What Happens When Corporations are Taxed at 50% - Like Before the Reagan Revolution?

It’s time to tax the rich, be they individuals or giant corporations, if we want to restore the American middle class and return our nation to the vitality that was once normal…

Image by Gerd Altmann from Pixabay

If we want a healthy, happy society in America, it’s not enough to just raise the top personal income tax bracket; we must also raise corporate taxes. Let me explain…

Last week on Hartmann Report I proposed we raise the top personal income tax bracket — paid only by people making over (for example) around $50 million a year, and only on the money above that amount — back up to the 90 percent that FDR set in the 1930s and 1940s and Republican President Dwight Eisenhower (along with JFK) defended and maintained.

(LBJ dropped it to 74 percent, but closed so many loopholes that it was actually a tax increase on the morbidly rich. Reagan then dropped it to 27 percent, and the middle class began a 42-year-long collapse.)

The main benefit of raising the top personal income tax bracket back up to nosebleed levels is that it causes CEOs and business owners (people who can essentially determine their own pay) to restrain themselves from draining the corporate coffers just to buy a new super-yacht, jet, private island, or a fourth 70-room mansion in the Swiss Alps.

Back in the 1933-1981 era, instead of behaving like spendthrift wastrels, CEOs and business owners would take income up to the edge of the top tax bracket and then stop (with the most prosperous CEOs maxing out at around 30 times average worker income), leaving the rest of the money in the company.

This had two results.

First, it prevented massive levels of inequality like we see today: where 3 men own more wealth than the entire bottom half of Americans; $50 trillion has transferred from working class families to the top 1 percent since Reagan dropped the top income tax rate in the 1980s; and poverty has exploded into an epidemic of early death, crime, and homelessness.

Literally hundreds of studies over the years document how when societies become more unequal their middle classes collapse and a whole variety of social ills — including crime, teenage pregnancy, divorce, STDs, obesity, declining lifespans, reduced social trust, lower social mobility, economic instability, political instability, debt, and even inflation — explode.

Second, when CEOs only take about 30 times what their workers make (as was the case from the 1930s through the early 1980s because of that high income tax bracket), there’s more money left in the companies that they own or employ them.

Which brings us to the second half of the equation: corporate income taxes.

Just like the debates around raising personal income tax rates are demagogued by rich people and their shills, there’s a world of misinformation around the issue of raising corporate income taxes.

Most of these myths promoted by the morbidly rich exploit the fact that only a tiny fraction of Americans have ever run a business or taken a business course in college, and so most Americans don’t have a clue how corporate income taxes work.

They think that if you tax corporations, those corporations will pass that tax along as higher prices. That’s a lie because there are so many good things that corporations can do that will reduce or eliminate their taxes altogether.

They also think that taxing corporate profits somehow cripples or weakens them. In fact, it does the opposite: it strengthens and expands companies because of the positive behaviors that the threat of taxation provokes.

For example, back in the early 1970s (before Reagan), the late Terry O’Connor and I owned a small herbal tea, potpourri, and smoking mixture company that was doing very well. We had about a dozen employees, were buying herbs by the ton mostly from Eastern Europe, and selling our packaged herbal products nationwide. We were making very good money for a couple of guys in their 20s.

At the time, the top income tax rate for a corporation was 48 percent (down from 52.8 percent in 1969) on profits over $25,000, and as we approached year’s end we were showing what would be a profit well in excess of that.

My dad, who did the bookkeeping for the small tool-and-die shop where he’d worked since 1957, was our business mentor (and taught Terry, Louise, and me double-entry bookkeeping) so we sat down with him and asked him what to do.

Our first idea was to simply distribute the profit to ourselves as a paycheck. My dad put the kibosh on that idea, because we were both already making enough that the top part of our income was being taxed at 60 percent, which meant almost two-thirds of every additional dollar we took would simply go to the federal government. (We were paying ourselves about three times what our workers were making, and they were paid at Lansing union scale along with full health insurance.)

