Capital Taxation During the U.S. Great Depression

Previous studies of the U.S. Great Depression find that increased government spending and taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, excess profits, and undistributed profits predicts patterns of output, investment, and hours worked that are more like those in the 1930s than found in earlier studies. The greatest effects come from the increased taxes on corporate dividends and undistributed profits. ∗Appendices, data, and codes are available at my website, www.minneapolisfed.org/research/sr/sr451.html. For helpful comments, I thank Roozbeh Hosseini, Ayşe İmrohoroğlu, Lee Ohanian, Ed Prescott, Martin Schneider, the editor, five anonymous referees as well as conference participants at the Center for the Advanced Study in Economic Efficiency and seminar participants at the Norges Bank, the Institute for International Economic Studies, the Toulouse School of Economics, the Federal Reserve Bank of Minneapolis, the University of Virginia, Harvard University, and the University of Pennsylvania. For editorial assistance, I thank Kathy Rolfe and Joan Gieseke. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.