It is hard to believe but there is actually a correlation between very low tax rates and market crashes.Chris of our office came across the chart below and as you can see tax rates declined from almost 80% to about 25% between the end of World War I and 1925.  The rate stayed at 25% for about 4 years before the Crash of ‘29, which signaled the beginning of the Great Depression.  Thereafter, rates rose dramatically from 25% to about 78% to pay for The New Deal under FDR.   During World War II the rate reached about 95% before settling in at 90% from 1951 till 1964.  Then rates dropped under Johnson to 70% which lasted till roughly 1981.  From 1981 till 1986 they dropped to 50% for salaries and eventually they fell to a low of 28% for several years and then started to rise under both George H. W. Bush and Clinton.  George W. Bush implemented tax cuts , which reversed the trend and brought the highest rate down to 35% where they have remained since 2002.

We all know that by 2007 (5 years after the low rate was enacted) the market peaked and in 2008 we had the worst stock market meltdown and economic collapse since the Great Depression.  The Great Depression lasted from 1929 till 1941 when the US entered World War II.  So, there were twelve years of economic pain.  We are 4 years into our retrenchment and it does seem that things are not getting worse, unless our government messes things up again.  The other surprise is that depressions and recessions seem to be followed by major rate changes in taxes.  Unless rates drop to 25% we are probably at the low end of the tax scale which means the Great Recession (as the 2008 economic collapse is usually called) will probably lead to a significant change in tax rates!  And if history is an indicator, rates will be going up!