Wednesday, December 15, 2010

Higher Capital And Dividend Taxes Worsened, Extended The 1930s Great Depression

From Federal Reserve Bank Of Minneapolis study "Capital Taxation During the U.S. Great Depression" by Ellen R. McGrattan:
higher taxes during the 1930s led to a dramatic decline in tangible investment, similar to that observed in the United States, with the most important factor being the rise in the effective tax rate on dividends. The pattern of investment shows a steep decline in the early part of the decade, followed by some recovery and another steep decline starting in 1937. The important factor in the latter period is the introduction of the undistributed profits tax. The model predicts a decline in GDP and hours between 1929 and 1933 that accounts for 40 percent and 47 percent of the actual declines, respectively.
Although the results show that tax policy had a major impact on economic activity in the 1930s, they also show that it could not have been the only factor contributing to the large contraction and slow recovery of the 1930s.
Adding New Deal policies ... would help in further accounting for the time series patterns in the second half of the 1930s....

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