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Tuesday, November 8, 2011

Tax Cuts for the Wealthy -- Then and Now

John Kenneth Galbraith, in The Great Crash, 1929, made two points that are very relevant today.  First, he observed that the 1925-26 tax cuts for the wealthy left the wealthy with lots of cash on hand to dump into an overheating market (according to an internet source, in 1925-26 the top marginal income tax rate decreased from 73% to 25%).   Second, he pointed out that the historically unequal distribution of wealth led to suboptimal consumption of market goods (in other words, if only the rich can afford to buy consumer products, industry suffers from lost potential sales to lower and middle class consumers). 

So it makes sense to tax the rich for their own good -- so they don't pump all that extra wealth into the stock market, causing all these gigantic bubbles.  Instead, let the middle class keep a bit more of their hard-earned income, and maybe they'll spend it in ways that help, rather than hurt, the economy.

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