Page Created:
        October 20, 2019
Last updated:
        Dec. 27, 2020

Bidenomics May Repeat FDR’s Blunder

Democrats propose new taxes similar to those that plunged America back into depression in 1937

by Jay Starkman, CPA

[A version of this article (without footnotes) was originally published in The Wall Street Journal on September 29, 2020, p. A17.]

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Liberals hope Joe Biden will be another FDR. But that‘s something to fear, as Mr. Biden‘s tax proposals threaten to repeat Franklin D. Roosevelt‘s big mistake, which many historians blame for plunging a recovering economy back into depression.

Roosevelt proposed a wealth tax in 1935, expanded it in 1936, and gave it real teeth in 1937. The federal government needed to repel the attack on the foundations of society by “economic royalists,” he argued. John Nance Garner, his vice president, agreed. As a congressman Garner had been forthright. “We have got to confiscate wealth,” he declared in 1918. 1

By 1936 the top U.S. personal income-tax rate had been raised to 79%, with a 70% maximum estate tax. The top federal corporate tax rate, however, was only 15%. In response, wealthy Americans accumulated profits inside corporations that owned their residences and other assets. Hollywood actors had their compensation paid to corporations they owned and from which they borrowed heavily.

Suddenly, at Roosevelt‘s urging, Congress tore up all this careful and legal tax–avoidance planning with the Revenue Act of 1937. Corporate money was subject to immediate distribution and taxed at high individual rates. In effect, these were accumulated- wealth taxes, imposed at precisely the wrong time. The year also saw the introduction of a 1% Social Security tax on the first $3,000 of wages.

The economic pain was swift and severe. The Dow Jones Industrial Average crashed to 114 on Nov. 24, 1937, from 190 on Aug. 14, a 40% decline.2 Gross domestic product fell by more than 5% between 1937 and 1938.3 Unemployment, roughly 12% in May 1937, climbed to 20.7% in April 1939.4 Industrial production tumbled 33% from the spring of 1937 to May 1938 and didn’t return to its 1937 peak until late 1939.5

Many factors contributed to the decline, including a contraction in the money supply, a doubling of bank reserve requirement ratios, and the Wagner Act. But taxes, particularly the Revenue Act’s undistributed profits tax, were the trigger.6 Without much warning, businesses and individuals had to raise large amounts of cash quickly by cutting back on workers and investments to pay taxes that would be coming due. Senate Finance Committee Chairman Byron Harrison was convinced that the tax had proved harmful and enacted a phased reduction beginning in 1938.7

Today the U.S. economy is recovering from a great crash, as it was before Roosevelt“s tax onslaught. Unfortunately, Mr. Biden doesn’t seem to have learned the right lessons. Should he win in November, he proposes to cancel the Trump tax cuts, raising the top federal income-tax rate back to 39.6%, and raise the corporate income tax from 21% to 28%. He also promises to limit low capital-gains tax rates to the first $1 million in profits and extend the full Social Security tax to income above $400,000.

In 2011 Stephen J. Entin, then president of the Institute for Research on the Economics of Taxation, told a congressional committee that the “income tax is heavily biased against saving and investment” and that the “burden of higher taxes on capital formation falls largely on labor in the form of lower wages and hours worked.”8

As in 1937, the effect of Mr. Biden’s proposals would be to draw funds out of the economy to pay taxes, discourage new investment, hurt wages and hours worked, and discourage recognizing capital gains.

Mr. Biden’s plan isn’t the only tax increase circulating around the Democratic Party. Sen. Elizabeth Warren has proposed 2% and 6% wealth taxes on assets valued more than $50 million and $1 billion, respectively. Wealth taxes have mostly been abandoned in Europe because they are difficult to administer, facing hopelessly complicated valuation issues and often hitting people with valuable assets but little cash. 8a

Many blue states are also proposing tax hikes. Progressive New York lawmakers propose raising the top marginal income-tax rate of 8.82% to 9.62% and 11.85% on the super-rich.9 That’s on top of New York City’s 3.876% income tax. California lawmakers have proposed raising the Golden State’s 13.3% top rate — highest in the nation — to 14.3% and 16.8%, applied retroactively to the start of this year,10 in addition to a wealth tax.11 New Jersey is set to extend its 10.75% top rate to filers earning between $1 million and $5 million. The Garden State governor’s budget would also make permanent a 2.5% corporate surtax, creating an 11.5% state corporate tax.12

New York is considering an annual mark-to-market income tax, or M2M, in which stocks and other securities held by residents are valued annually and the gain immediately taxed, rather than waiting until a sale or exchange.13 A nightmare to calculate, a state-level M2M would also burden people who move to another state, resulting in a double tax on the eventual sale of their assets.

While M2M may appear to violate the well-entrenched requirement that gain and loss recognition requires a sale or exchange, federal M2M has been upheld by courts.14 Rep. Ilhan Omar and Sen. Bernie Sanders have introduced the Make Billionaires Pay Act. It would impose a one-time 60% M2M tax on gains in wealth between March 18 and Jan. 1, 2021, by individuals with assets valued at more than $1 billion.15 Elon Musk would be bankrupted by the tax owed on his Tesla paper gains.

