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The 90% tax rate, but subject to a 50% capital gain disregard (The law prior to Reagan) would produce an effective 45% tax rate, but only if you held the assets for at least five years (Which is how Congress defined "Long Term Capital Gain"). This meant that you cared less about profits for this year, it was taxed at 90%, but if you kept it invested for five years the tax rate on the profit was only an effective 45%.
Now remember this was on Investments, thus stock holders did NOT want dividends (Taxable at the 90% rate) but capital gains do to the price of the stock going up. As the price of the stock went up, the difference between the new price and the price when purchased is the capital gain. If the stock was only sold after five years, then the profit on sale of the stock was only taxable for half its gain. Thus people did not care what the business did this year as to profitability, but what it will do over the next five years.
Today, the situation is different, and from reading about Corporations you find that over the last 20 or so years, Corporations have become more worried about what is their profit year to year. Why? Because investors since Reagan no longer look long term, they are looking at profits THIS YEAR. Since Reagan the tax rate for Long Term Capital Gains and Short Term Gains have been the same, and thus you no longer have the huge tax savings if you hold the stock five years. You are taxed the same if you hold it one year or ten years. Thus investors have incentives to take their money invested in one business and move it to another (This was permitted even under the old Capital Gain Tax rules) OR take it as profit. It is the later that caused all the problem. Most Corporations fear the affect on their business of massive withdraws by investors (More do to how it will affect their own stock options then the corporation itself). Over the last 20 or so years such withdraw of investors must be avoided, and it is avoided by providing increase profits on investments EACH YEAR, even if that profit HURTS long term investments. Thus corporations look for safe investments that will produce profits each year. The Safest investments is Real Estate, thus corporations flock to it when it is raising. Real Estate raise do to this increase level of investments and you have a real estate boom on your hands. Sooner or later the Real Estate Boom busts and you have what we have today.
This could very well explain the huge number of ups and downs in the economy from the early 1800s to WWII. Long term investments went into various industries during that time period, but more as a boom (Like the Dot.com Boom of the late 1990s) then any serious investment. The Canal Boom (1820s), the Railroads (1850s) Boom and even the raise of the Automobiles in the 1920s (and boom in the 1920s) all lead to real estate booms and then busts (The 1837 Recession was the worse in US History, except for the 1870s and 1930s, and lead to almost complete elimination of Paper Money in the 1830s). The railroad boom went longer (and made longer by the Civil War), but it went bust in the 1870s. Most Americans still lived in Rural areas in the 1870s (The first Census that shows more Americans in Urban areas then Rural Areas is 1920), but that did NOT severe hardship in Urban America, which in turn lead to the closest thing to a Communist revolt that ever occurred in the US, the General Strike of 1877 of the strike they are other threads on it in DU). The 1920s can be seen as a Bubble investment in the then new Automobile, which lead to another land bubble and the crash of 1929.
Thus Congress passed high tax rates in the 1930s to get money for the various programs to get the US out of the Depression. The high tax rate prevented anyone thinking in terms of five years or less. By the 1970s this was standard business practice, in fact most businesses no longer considered Five years "Long Term", they were looking 10-20 years down the pike. Five years had become the new Short term (And the then old short term of one year was viewed as unimportant except for SEC and tax purposes).
Now in the 1970s inflation was a problem. It was both a reflection of the need to finance the Vietnam war AND the fact the US was no longer a net exporter of oil. It was bad under LBJ but he balanced the budget for 1969 with a special income tax to finance the Vietnam War (A tax Nixon refused to renew and till Clinton was President the last Balance Budget). Nixon tried everything EXCEPT raising taxes to end inflation, he did wage and price controls (They did NOT work) he ended the pegging of the US Dollar to $35 a ounce of Gold (it provided him sometime but inflation continued). Ford tried talking it down (Ford's WIN i.e. "Whip Inflation Now" Campaign was comedians fares for years). Carter tried to undo the damage done, but his main concern was employment so he left inflation get to 18% before he decided to appoint Vocker as Chairmen of the Federal Reserve to get Inflation under control. Reagan claimed he beat inflation but it was still a healthy 6-7% annual rate till Clinton became President (And this is with the HUGE reduction in oil prices during the 1980s, do people remember the "Oil Glut"?).
I go into the above history of Inflation for it was used as the rationale to eliminate the Long Term Capital Gain disregard and to treat all income equally AND at a rate lower then it had been even under the 70% tax rate LBJ had imposed (down from the 90% FDR had imposed). With the Long Term Capital Gain disregard, the effective tax rate on investments held for five years was 35% since the 1960s and under Reagan that became the rate for both Long Term and Short Term Gains (The Long Term Capital Gain Tax rules stayed in the Tax Code, but given the disregard was abolished AND the rates were the same for both long term and short term, no longer affecting tax law). The rationale was that inflation was eating up people's investments for after 5 years the money you received for your investment was in inflation adjusted dollars much less then its nominal value (i.e. if you invested $100 for five years and sold the investment for $500, you would have a nominal long term capital gain of $400, but if inflation had averaged 100% for each year, and you reduce that $400 by the inflation the profit would have been less then Zero, yet you have to pay taxes on your $400 gain).
Now no one ever expected inflation to get to 100%, in fact Carter policies reduced it to about 6%, which Reagan and Bush I kept, but the rationale was a good excuse to eliminate Long term capital gain treatment. The problem is it lead to a return to short term thinking and in the short term the safest investment is real estate (It is hard to destroy) so sooner or later that is where the money goes, and once it starts a bubble will commence and it is the bubble that destroys the economy. Thus I have to agree with the Author, return to a 90% tax rate, with a 50% long term Capital gain disregard so to encourage long term planning.
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