When President Herbert Hoover persuaded Congress to raise federal taxes after the stock market crash of October 29, 1929, he transformed an economic downturn into a Great Depression.
Obama is condemned to Hoover’s fate by repeating Hoover’s mistake. A myriad of new taxes in Obama’s healthcare “reform” and the financial regulation “reform” are going into effect and Obama has vowed to let the Bush tax cuts on the “rich” expire at the end of the year. Obama should listen to history.
Hoover, a Republican, responded to the effects of the 1929 market crash by increasing federal spending on public works, such as roads, through deficit spending. When the federal government started spending $2.5 million a day more than it took in, cries for “balancing the budget” gained political momentum. Sound familiar?
Unlike Obama, Hoover initially counted on cutting the budget to balance the budget. He reduced his own salary (from $75,000 to $60,000), made federal workers take unpaid vacations, and cut pension benefits to retired federal workers, including retired Gen. “Blackjack” Pershing. Hoover’s wife, Lou, did not vacation in Spain.
But in 1932, Hoover, who had resisted calls to increase taxes to balance the budget, changed his mind. Hoover proposed increasing the personal income tax top rate and the estate tax rate from 23% to 45%, coupled with similar increases in the corporate and capital gains tax rates and the imposition of a new tax on gasoline.
In a dramatic personal appearance in the Senate, Hoover personally pleaded for his tax proposal, telling senators that they must raise taxes to help the unemployed and balance the budget. The American people, he said, “know from bitter experience that the course of unbalanced budgets is the road to ruin.” The Senate agreed, raised the taxes, and started the nation down the road to a ruinous decade-long depression.
The Revenue Act of 1932, in its final form, increased taxes on a host of previously untaxed items and activities—auto bodies, tires, and inner tubes; candy, cameras, and chewing gum; firearms and ammunition; coal and copper ore; telegraph, telephone, and radio; jewelry, matches, refrigerators, stamps, and toiletries; as well as tickets for admission to any event, etc. The construction of big government was begun by Herbert Hoover.
The result was catastrophe. By the March 4, 1933, inauguration of Franklin Roosevelt, federal revenues, after the tax increases, fell to $1.9 billion but the deficit was $2.7 billion. The GDP at $58 billion was 56% of what it had been just three years before, unemployment stood at 23.6% (using the 1932 definitions, unemployment today is 18%), and 1,453 banks had failed in the previous year.
The history of Hoover’s gas tax teaches a lesson we should never forget. Initially a one-cent per gallon tax to “balance the budget,” the gas tax (currently at 18.4 cents per gallon) has morphed into yet another re-election slush fund for congressional incumbents.
Hoover’s gas tax was set to expire on June 30, 1933. Roosevelt’s National Industrial Recovery Act of 1933 made the tax permanent and the Revenue Act of 1941 raised it to 1.5 cents to help pay for the war buildup. The Revenue Act of 1951 raised the gas tax to 2 cents to help pay for the Korean War.
Opposition to the gas tax grew. A coalition calling itself the National Highway Users Conference called for repeal saying that “no tax for the general support of the government is just in its application when the amount of the burden is determined by the distance the taxpayer must drive to or from his farm, or place of employment, or in the conduct of his business”.
President Eisenhower wanted a Federal Interstate Highway System like the Autobahn he saw in Germany. He justified the constitutional question by asserting a national defense purpose for this “freeway” system. In 1956, he beat back opposition to the gas tax by creating a federal Highway Trust Fund making the tax on gasoline and diesel sales a “user’s tax” with the revenues dedicated to build the Federal Interstate Highway System. Eisenhower got Congress to increase the gas tax to 3 cents in 1956 and 4 cents in 1959.
This deal lasted until 1983 and built the finest roads in the world.
In 1983, Reagan signed the Surface Transportation Assistance Act which raised the gas tax to 9 cents, with 1 cent of that going to the new Mass Transit Account. For the first time, federal gas tax money could be spent by state and local governments on public transit, and (to satisfy political opposition) on local roads too. In 1986, another 0.1% was added to the gas tax for the “Superfund” cleanup. In 1990, Bush 41 agreed to another 5 cent increase, half of which was dedicated to “deficit reduction.” In 1993, Clinton added 4.3 cents—with all of that increase dedicated to “deficit reduction.”
The gas tax had come full circle. From Hoover’s budget balancing tax to Eisenhower’s “Trust Fund” user tax, back to “deficit reduction.” The tax stands at 18.4 cents per gallon and the deficit has never been higher.
Sen. George Voinovich (R.-Ohio) last week proposed an increase in the federal gas tax to close the deficit and create jobs. The outgoing senator said the gas tax had not been increased since 1993 and the “lack of investment in our crumbling bridge, highway, and transit systems is a missed opportunity for the creation of thousands of well-paying jobs and long-term economic growth for our nation”.
Only in Washington, D.C., would making gas more expensive seem like a good idea.
Here’s a better idea. Restore the “User’s Tax” idea. Take the 25% of federal gas tax revenues that are currently spent on urban trolleys, bike paths, and local roads and rededicate the whole “Trust Fund” to the federal highway system. That would more than offset the $9 billion general-fund subsidy to the “Trust Fund” last year and make unnecessary any tax increase. The “User’s Tax” approach makes sense. Trolley riders should pay for trolleys, bikers for bike paths, and local gas taxes for local roads.
But most of all, Obama must learn from Hoover’s history and not raise any taxes at the moment when this Great Recession threatens to turn into Great Depression II.