Tuesday, November 11, 2008

1930s Income Taxes

A variety of economists have been debating the role of fiscal policy during the Great Depression. Some of them (also here) seem to suggest that things would have been much different if income tax rates had been lower. Although many things can be blamed on income taxes, the Great Depression is not one of them.

The reason why it's hard to blame much on the income tax is quite simple: most people did not pay any. There was not even withholding in those days. You may have seen some reports about the "lowest income tax bracket" during the 1930s was rising, but that ignores the most prevalent bracket of all -- the zero percent bracket!

I have toyed with the idea of putting some blame on property taxes -- property taxes were hefty, but I don't yet see the mechanism.

5 comments:

Raționalitate said...

Property taxes at the time were by far the most onerous ones. And though urbanites didn't generally own their own homes back then (this was before the era of massive government intervention in the housing market, what with VA mortgages, the FHA, Fannie Mae, Freddie Mac, CRA, etc.), the taxes were obviously passed on to renters.

I once wrote a blog post where I posited, based on a statement by a government commission, that perhaps it was the construction of roads that led to the hike in local property taxes (the most onerous taxes during the time before the federal income tax got to be so high, the welfare state, etc.). This was before roads were funded from user fees.

Alberto said...

Prof,

What then, in your mind, caused the Great Depression (as opposed to a simple recession) if not taxes? Was it protectionism/excessive regulation? Was it the uncertainty generated by the threat of new rules/regulations? Was it the shocks to the money supply?

Thanks in advance,

Brian27 said...

Wasn't Al Capone jailed for tax evasion. Evading income taxes carried a hefty jail term. Perhaps the thirties were full of criminals. What exactly are the revenue to GDP numbers?

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