“Leave that money in the company,” Dad advised us. “You’ll get your payday when you sell it and only have to pay long-term capital gains taxes.”

At first we thought that was bad advice.

“But if we keep the money in the company, it’ll have to pay 48 percent taxes on the profits!” we objected. “Why just give it to Uncle Sam?!?”

I remember my dad smiling at that.

“That’s why there are tax deductions,” he told us, as I recall. “They’re designed to incentivize particular behaviors that are good for the country and good for your business as well.”

The particular tax deductions he suggested we use were to give our employees a raise, invest in advertising and marketing to increase our sales, and to develop a new product line. Advertising, salaries and benefits, R&D, and new product development were all fully tax-deductible (and still are).

We took his advice and grew the company from a dozen employees to around 18, made a pile of money selling the new ginseng product we developed with those profits to Larry Flynt, and eventually cashed out when we sold the company to several of our employees in 1978.

This example highlights how there are really two reasons for both personal and corporate taxes, and they’re both based on similar rationales.

The first reason — the one everybody understands — is to raise money to pay for government services. Taxes, as FDR often said, are the price of admission to a civil society.

The second, though, is really the most important: taxes are used to incentivize behaviors that are good for the nation and discourage behaviors that are destructive to the nation.

This is where Reaganomics has not only screwed average American working people but screwed American business — particularly small and medium-sized businesses — as well.

While America is still a wellspring of innovation, we could be doing so very much better.

Recently, for example, just the mostly tech companies listed in the S&P 500 bought back $882 billion of their own shares in 2021 and over $1 trillion last year. And that’s just one or two market sectors!

Two trillion dollars is four times the cost to eliminate all poverty in the United States.

So, you’d think that if America’s biggest companies were spending roughly a trillion dollars every year they were doing something important with it.

You’d think that maybe they were doing it because the government had provided them with some incentive, either direct payments or tax advantages, to do it.

Sadly, you’d be wrong: that’s very much not the case.

Not one penny of that nearly $2 trillion in 2021 and 2022 went to developing new products, promoting existing products, paying employees better, building new facilities, or supporting the communities in which they operate.

Instead, virtually all of that money went straight into the pockets of shareholders, senior executives, and CEOs who are compensated with stock and stock options.

Before Reagan, this was a felony; CEOs who executed share buybacks just to artificially inflate stock prices could go to prison.

FDR criminalized share buybacks in the early 1930s because they’re simply a form of stock price manipulation and were one of the main reasons for the stock market crash of 1929 that kicked off the Republican Great Depression.

Which super-illustrates the point that there’s nothing magical, normal, or “natural” about national economies. They’re not the result of immutable laws, any more than the NFL’s rules for football are.

The rules of marketplaces are created by governments, and governments decide who will benefit from those rules.

Today’s personal and corporate tax situation is very intentional, including its outcomes of massive inequality, mind-boggling riches in a few hands, and widespread poverty across the land.

It follows a plan that was first laid out by Ronald Reagan, later executed by Newt Gingrich, and then continued by the Republicans who followed them in both the White House and as Speakers of the House of Representatives. And, of course, Mitch McConnell in the Senate.

None of it is accidental, and none of it follows some sort of ancient natural law — other than that the demands of greed are almost always in conflict with the needs of the mass of the people and have been throughout history.

It’s not just “all about the rules”: instead, it’s about who writes and enforces the rules.

The NFL, for example, always gives first choice of draft picks to the worst-performing team during the previous season. It’s an attempt to even the playing field, to keep the game competitive.

If the team that won the most games — and thus earned the most revenue — always got first pick of new talent because they could pay the most, they’d never lose a game again; eventually the poorest performing teams would die out and we’d be left with just two or three national teams of any consequence. And football would become so boring nobody would watch, because everybody would know that the richest team was going to win almost every game.

Economically, at the national level, there are several equivalents of that NFL rule and the circumstances that provoked it.

