The secret billionaires don't want you to know is that your pay won't change whether taxes go up or down

It's time to bring back the top 74% tax bracket that Ronald Reagan blew up, so average working people's wages can rise again and we can get our billionaire problem under control. It'll also enable America to return to the widespread growth and prosperity America saw before Reagan took a meat-axe to our economy.

When Reagan came in the office, the tax rate paid by those in the very top tax bracket was around 70%, which is why back then the average CEO in America only paid themselves 30 times what their average employee made.

If a CEO took out more money than that, the taxes on their income were so high it wasn't worth the effort, so the fat-cats left their money in their companies to grow their businesses, develop new products, and pay their employees a decent wage.

Today, however, CEOs average well over 300 times their average workers pay and, in some industries, CEOs make thousands or even tens of thousands of times more than their average workers. How did this happen?

In 1920, Republican Warren Harding was elected president on a platform of dropping the top tax rate from 91% to 25%, which he did. It kicked off the "Roaring 20s," a time when working peoples' wages actually went down, but the income and wealth of the very, very rich exploded.

Rich people had to have someplace to put all that new money, so they poured it into the stock market; when that stock market bubble burst, it dragged the entire world into the First Republican Great Depression.

In the early 1980s, Reagan set up what was essentially the same situation. When he came in the office, the top tax rate was 74%, and when he dropped it down to 25% the rich got massively richer, but working class people saw their incomes begin a 40-year slide, compared to the increases going to the top 1%.

Why would that be? Why is it that when taxes are cut average people's wages, over time, actually go down or remain frozen, even as inflation and the cost-of-living explode all around them?

Some years ago I did my radio program for a week from the studios of Danish Radio in Copenhagen.

Speaking with one of the more conservative members of Parliament, I asked why the Danish people didn't revolt over an average 52% income tax rate on working people, with an even higher rate on really high earners?

He pointed out to me that the average Dane was doing just fine, with a minimum wage that averaged about $18 an hour, free college and free healthcare, not to mention four weeks of paid vacation every year and notoriety as the happiest nation on earth, according to a study done by the University of Leicester in the United Kingdom.

"You Americans are such suckers," he told me and I reported some years ago. "You think the rules for taxes that apply to rich people also apply to working people, but they don't.

"When working people's taxes go up," he said, "their pay also goes up over time. When their taxes go down, their pay goes down. It may take a year or two or three at all even out, but it always works that way - look at any country in Europe. And that rule on taxes is the exact opposite of how it works for rich people!"

Economist David Ricardo laid this out in 1817 with his "Iron Law of Wages" laid out in his book On the Principles of Political Economy and Taxation.

Ricardo pointed out that before-tax income is pretty much irrelevant. The money people live on, the money that defines the "marketplace for labor," is take-home pay. After-tax income.

But the rules for how taxes work are different for rich people.

When taxes go down on rich people, they simply keep the money that they saved with the tax cut. They use it to stuff larger wads of cash into their money bins.

When taxes go up on them, they'll just raise their own wages - until they hit a confiscatory tax rate (which haven't existed since the Reagan Revolution), and then they'll stop giving themselves raises.

And, history shows, while keeping that money in their company to avoid the top tax bracket, employers typically pay their workers more over time as well.

In other words, as taxes go up, income typically goes up for working class people but goes down for the very rich: High tax brackets discourage exploitation by the very rich and push up wages for working class people.

We saw this throughout the 1940-1980 period; income at the very tip-top was stable at about 30 times worker's wages because rich people didn't want to get pushed into that very tip-top tax bracket of 74%.

But for working class people, Ricardo pointed out 200 years ago, the rules are completely different.

When working class people end up with more money as a consequence of a tax cut, their employers realize that they're being paid more than the "market for labor" would dictate.

For example, if the average worker on an automobile assembly line made $30,000 a year in take-home pay, all the car manufacturing companies know that $30K is what people will build cars for. It's the set-point in the "market for labor" for that industry or type of job.

Because of income taxes, both federal, state and local, an auto worker may need an income of $40,000 a year to end up with that $30,000 take-home pay, so that $40,000 gross (before-tax) income becomes the average pay across the industry. At that pay and tax rate, workers end up taking home $30,000 a year.

But what happens if that income tax is cut in half?

Now, a $40,000 a year salary produces $35,000 a year in take-home pay, and employers in the auto industry know that that's $5000 a year more than they can hire people to build cars for.

Put another way, the employers know that they can hire people in the labor market for $30,000 a year take-home pay, which is now a gross salary of $35,000, so they begin lowering their $40,000 gross wage offerings toward $35,000 to make up for the tax cut and keep take-home pay within the $30,000 "market for wages."

Since Reagan's massive tax cut, we've seen this very phenomenon in the auto industry itself!

In other words, income taxes don't much affect the take-home pay of working people who have a little control over their salaries.

When income taxes are high, employers have to raise working class wages so their workers' take-home pay stays the same. And that's exactly what happened in the period from the 1940s to the 1980s as tax rates were fairly high.

On the other hand, when income taxes on working people go down, employers will reduce the wages they offer over time to keep their workers' take-home pay at the same level. That, after all, is what Ricardo's "market for labor" specifies.

But the rules are completely different for the rich, who live outside the "Iron Law of Labor." When taxes change for the very rich, they take home less money when taxes go up, and keep more money when taxes go down.

The incredible magic trick that the very rich have done in America over the past 40 years is to convince average working people that the tax rules for the rich also apply to working class people, and therefore tax cuts benefit average workers, too.

Economist have known since the early 1800s that this is nonsense, as David Ricardo and many others have pointed out. But after decades of this "you should worry about tax increases the same way rich people do" message being pounded into our brains by mostly Republican politicians, working people think that tax cuts benefit them and tax increases hurt them.

It's a real testimonial to the power of the Republican propaganda machine that even though individual wages have been relatively flat for 40 years because of Reagan's tax cuts, the average American still thinks tax cuts are a good thing for them.

In fact, the time of greatest prosperity for the working class, when working class take-home pay (and wealth) was increasing faster than the income (and wealth) of the top 1%, was the period from 1940 to 1980 when taxes were high and the nation was prosperous.

FDR raised the top tax bracket to 91% and it stayed there through his administration, as well as those of Truman, Eisenhower, JFK and the early years of LBJ. President Johnson dropped it to 74%, which held through his administration as well as those of Nixon, Ford and Carter.

This was the time of maximum American working class prosperity.

Reagan's massive tax cuts in the 1980s, of course, put an end to that and started the explosion of wealth at the top which has led America to have over 700 billionaires today. And gutted America's ability to maintain first-class infrastructure.

To stabilize our economy and re-empower working people, we must bring back the top tax brackets that existed before the Reagan Revolution. It'll also provide the necessary funds to rebuild our country from the wreckage of Reagan's policies, which are largely still in place.

By taxing income in the very top brackets at a rate well above 50%, ideally the 74% rate we had before Reagan, we stabilize the economy, stop the relentless poaching of working peoples' wages for the money bins of the rich, and begin restoring our middle class.

-Thom

Originally posted on thomhartmann.medium.com.