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What Year Is This?

The opinions expressed by columnists are their own and do not necessarily represent the views of

The calendar says this is 2010 -- I just looked -- but there are times when current events feel more like an historical re-enactment. It could be 1937 all over again:


A president has been ushered into office on the wings of Hope and Change after a sweeping electoral triumph, and the clouds have started to lift.

Vast new programs, however debatable or constitutional their merits, have been enacted.

An economic recovery is under way, however slowly and tentatively.

And just at this delicate moment, the president decides this would be the perfect time to launch a rhetorical attack on big business, "the rich," and capital in general. And not just a rhetorical attack. His administration has fashioned a whole new web of taxes and regulations to crack down on those evil plutocrats.

The president was Franklin Roosevelt, and his ideas about how to rev up the economy were embodied in the Revenue Act of 1935, aka the Wealth Tax:

Increase the tax on the largest incomes -- up to a confiscatory level of 75 percent.

Raise estate taxes so the dead could do their share to aid the recovery -- and balance the federal budget, too. At least theoretically. And perhaps only theoretically. (As usual, the richest taxpayers also were proving the most skillful at tax avoidance, or at least their lawyers, accountants and trust officers were.)

Hike the corporate income tax on the biggest corporations, those with the most employees to lay off. Another brilliant move.

Raise the tax on "excess" profits.

Impose a new tax on any corporate profits that weren't being distributed to shareholders. To make sure the government would get its share before it was used to create jobs. Even while the administration was cutting back on its own public works projects.


And generally punish investment by those able to invest the most. That would show those whom FDR assailed as "economic royalists." We were going to tax our way to prosperity!

It would have been hard to design a tax structure surer to retard economic growth by suppressing private investment. Federal tax policy would take a redistributionist turn in the middle of the 1930s, just as it looked as if the country might be returning to some semblance of normal growth. Once again ideology had taken precedence over practicality, the satisfactions of class warfare over any consideration of how all this might work out in practice.

"These soak-the-rich efforts," to quote the economic historian Robert Higgs, "left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation's decisions about private investment." After all, doesn't government always know best?

The results of FDR's newest New Deal were predictable: The following year, profits, excess or otherwise, did indeed decline. (The surest way to reduce something is to tax it more.) And so did employment. Unemployment leapt from 14.3 percent in 1937 to 19 percent in 1938. Within one two-month period, the ranks of the jobless jumped from 5 million to more than 9 million, reaching almost 12 million in the banner year 1938. Manufacturing output fell back to 1934 levels. Businesses and individuals hesitated, understandably enough, to invest when the only thing certain was uncertainty.


The shorthand for all this bad news in the history textbooks is the Roosevelt Recession of 1937, a recession within the Depression. It's also known as the Double Dip, a specter that haunts economic policymakers to this day.

Sound familiar? With the expiration of the Bush tax cuts at the end of this year, the economy is about to get hit with one of the largest, across-the-board tax increases since, well, 1937.

To quote one not very assuring summary of what could happen if Congress doesn't do something, and do it soon:

"On January 1, 2011, the top individual tax rate jumps from 35 percent to 39.6 percent. The child tax credit gets slashed in half--from $1,000 to $500. Taxes on dividends snap back to 39.6 percent from their current 15 percent rate. Capital gains rates jump from 15 percent to 20 percent. The current lowest tax bracket increases by 50 percent--from 10 percent to 15 percent. The estate tax, which phased down to zero this year, surges to a whopping 55 percent. Taxes on married couples increase, and the dependent care and adoption tax credits get reduced." --Gary Andres in the July 26 edition of the Weekly Standard, who adds: "This is just a sampling." How assuring.

The results of such a soak-the-rich approach are as predictable today as they were in 1937: a Roosevelt Recession Redux.

Please, somebody stop them before they raise taxes more.


But the usual kneejerks will object: Hey, only The Rich will get their taxes raised -- just those making more than $250,000 a year. That is, those who have plenty of cash to invest, create jobs and thereby employ the rest of us. (Please excuse me, Gentle Reader, for being so crass as to mention the actual results of higher taxes in the real world.)

Yet the higher taxes, increasing deficits and unsustainable entitlement programs may not be the worst thing about this administration's plans for us lucky subjects. What's worse is that no one knows just which plans of so many competing ones will actually become law, perhaps at a lame-duck session of Congress after the voters have spoken in November and the Democratic majority need no longer fear how they'll react to all these taxes.

But even after all those bills are rushed into law, it may not be clear just how many jokers are hidden in the deck, which in this case could consist of thousands of pages of small print. (See Obamacare.)

In so uncertain an economic climate, why invest? Why not wait and see what policies are adopted next? No wonder banks, companies and investors in general are sitting on their hands. And their capital. By one estimate, American corporations now hold more cash (at least two trillion dollars of it) than at any time in the past. Capital has gone on strike. And who can blame it? Nothing stifles investment like uncertainty.


To quote a forgotten voice from 1937, though the name was well known at the time, the industrialist and investor Lammot du Pont: "Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don't know. Is labor to be union or non-union? ... Are we to have inflation or deflation, more government spending or less? ... Are new restrictions to be placed on capital, new limits on profits? ... It is impossible even to guess the answers."

Does it all sound familiar? All too familiar?

No, history doesn't repeat itself, not exactly. But, as Mark Twain is supposed to have added, it rhymes.

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