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What ‘Toys R Us’ Teaches Us About Taxes

By the time you read this, your favorite hangout as a kid may have gone kaput. Toys “R” Us, the iconic global retailer, recently announced its impending demise after over a six-decade run.

That sad news no doubt has many of us waxing nostalgic. All those aisles piled so high with games and action figures! For kids, a veritable miracle.

But this miracle, according to the economic orthodoxy that dominates our times, should never have happened.

Conservative pundits and politicians have been insisting for a generation now that entrepreneurs only start exciting new businesses when governments “back off.” So governments have backed off. At every level, they’ve deep-sixed regulations and cut taxes on rich people.

High taxes on high incomes, the reasoning goes, discourage entrepreneurship. No one with a great idea for a new business is going to start that business, conservatives argue, if Uncle Sam is just going to tax away the rewards.

The same goes for investors, they say. They’re not going to invest in “job-creating” enterprises if high taxes threaten to eat away at their potential earnings.

 

This conservative take on taxes totally muddies how our economy actually works. Case in point: the story of Charles Lazarus, the founder of Toys “R” Us.

Lazarus, a World War II veteran, noticed soon after the war that all his veteran friends were settling down and raising families. Products for kids, Lazarus figured, had a great future, and in 1948 the budding 25-year-old entrepreneur opened a storefront outlet for children’s furniture.

Lazarus soon added toys to his store’s selection and quickly saw their awesome sales potential. Parents, he realized, only buy a crib once. But they replace toys year after year. By 1957, Lazarus had opened his first toys-only store. By the mid-1960s, his one store had become a chain. Lazarus became a classic entrepreneurial success story.

All this success happened in an economic environment that bears little resemblance to ours. In America’s postwar years, high incomes faced high tax rates. Income over $200,000 for a single earner faced a 91 percent tax rate throughout the 1950s. In 1980, the year Ronald Reagan won the White House, America’s most affluent still faced a 70 percent top tax rate.

These high tax rates didn’t seem to undermine the entrepreneurial spirit of Charles Lazarus. He built his toy business right amid them. And Lazarus didn’t build that business out of the goodness of his heart, either. He saw himself as a businessman out to make a buck.

“If you’re going to be a success in life, you have to want it,” he would later tell Forbes. “I wanted it. I was poor. I wanted to be rich.”

But “rich” will always be relative. Yes, Lazarus did face high tax rates. But so did everyone else in his lofty income tax bracket. He remained, after taxes, rich by the standard of his day. He felt rewarded enough to exercise his entrepreneurial talents.

In the 1980s, America’s economic dynamics — and incentives — changed. By 1986, the tax rate on top-bracket income had sunk to 28 percent. America’s wealthiest now had opportunities to become wealthier than they had ever imagined. They rushed to seize those opportunities by any means necessary.

Those means eventually did Toys “R” us in. In 2005, private equity speculators bought the company and loaded it up with debt. Along the way, they extracted $470 million in fees. Last September, Toys “R” Us filed for bankruptcy. Now the company is closing its stores.

And Charles Lazarus? The 94-year-old died March 22, one week after the Toys “R” Us shutdown announcement.

 

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Sam Pizzigati writes on inequality for the Institute for Policy Studies. His latest book:The Case for a Maximum Wage  (Polity). Among his other books on maldistributed income and wealth: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970  (Seven Stories Press). 

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