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Depressions push taxes onto the wealthy
Deficits explode
Lower incomes and less employment mean the government collects fewer taxes. At the same time it needs to spend more, because many of the unemployed have inadequate savings and need financial support, and governments launch stimulus plans to make up for the shrinking economy. Budget deficits explode in a deleveraging because the government spends more than it earns in taxes.
Taxing the wealthy
To fund the deficit, a government has to raise taxes or borrow. With incomes falling and so many people unemployed, wealth is the place to look, and wealth is heavily concentrated in a small percentage of the people. Governments naturally raise taxes on the wealthy. The have nots, who are suffering, begin to resent the haves, and the haves, squeezed by a weak economy, falling asset prices, and higher taxes, begin to resent the have nots.
Social and political strain
If the depression continues, social disorder can break out. Tensions rise between countries too, especially debtor and creditor countries, and the political change that follows can sometimes be extreme. In the 1930s it led to Hitler coming to power, war in Europe, and depression in the United States.
How did the US raise taxes in the 1930s?
The Revenue Act of 1932 raised the top federal income tax rate from 25 percent to 63 percent. The Revenue Act of 1935 added still higher rates at the top of the income scale.
By 1936 the top rate was 79 percent, on income above $5 million.
Why do budget deficits balloon in downturns?
Many government programs adjust automatically: unemployment benefits and other transfers rise as jobs vanish, while income and payroll tax receipts fall. Economists call these automatic stabilizers.
After the 2008 crisis, the Congressional Budget Office reported a federal deficit of about 9.8 percent of GDP in fiscal 2009, the largest since 1945.
How did the Depression feed Nazi support?
German unemployment reached about six million in 1932, close to a third of the workforce. The Nazi Party's share of the Reichstag vote rose from 2.6 percent in 1928 to 37.3 percent in July 1932.
Hitler was appointed chancellor in January 1933.
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