The Federal Government’s Efforts to Improve the Economy

Economic growth and employment are the basis for increased prosperity. Over the course of American history, there has been much debate regarding whether attaining that increased prosperity is (or is not) a direct reflection of imposed federal, state, and local tax policies. These tax policies are imposed for a variety of reasons, such as to reduce budget deficits, support war efforts, and strengthen the economy. It has become increasingly difficult, however, to ascertain which economic effects are true consequences of changes in tax policy.
By reviewing the state of the U.S. economy over time and how growth and employment were affected by taxation, we can see how the Fed has engaged in economic policies.

The Great Depression (1929 – 1939)

The stock market crashed in 1929 and the Great Depression began. The United States economy spiraled downward as the government increased taxes (through the Tax Acts of 1932 and 1936 as part of President Franklin D. Roosevelt’s “New Deal”) in order to compensate for lost revenue. During this time, public opinion had been that the wealthy were shirking their fiscal responsibilities through aggressive tax avoidance. In response, President Roosevelt’s New Deal tax laws were designed to increase statutory and effective rates on the nation’s wealthiest citizens. The rationale behind the tax increases was that increased government spending without raising taxes would weaken confidence in the government and its stewardship of the economy, thereby inhibiting recovery.

The combination of a shrunken economy and the repeated tax increases, however, raised the Federal government's tax burden to 6.8 percent of GDP by 1940. The tax increases essentially reduced incentives for work, investments, and entrepreneurship. Millions of Americans lost their jobs. The worst