Neal Gabler: Disincentivizing Greed
[Neal Gabler is a public policy scholar at the Woodrow Wilson Center in Washington. He is writing a biography of Ted Kennedy.]
...Human nature hasn't changed much from the way it was during the 50 years spanning the early 1930s to the early 1980s. Glass-Steagall didn't, and couldn't, prevent all wrongdoing in those years, as we've seen, but there was less financial misconduct. Investment bankers largely toed the line, and one is hard-put to find any scandal on the scale of what we have experienced since. So what's the explanation?
The answer is simple: In 1981, the government decided to reward greed. Top marginal tax rates — the rates on the highest earners — suddenly plummeted thanks to the Reagan tax cuts, and just as suddenly there was a huge incentive to get as much as one could no matter what one had to do to get it. In effect, the Reagan tax cuts, which were hailed by conservatives as a way to unleash American initiative, also unleashed American avarice.
To a surprising degree, economic misfortune has correlated with low top marginal tax rates. The top marginal tax rate at the time of the 1929 crash was 24%. After his election, Roosevelt promptly raised it to 63% and then to 94%, and one could easily make the case that it was this rise, rather than financial regulation, that played the primary — though certainly not the only — role in curbing abuses by attacking greed at its source, without, by the way, damaging the economy. Roosevelt essentially taxed away big money.
During the long postwar economic boom, the top marginal rates hovered at 91%, removing a lot of the incentive to game the financial system. There was no point in scheming if you couldn't profit from it. Still, the country prospered. So did Wall Street....
Read entire article at LA Times
...Human nature hasn't changed much from the way it was during the 50 years spanning the early 1930s to the early 1980s. Glass-Steagall didn't, and couldn't, prevent all wrongdoing in those years, as we've seen, but there was less financial misconduct. Investment bankers largely toed the line, and one is hard-put to find any scandal on the scale of what we have experienced since. So what's the explanation?
The answer is simple: In 1981, the government decided to reward greed. Top marginal tax rates — the rates on the highest earners — suddenly plummeted thanks to the Reagan tax cuts, and just as suddenly there was a huge incentive to get as much as one could no matter what one had to do to get it. In effect, the Reagan tax cuts, which were hailed by conservatives as a way to unleash American initiative, also unleashed American avarice.
To a surprising degree, economic misfortune has correlated with low top marginal tax rates. The top marginal tax rate at the time of the 1929 crash was 24%. After his election, Roosevelt promptly raised it to 63% and then to 94%, and one could easily make the case that it was this rise, rather than financial regulation, that played the primary — though certainly not the only — role in curbing abuses by attacking greed at its source, without, by the way, damaging the economy. Roosevelt essentially taxed away big money.
During the long postwar economic boom, the top marginal rates hovered at 91%, removing a lot of the incentive to game the financial system. There was no point in scheming if you couldn't profit from it. Still, the country prospered. So did Wall Street....