Isegoria

Nathan Lewis discusses the US tax hikes of the 1930s:

I make a big deal of the tax hikes of the 1930s — first the Smoot Hawley Tariff, and then the Hoover tax hike of 1932 — mostly because they are largely ignored by economists who would rather believe that it was all a mysterious aftereffect of a decline in stock prices. Stocks go down, and everyone loses their “animal spirits,” and poof! — ten years of tragedy leading to a World War. You would think that people would find that a little simplistic.

(On the other hand, I think economists like it because it places no blame on the government. Economists know on which side their bread is buttered.)

Also, it was not just U.S. policy, but very similar policy around the world. Virtually all countries had tariff hikes of a similar scale as the Smoot Hawley Tariff (60% tariff on just about everything), and also many countries had domestic tax hikes on the scale of the 1932 Hoover hike. In fact, Hoover was imitating policies in Britain and Germany, who were really the first with the big domestic tax hikes.

The Smoot-Hawley Tariff began as an agricultural tariff:

Farmers weren’t participating in the great economic boom of the 1920s. Indeed, it appears that the introduction of motorized tractors resulted in agricultural overcapacity. About 1/3rd of farmland, in those days, was set aside for horse pasture. The horses then pulled the plows and wagons. When horses were replaced with motorized tractors and trucks, the farmland available for growing crops increased by 50%. At least, that is one story — there is a slight decline in corn, wheat and soybean prices toward the end of the 1920s, but not a lot. To gain congressional support for the tariff, however, the supporters started to add products from other Congressmen’s districts. This all began in 1920s — Herbert Hoover campaigned on an increased tariff for agricultural products in 1928. After his victory, in 1929 Hoover asked Congress for a new tariff in which rates for agricultural products rose and rates for industrial products declined.

In May 1929, the House passed a tariff in which rates for both agricultural and industrial good increased. This went to the Senate, which then debated the tariff. The initial stock market decline in 1929 lines up exactly when tariff supporters in the Senate got enough votes to pass the tariff — by adding more and more items to the list of goods subject to the tariff. In May 1930, the House passed the new bill. At first, Hoover opposed the bill, calling it “vicious, extortionate, and obnoxious.” However, in U.S. history, the Republican party has typically been tariff supporters, while the Democratic party has been in favor of lower tariffs. Republicans have often seen tariffs as a type of economic support, as it protects existing businesses from foreign competition. In the initial downturn of 1929-early 1930, the tariff was then seen as an additional economic booster. Hoover was pressured by his own party to pass the tariff into law, and he did so in June 1930. The new tariff applied to over 20,000 goods and imposed a 60% rate on more than 3,200 products, quadrupling previous rates.

Between 1929 and 1934, with tariffs blasting higher worldwide, world trade decreased by 66%.

This was followed by the Revenue Act of 1932:

This raised the top income tax rate from 25% to 63%, with increases on all incomes above $6,000. The estate tax rose to 45% from 20% and the corporate tax rate rose from 12% to 13.75%, and exemptions were reduced. Exemptions for individuals were reduced, with the basic exemption for a married couple falling from $3,500 to $2,500. This was aimed at bringing 1.7 million new taxpayers into the income tax system. However, the big increases were in excise taxes, which were expected to raise 51% of the $912m in increased revenue expected by the tax hike. (In actuality, revenue declined as the economy imploded.)

This was the result of a debate that began with the idea of introducing a new national sales tax, in an effort to “broaden the tax base.” Ultimately, the national sales tax idea was abandoned with the argument that tax rates should fall higher on luxuries than on necessities.

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