To a surprising degree, economic misfortune has correlated with low top marginal tax rates. The top marginal tax rate at the time of the 1929 crash was 24%. After his election, Roosevelt promptly raised it to 63% and then to 94%, and one could easily make the case that it was this rise, rather than financial regulation, that played the primary — though certainly not the only — role in curbing abuses by attacking greed at its source, without, by the way, damaging the economy. Roosevelt essentially taxed away big money.
During the long postwar economic boom, the top marginal rates hovered at 91%, removing a lot of the incentive to game the financial system. There was no point in scheming if you couldn't profit from it. Still, the country prospered. So did Wall Street.
Then came the greed deluge. Economics is a complicated business, and it is seldom subject to a single cause. Deregulation does play a role. But when President Reagan cut the top marginal tax rate drastically from 70% to 50% in 1981 and then to 28% in 1988 (putting aside for the moment the cut in the capital gains tax and other investment incentives), that's when the troubles began — from the S&L crisis right through to the fall of Lehman Bros. It wasn't enough for the rich to be rich. Human nature being what it is, they had to be super-rich. Or put another way, tax cuts, including the Bush tax cuts, fed some of the worst aspects of human nature and led to some of the worst excesses. It was just a matter of time before Wall Street went wild.
When the fire of greed is stoked this way, financial reforms cannot possibly bank it. In truth, probably nothing can. We now live in a country that seems to worship wealth, and we may just have to live with the consequences — a Bernie Madoff, an Enron, a Lehman Bros., and a steep recession when the super-rich overplay their hand. The alternative is regulation that goes to the source by raising those marginal tax rates (and capital gains taxes) and forcing the super-rich to merely be rich again. And honestly, that's not going to happen. It would be a violation of human nature.
Neal Gabler is a public policy scholar at the Woodrow Wilson Center in Washington. He is writing a biography of Ted Kennedy.
