The final two years of the George H.W. Bush presidency brought a creeping recession, with an unemployment rate that increased from 5.6% in 1990 to 7.5% in 1992. In June 1992, just five months before the elections, the rate reached 7.8%, and Bush lost his reelection bid ("It's the economy, stupid").
What did the new president do about the economy? President Clinton in 1993 proposed to raise the highest marginal tax rate immediately from 31% to 39.6%. In a Wall Street Journal article, Martin Feldstein, the former chief economic advisor to President Reagan and then as well as now a professor of economics at Harvard, opined that "Mr. Clinton's proposal to raise the marginal tax rates of high-income individuals would hurt incentives, weaken the economy and waste investment dollars."
This was, of course, a reincarnation of the GOP's trickle-down theory — tax cuts for the rich would eventually benefit the middle and lower classes. But Republicans did not let the fact that the Reagan tax cuts had decimated government services and created huge deficits stand in their way. Claiming that it was wrong to raise taxes on the rich in the middle of a recession, every one of them, in both houses, voted against it. Forty-one Democratic representatives and six Democratic senators joined them. The tax increase passed by only the narrowest of margins. In the House the vote was 218 to 216, while in the Senate the increase passed with a tie-breaking vote by Vice President Al Gore.
And what were the consequences? In the seven years that followed, the unemployment rate decreased steadily, every single year, until it reached 4% in 2000.
Was it the tax increase alone that caused this spectacular drop in unemployment? Probably not. But the increase went a long way toward closing the budget deficit that Clinton inherited from Reagan and Bush, and it also raised the incomes of poor families through the Earned Income Tax Credit. Both factors provided major economic boosts.
The lesson from this for President Obama and the Democrats is straightforward: Taxing the rich is good economic policy, and in the remaining time that Congress is in the hands of Democrats, they should seize the moment and raise taxes, with no less urgency than they gave to the bank bailouts.
Given the needs of the country, the increase in tax revenue must be substantial. It is clear that the private market is unable to create the jobs we need. The level of uncertainty in the economy is such that most investors are choosing to wait, and banks are reluctant to make loans to those who are reckless enough not to. Continuing to flood the banks with more and more money in the hope that they will make loans is irresponsible. And because this policy has already failed — and its main beneficiaries have been bankers — it is also puzzling.
During Dwight Eisenhower's presidency, the highest marginal tax rate was 91%, and this permitted Congress to pass the National Interstate and Defense Highways Act in 1956, a law that funded the interstate highway system, and the National Defense Education Act in 1958, which paid for a major expansion of state universities all over the country. Today, with roads, schools and the healthcare system crumbling all around us, our needs are even greater.
The highest tax rate is currently 35%, and if the George W. Bush tax cuts are allowed to expire, this rate will return to 39.6%. But charging the same tax rate for all levels of income above $380,000 is unfair. The highest marginal tax rate should be what it was during the Eisenhower years — 91% — and one way to reach it would be in steps of, say, a 1% increase for every $1-million increment in family income. That would mean that a family's second million would be taxed at 40.6%, and the third at 41.6%. A family whose income exceeds $53 million a year would pay the maximum rate of 91% on each dollar above this sum.
Of course, come January, the Republican majority in the House would try to get rid of these tax increases. Let them try to convince the American people that lowering taxes on the rich makes more sense than building more schools and universities, repairing roads and paying for healthcare.
Democrats have the Clinton and Eisenhower records on their side, and with a Democratic Senate and president, and with a clear articulation of how these tax dollars would be used, Democrats ought to be able to prevail and do the right thing for the country.
Moshe Adler teaches economics at Columbia University and is the author of "Economics for the Rest of Us: Debunking the Science That Makes Life Dismal."