Ronald Reagan Raised Taxes in a Recession, Too

By Derek Thompson

I do not agree with most things written by Amity Shlaes, the right's resident historical revisionist. But she's an enormously influential thinker on the right, so I wanted to share a snippet of her latest column for your consideration. Here, she's blaming FDR's tax policy for the 1937 double dip and warning that letting parts of the Bush tax cuts expire will do the same:

Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the "soak the rich" law...

The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax.

Shlaes might be absolutely right. Obama might send the U.S. economy into a double dip recession in 2011 and 2012 by bringing marginal income rates on richer families to their 1999 levels. That could happen.

But there are a couple reasons to think it won't. First, 1937 was a year of dramatic budget and monetary tightening that dangerously shrank the money supply in the middle of a precarious recovery. That's one reason why unemployment surged again through 1938. With Ben Bernanke in the Fed chair and Obama in the Oval Office, it seems unlikely to me that we'll see dramatic retrenching in fiscal and monetary policy in the next year.

Another reason to think she might be wrong is that Reagan raised taxes in a recession, too. In 1982, with unemployment near 10 percent, President Ronald Reagan signed TEFRA. By cleaning up the tax code, slashing deductions, that tax act raised revenue by one percent of GDP over four years -- the largest peacetime tax increase in American history. I wonder what Shlaes would have written about him in 1982.

This article available online at:

http://www.theatlantic.com/business/archive/2010/07/ronald-reagan-raised-taxes-in-a-recession-too/59454/