Even death offers no escape. The Democratic Party platform calls for raising estate taxes “back to the historical norm.“ It isn’t clear what that means, but a 55% top rate — up from 40% now — with a greatly reduced exemption is often discussed in liberal policy circles. Proposals to repeal the “step-up in basis” for inherited assets could tax the gain once more, on sale by the heirs, resulting in multiple taxation.

Such conflicting tax policies sometimes produce bizarre confiscatory results. State courts are loathe to overturn a state tax. The U.S. Supreme Court hears very few tax cases, especially avoiding those involving excessive taxation.

People with multiple residences risk their estates being taxed by multiple states. When John Dorrance, owner of the Campbell Soup Company, died in 1930, New Jersey and Pennsylvania each insisted that he died domiciled in their respective state, and both taxed Dorrance’s estate. Edward Green died in 1936 leaving a $36 million estate and an estate tax bill totaling almost $38 million because Florida, New York, and Massachusetts all claimed he had been domiciled in those states. When millionaire aviation pioneer Howard Hughes died in 1976, his proposed tax was 101 percent of the estate because California and Texas both claimed that he was domiciled there. An estate tax increase enacted on August 20, 1993 was upheld retroactively taxing the estates of two women who died in March and April 1993.16

Employees working from an out-of-state home in many states are liable for state income taxes in the state where their employer is based. New York claims they work from home for “their own” convenience, not the employer’s, even during this Covid–19 epidemic. Several other states have adopted this rule that New York originated. The taxes those middle class employees pay to New York may be denied as tax credits against their home state income tax. Thus, many employees can count on continuing to be taxed twice on their income, as long as Congress refuses to fix this problem.

Many of the nation’s richest people favor higher taxes on the wealthy. The richest could voluntarily pay higher taxes, but don’t.17

Form 1040 instructions invite taxpayers to send Uncle Sam a tax-deductible gift to reduce the public debt. The very rich could ease their consciences and pay more this way, but few do. In 2018, a trifling $775,654.63 was raised through voluntary donations.18

Not every tax proposal I’ve outlined will ultimately be enacted. But pass enough of them, and you can expect a disastrous result. Even though Democratic politicians will claim to only target the superrich, a deluge of tax increases can send the whole economy right back to the dumps. As in 1937, today America’s economic recovery is fragile. A campaign against the 1% — the new “economic royalists” — would risk repeating FDR’s mistake.


1 Bascom Timmons, Garner of Texas: A Personal History (NY: Harper & Brother Publishers, 1948), 85.

2 "Dow Jones Closing Prices 1931 to 1940,

3 GDP statistics; "America’s Depression Within A Depression, 1937-1939," Foundation for Economic Education, 22 Oct 2010;

4 Unemployment During The Great Depression,

5 "America’s Depression Within A Depression, 1937-1939," Foundation for Economic Education, 22 Oct 2010.

6 Amity Shlaes, "The Forgotten Man: A New History of the Great Depression," (New York: Harper Collins, 2007) p. 347; John F. Witte, "The Politics and Development of the Federal Income Tax," (Madison, WI: University of Wisconsin Press, 1985) p. 105; "Levy on Profits Halts Expansion," NY Times, 27 Aug 1937

7 Randolph Paul, "Taxation for Prosperity," (Indianapolis: Bobs-Merrill Company, 1947), 60.

8 "Congressional Joint Economic Committee hearing testimony of Stephen J. Entin" (Nov. 17, 2011).

8a "Wealth and Inheritance Taxation: An Overview and Country Comparison," ifo DICE Report 2/2018 June Volume 16, p. 45.

9 "Tax the Ultrarich? Cuomo Resists, Even With a $14 Billion Budget Gap," NY Times, 7 Sep 2020, A12.

10 "California’s Next Tax Increase," Wall St Journal, 15 Aug 2020; "California Legislature to consider new tax on millionaires for schools, other services," LA Times, 28 July 2020.

11 California Assembly Bill 2088 (5 Feb 2020).

12 "Understanding the Realities of NJ’s Income Tax Increase," NJ Business and Industry Association, 17 Sep 2020.

13 NY Senate Bill S8277B; "The Billionaire Mark-to-Market Tax: $5.5 Billion or More for the NYS Budget," Fiscal Policy Institute, 12 Aug 2020.

14 Murphy v United States, 992 F.2d 929, 931 (9th Cir. 1993), citing Helvering v. Horst, 311 U.S. 112, 118 (1940); "Murphy’s failure to withdraw his gains immediately was little different from a failure to withdraw interest which has been credited to a bank account."

15 H.R.8020 and S.4490 (116th Cong., 2019-2020) introduced 8/11/20 and 8/6/20.

16 Jay Starkman, "Can An Estate Tax Be Retroactive?" Tax Notes, 22 Feb 2010.

17 "Donations to pay down US debt are pointless," AP News, 27 Feb 2019.

18 "Gift Contributions to Reduce Debt Held by the Public, U.S. Treasury.



A version of this article (without footnotes) was originally published in Wall St Journal on 29 Sept 2020, p. A17.