The Elusive Quest for Tax Reform: Lessons from the New Deal Era

In the early 1930s, the United States grappled with the devastating impacts of the Great Depression. President Franklin D. Roosevelt (FDR) and his administration introduced numerous policies to address this economic crisis, one of which was the National Industrial Recovery Act (NIRA) of 1933. This Act aimed to stimulate economic recovery by putting the country on a centrally-planned economic model. FDR saw Stalin as a leader of 'economic democracy,' essentially equating this socialist approach with the principles of democratic governance.

By the spring of 1939, the economies of Germany and Great Britain had made significant strides in recovering from the Great Depression. In contrast, the U.S. economy, despite the implementation of FDR's New Deal policies, struggled to make similar progress. Henry Morgenthau, FDR's Treasury Secretary, acknowledged in his diary that while the New Deal created a substantial amount of debt, it failed to effectively pull the nation out of its economic morass.

The Complexity of Tax Systems and the Widening Wealth Gap

The discussion of tax reform brings to light the intricate and complex nature of tax systems. In a recent scenario, if the top marginal tax rate was increased from 35 to 91 percent, similar to the rate imposed during the New Deal era, the wealth of the top 1% would likely decline from 45% to 25% of the total wealth, while the wealth of the top 0.1% would decrease from 25% to 10% in just seven years. However, such drastic changes may not yield the intended results due to the advanced tax planning strategies used by the rich.

Tax Loopholes and the Super-Rich

Rich individuals will always find ways to evade high taxes. They invest in assets that appreciate in value but do not provide taxable income. This is not simply unethical; it is a well-documented phenomenon. Rich people have access to the best tax accountants and lawyers, who can help them structure their investments to minimize their tax liability.

No Loopholes Left Behind

No matter what changes are made to the tax system, there will always be "loopholes." In the current tax system, if you are single and earn less than $25,000 or married and jointly file with an income of less than $50,000, you pay no tax. Moreover, for individuals who earn higher incomes through wages, the process is relatively straightforward. The tax system becomes increasingly complex for those with multiple forms of income, such as owning a small business, being self-employed, or investing in real estate. In these cases, hiring a professional tax accountant is necessary to navigate the complex tax laws.

The complexity of tax laws arises from the ongoing cycle of creating and closing loopholes. The Internal Revenue Service (IRS) attempts to prevent exploitation of loopholes, but politicians, lobbyists, and accountants often add new loopholes that can be exploited. Even new loopholes discovered by tax experts after studying the latest tax laws can be advantageous. Politicians need the support of the ultra-wealthy to fund their campaigns and desire to exploit the loopholes themselves. Many politicians, who are also lawyers, aim to protect their friends, colleagues, and lobbyists.

The rich and well-connected are the only ones who can play the game of tax reform. Historical evidence shows that even in a war-torn country like Ukraine, a class of people becomes extremely wealthy during times of conflict. This is not unique to war-torn nations, as super-rich individuals will always exist, even in the poorest countries. After the French Revolution, a new ruling class emerged, even though many of the old elites were killed and their wealth confiscated. Wealth concentration continues, typically with the powerful and well-connected few benefiting the most.

Taking money from the ultra-rich may seem like an effective solution to address wealth inequality, but evidence suggests that this approach may not solve the underlying issues. The wealth disparity will continue, and the money will only become even more concentrated in the hands of the powerful. It is crucial to understand the complexities of tax reform and the role of tax accountants, lawyers, and policymakers in shaping the tax landscape.