During these thirty-plus years, the poorest fifth of Americans saw a 116 percent increase in their incomes. The middle fifth, a 111 percent increase. And the top 5 percent saw an 85 percent increase. All income classes shared in the prosperity of the times when the top marginal income tax rate was above 70 percent.53
The second effect of a high top income tax rate is to bring stability to the economy.
Writer and political/economic commentator Larry Beinhart figured out the truth about taxes, which is that they can be very destructive if kept too low.
He looked at the history of tax cuts and the history of economic bubbles and busts and found a relationship between the two. Whenever top marginal tax rates were relatively high—above 60 percent usually—the economy was at its most stable. Economic bubbles were kept in check since the superwealthy didn’t have enormous amounts of hot money to go speculate in the market; debt and deficits were lower, giving the government enough resources to sew a strong social safety net; and working people’s wages grew steadily. As a result, the economy as a whole saw sustained growth.
But when those top marginal tax rates dropped, the opposite happened. The very wealthy had a lot of extra money with which to go play in the markets and to place enormous bets on everything from start-up tech companies, to oil and food commodities, to real estate, setting up boom-bust cycles that made some people mind-bogglingly rich during the boom, but left most Americans holding an empty bag when the bust happened.
This was the lesson we thought we learned after Treasury Secretary Andrew Mellon cut the top rate from 73 percent to 25 percent in the 1920s, setting up a frenzy of market speculation and the eventual Great Crash of 1929.
And, as studies from the Center for American Progress show, when the top marginal income tax rate is above 50 percent, economies perform better as a whole. During the past fifty years, average annual GDP growth and employment growth was the highest when the top marginal income tax rate was between 75 and 80 percent. The lowest was when the top marginal income tax rate was 35 percent.54
But progressive taxation provides another benefit to the middle class.
Step Two: A Social Safety Net
With more revenue coming in to the government thanks to progressive taxation, the middle class can be protected by a strong social safety net.
In announcing his third run for the White House in 1912, President Teddy Roosevelt laid out the basis for what would become the New Deal a generation later. He named it the “Square Deal,” and said:
We stand for a living wage… [which] must include:
Enough to secure the elements of a normal standard of living;
A standard high enough to make morality possible;
To provide for education and recreation;
To care for immature members of the family;
To maintain the family during periods of sickness;
And to permit of reasonable saving for old age.
With the Social Security Act of 1935, FDR created Social Security and laid the groundwork for states to implement unemployment insurance programs, borrowing some of the policies in his cousin Teddy’s Square Deal. For the first time, our nation’s elderly population could enjoy a decent quality of life after retirement and be reassured that those who fell on hard times and lost their jobs wouldn’t be swept into destitution.
In his 1936 Democratic National Convention speech—the same speech in which he first called out the Economic Royalists—Franklin Roosevelt quoted an old English judge who once said, “Necessitous men are not free men.”
What Roosevelt was touching on was that if you have necessities that are not met—if you’re in need—then you’re not free. If you’re hungry and don’t have food, you’re not free. If you’re homeless, you’re not free. If you don’t have health care, you’re not free. If you don’t have a job, you’re not free.
Roosevelt went on to say, “Liberty requires opportunity to make a living—a living decent according to the standards of the time, a living which gives man not only enough to live by, but something to live for.”55
For a middle class to take hold, basic necessities must be met. And so, in 1944, FDR went a step further and proposed a Second Bill of Rights. He explained the need for it by saying, “It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known.”56
He noted, “We cannot be content, no matter how high that general standard of living may be, if some fraction of our people—whether it be one-third or one-fifth or one-tenth—is ill-fed, ill-clothed, ill-housed, and insecure.”
And thus he proposed his Second Bill of Rights, which included the following:
The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
The right to earn enough to provide adequate food and clothing and recreation;
The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
The right of every family to a decent home;
The right to adequate medical care and the opportunity to achieve and enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.
FDR’s Second Bill of Rights never came to fruition. But in 1965, President Lyndon Johnson’s “Great Society” built upon FDR’s “New Deal” Social Security Act and created Medicare—a single-payer health care system for Americans sixty-five and older. And LBJ’s Great Society cut poverty in half in a decade.
After World War II, our nation spread freedom to more and more Americans by caring for one another and by everyone—even the rich, who paid an income tax rate over 70 percent after their first million or so and sometimes above 90 percent—pitching in to create a social safety net.
Then there was the GI Bill, which sent millions of young men like my dad to college and technical schools in the late 1940s and early 1950s.
What happened was that more and more Americans were free to chase down their dreams—to be artists and inventors, to find that perfect job, to teach and to build. They were free to spend more time with their families and to take vacations. The explosion of innovation and opportunity, and the rise of the American middle class, was the result of that freedom.
Step Three: Protections for Working People
When George Washington took office, remembering how difficult it was for him to find an American-made suit to wear to his inauguration, he tasked his treasury secretary, Alexander Hamilton, to come up with a plan to make America more self-sufficient—to produce its own goods and services and not have to rely on Britain anymore.
The full title of Hamilton’s plan was “Alexander Hamilton’s Report on the Subject of Manufactures: Made in His Capacity of Secretary of the Treasury.” In it, Hamilton proposed an eleven-point plan to foster American manufacturing. Once enacted, that plan transformed our nation from an infantile dependent into a world superpower.