In 1944, in the United States, the income tax for those with an income over $200,000, which adjusted for inflation today would be about $2.5 million, reached 94%[158]. Yes. I didn’t write it wrong. You didn’t read it wrong; 94%.
The year 1944 explains a lot. Wars are expensive. In France, before 1914, there was no income tax. After a year of the start of World War I, it had escalated to 50%. Canada, similarly, implemented a temporary tax in 1917 to finance war expenses. This not-so-temporary tax in Canada came to apply to 20% of all income received by individuals, while for companies, it reached almost 69% by 1942. There is hardly a worse business partner than a confiscatory state, where you invest, take the risk, and if it goes well, most of it goes to other pockets. Of course, taxes are necessary, but there are limits.
Once the war ended, these margins decreased but remained higher than they were before the wars began. In the United States, the situation was similar. Before the war, this tax was applied to the upper class. Then, when the war arose, it became a tax applied to the masses. Thus, it went from being collected by only 7 million people in 1940 to more than 42 million people by 1945. During the 50s, 60s, and 70s, the income tax in the United States did not drop below 70%. It was only with the Economic Recovery Tax Act of 1981 that the rate was reduced to 50%, approaching less confiscatory numbers.
These sudden changes, which tend to strengthen state coffers through greater state intervention in the economy, generally occur when there is a need to respond to an external shock or the potential threat of such a shock on the horizon.
The crisis triggered by the COVID-19 pandemic represented that external shock that no one wants to face. Consequently, the formation of a larger and more powerful state took place as these governments took full control of the economy. Not only by regulating which activities could continue freely and which had to cease temporarily, but governments also carried out fiscal stimulus plans on an unprecedented scale. The implementation of all these programs vastly exceeds the expenses of the famous Marshall Plan that took place after World War II. While the Marshall Plan allocated around $15 billion at that time, equivalent to just over $140 billion today when adjusted for the consumer price index, it pales in comparison to Biden’s $1.9 trillion fiscal aid package (1,900,000,000,000)[159]. If we add the total contributed by other countries, we face an unparalleled intervention in economic life. This was done with the intention of protecting the poorest, preserving middle-class jobs, and helping businesses not to close their doors permanently. The success or failure of these measures can be debated by others; here we will focus on objective facts.
At the same time that these fiscal stimulus plans were implemented, central banks cut their interest rates and injected liquidity into the system to cover their governments’ social welfare plans, which in many cases involved direct money transfers and, in other cases, pauses in the collection of certain fees and even the suspension of mortgage payments.
Only governments have the ability to undertake a project of this level. Without it, the economic crisis would have been much deeper, and the social collapse, which is different from the health crisis, would have made headlines in many countries.
[158] History of Federal Income Tax Rates: 1913-2021. Bradford Tax Institute. (2021). Retrieved on June 29, 2021, from https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx.
[159] Pramuk, J. (2021). Biden signs $1.9 trillion Covid relief bill, clearing way for stimulus checks, vaccine aid. CNBC. Retrieved on March 14, 2021, from https://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief-package-thursday-afternoon.html.