One of Bernie Sanders’ favorite lines on the stump involves likening himself to a revered Republican president: “I’m not much of a socialist compared to Eisenhower”. Sanders is trying to make the point that tax rates were much higher during Dwight Eisenhower’s presidency than they are now, and that that ought somehow to make his proposed massive tax rises palatable to the American public.
It is certainly true that taxes were high in the 1950s. In 1956, midway through Ike’s presidency, the highest rate of income tax was an eye-watering 91% (it is 40% today). Similarly, the top rates of capital gains and corporate tax at that time were 25% and 52% respectively (compared to today’s 15% and 39.1%). The Sanders thesis is essentially this: America prospered, and the quality of life of ordinary citizens improved massively, in this era of high taxes. Yet this conclusion falls down at the slightest scrutiny.
This is because economic conditions at the time were such that the American government could get away with bleeding its citizens with high taxes and yet still be the freest economy out there. In the 1950s the rest of the industrial world was still rebuilding from the complete gutting of its infrastructure and capital base after the violence of the Second World War. The United States enjoyed an unprecedented economic dominance in the world, one which has been eroding for decades as other economies industrialize and grow.
In the 1950s, the rest of the free world had taxes comparable to those in the US, but also far more direct government regulation and intervention in the markets. America also benefited from far less heavily regulated capital and securities markets, which allowed what money wasn’t gobbled up by Uncle Sam to be deployed far more efficiently than it could be in other market economies.
It is the cross-sectional comparison of countries’ taxation and regulatory systems that puts the lie to the Sanders thesis. He seems to think we still live in the world where a 90% tax rate would not send individuals and businesses fleeing to foreign shores. It used to be extremely costly for people and firms to up stakes and seek a better place to do business. Thanks to the globalization of the world economy, and the falling of barriers to movement and trade that accompany it, we have seen these switching costs fall dramatically in recent decades.
Not only have barriers to movement and commerce fallen around the globe, but the rest of the world has also caught up to, and even surpassed, the US in cutting taxes on income, corporations, and capital gains. In fact, the US now has the highest topline corporate tax rate, and second highest effective rate, in the OECD club of rich countries, which includes many of the “democratic socialist” countries that Sanders claims to emulate.
The bottom line is this: the idea that America can turn back the clock and impose onerous taxes like it did in the past is an utter absurdity. The US has already been losing out in competitiveness with much of the of the rest of the world, as can be seen by the ever more frequent “tax inversions” whereby US companies flee to countries that will not tax them to death. If any other rich country had the American corporate tax code, their companies would be fleeing in droves. The US is such a large market and has such an emotional pull on its own citizens and those of other countries as a land of opportunity that it has managed to get away with an onerous tax regime that would be unacceptable most anywhere else.
What is needed today is not more taxes and regulations, but less. And, contrary to what Sanders says, Dwight Eisenhower probably would have understood that. Because, if nothing else, Ike was a pragmatist in his policy-making. It seems hard to imagine that he would smile and gut the free enterprise system and the economic base of his country.
For Sanders to emulate the 1950s would not bring back some golden age that never truly existed. It would simply put the final nail in the coffin of an economy that has barely managed to survive an already crippling burden of tax and regulation.
* John Engle is a merchant banker and author living in the Chicago area. A graduate of Trinity College Dublin, Ireland and the University of Oxford, his first book, Trinity Student Pranks: A History of Mischief and Mayhem, was published in September 2013.
This post was written by John Engle.
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