C’mon Baby, Tax the Rich: The Elephant In The Room

I would like to follow up my colleague’s top notch research note HERE on the consequences of dramatically increasing taxes on the wealthiest Americans. I will start out by saying that I believe this to be an unproductive idea, but my reasoning will be very very different from most comments on the topic. And you will see, that while I believe this idea to be extremely unproductive, I will pinpoint the actual source of the problem and what needs fixing in order to justify the anger among middle and lower income families.

With that let’s delve right into the reasons for why we are having this discussion in the first place. It is plain as day that inequality or wealth gap has been increasing dramatically in the United States. Take a look at this animated chart:

As you can see from the animation above, inequality started rising in the early 1990’s when wealth of the top 10% of richest families took off.

Now what happened in early 1990’s? That is right, an Honorary Knight of the British Crown Alan Greenspan finally flexed his muscle and tried his first dramatic reduction in the Fed Funds rate from under 9% all the way down to below 3%. Such dramatic rate reductions have only been done in the past for a short period of time after rapid rate increases, as a monetary tool to restart the economy after soaking up the liquidity with high interest rates. Alan Greenspan did start to normalize the rate in 1994. However, it is here that something broke down in the checks and balances of the US Financial system. Instead of increasing the rate to a more normal level and keeping it there, Alan Greenspan took the US financial system on a downward financial spiral that were to end very badly in 2008. It is not a coincidence that the chart above (which shows the Fed Funds Rate) appears to be almost the inverse of the top 1% after-tax incomes above.

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