In 1890, Congress passed the Sherman Anti-Trust Act that said giant companies couldn’t dominate markets simply because they had the financial muscle to buy up their smaller competitors or drive them out of business by dropping prices long enough to run them into bankruptcy.

The law was so rigorously enforced — so the game of business could be played by all comers, not just the “big boys” — that in the 1960s the Supreme Court barred the merger of the Kinney and Buster Brown shoe companies because the new combined company would control 5 percent of the shoe market.

But then Reagan, in 1983, ordered the DOJ, SEC, and FTC to stop enforcing the Sherman Act, which is why today Nike, for example, controls about a fifth of the entire nation’s shoe market. It’s the same across industry after industry, from retail to grocery stores to railroads to computer software to social media to chip manufacturing to airlines to hotels…and on and on.

The rules — or the lack of rules, in this case — determine how the games of economics and business are played.

In an effort to get corporate share buybacks under control, the Inflation Reduction Act finally put a tax of a pitiful 1 percent on them. We really need to reverse Reagan’s actions and re-criminalize them — or tax them at 50 percent or more — so if companies want to jack up dividends and share prices they will have to do it the old-fashioned way: by having actual successes in the marketplace like they did before 1983.

(There’s an in-depth explainer about how share buybacks work and the damage they do to both our economy and working people that I published here back last December.)

Which brings us to the reason why we should go back to the 50 percent top corporate tax bracket that was in place until the Reagan Revolution.

There was hardly a company in America that paid that 50 percent tax, but that doesn’t mean it was ineffective. Just like my dad advised Terry and me, companies across America avoided paying income taxes by using their surplus cash to pay their employees better, offer expanded benefits, build new products and facilities, improve their marketing, and help out the communities in which they do business.

These things that derive from a high corporate tax rate all benefit the company, the workers, and the communities where they operate. They make America stronger.

Expanding innovation and product lines makes the companies and the economy more vibrant. They build and strengthen the middle class. They even help the entire nation via the federal and state governments, because companies must show some profits (as they become more successful) to distribute dividends to shareholders and those profits are taxed, producing government revenues.

All those activities mentioned above are tax-deductible. Which shows how important it is to have a high corporate income tax rate because, with the current absurdly low tax rates, companies have little incentive to do anything other than buy back their shares and make their already morbidly rich CEOs and major investors even richer.

It’s time to punch a hole in the neoliberal lie that high taxes hurt countries and companies. The only group that “suffers” from high taxes are companies that refuse to innovate, and morbidly rich individuals who keep bleeding their companies dry.

Every decade after World War II — before Reaganomics really bit into the American economy in the late 1990s — saw real GDP growth between 3.2 percent and 5.6 percent.

Then Newt forced Clinton to gut the Great Society social safety net and “end welfare as we know it” by threatening to blow up the economy with the debt ceiling, hopping on Reagan’s neoliberalism train.

Since Reaganomics fully hit us more than a generation ago, the decade of the 2000s saw 1.9 percent real GDP growth, and last decade it fell to an anemic 1.7 percent.

Taxes, after all, are an incentive for corporations to do the right thing, but in 2018 the Trump administration dropped the top corporate tax rate from 38 percent all the way down to a flat 21 percent. He destroyed much of that incentive.

If we want the vigorous, dynamic economy we had during the period from 1932 to the 1990s, we must restore the top 52 percent corporate tax bracket that Republican President Dwight Eisenhower championed and oversaw throughout his and JFK’s presidencies (and that stayed well above 40 percent until Reagan went after them in 1988).

Taxing the highest tranches of the personal income of the morbidly rich at 90 percent like Eisenhower (and five other presidents) did will incentivize them to leave money in their companies.

But it must be combined with an equally aggressive corporate income tax to insure companies also do the right thing by their workers, customers, and communities.

It’s time to tax the rich, be they individuals or giant corporations, to restore the American middle class and return our nation to the vitality that was once normal.

If the NFL can create rules to keep the game of football honest and well-played, so can the US government for the game of business. It just takes the will to do it and a few more honest politicians.

And that, at the end of the day, that is up to us.