At the height of the Depression in June, 1932, Republican President Herbert Hoover decided it was finally time to pay for the additional $1 billion of spending he had persuaded Congress to authorize earlier in the year. The economy was in a downward spiral, having shrunk 20% annually since the Crash of 1929. Unemployment was nearing 20%.
The fiscal year was just coming to an end, and it wasn’t a pretty site. Revenues had plummetted to $1.9 billion, as expenditures jumped to $4.6 billion. The resulting $2.7 billion deficit was the highest in the history of peace time America.
Hoover’s solution for the slide in revenue was to increase income taxes across the board, but especially for the “wealthy.” He persuaded Congress to pass the Revenue Act of 1932 just as the new fiscal year began, and he sat back, waiting for the extra revenues to start rolling in.
Why wouldn’t they?
After all, tax rates for those earning more than $1 million a year increased from 25% to 63%. At every level, the tax code was made “fairer” and more progressive. Estate taxes were doubled, and corporate taxes were also increased.
But a funny thing happened.
Total revenue didn’t increase a penny. The next fiscal year was a mirror of the previous pre-tax increase fiscal year–revenues remained stagnant at $1.9 billion, expenditures were kept at $4.6 billion, and an additional $2.7 billion was added to the deficit.
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