoped it will have," George said, "it will so stimulate the expansion
of business as to bring in a greater total revenue."

He was prophetic. By the late 1940s, a revived economy was generating
more annual federal revenue than the U.S. had received during the war
years, when tax rates were higher. Price controls from the war were also
eliminated by the end of 1946. The U.S. began running budget surpluses.