Skip to comments.Thomas Sowell: You Canít Tax the Rich (They'll Flee the Country Before You Can)
Posted on 09/15/2011 6:41:23 AM PDT by SeekAndFind
Ninety years ago in 1921 federal income-tax policies reached an absurdity that many people today seem to want to repeat. Those who believe in high taxes on the rich got their way. The tax rate on people in the top income bracket was 73 percent in 1921. On the other hand, the rich also got their way: They didnt actually pay those taxes.
The number of people with taxable incomes of $300,000 a year or more equivalent to far more than $1 million in todays money declined from over 1,000 people in 1916 to fewer than 300 in 1921. Were the rich all going broke?
It might look that way. More than four-fifths of the total taxable income earned by people making $300,000 a year and up vanished into thin air. So did the tax revenues that the government hoped to collect with high tax rates on the top incomes.
What happened was no mystery to Secretary of the Treasury Andrew Mellon. He pointed out that vast amounts of money that might have been invested in the economy were instead being invested in tax-exempt securities, such as municipal bonds.
Secretary Mellon estimated that the amount of money invested in tax-exempt securities had nearly tripled in a decade. The amount of this money that the tax collector couldnt touch was larger than the federal governments annual budget and nearly half as large as the national debt. Big bucks went into hiding.
Mellon highlighted the absurdity of this situation: It is incredible that a system of taxation which permits a man with an income of $1,000,000 a year to pay not one cent to the support of his Government should remain unaltered.
One of Mellons first acts as secretary was to ask Congress to end tax exemptions for municipal bonds and other securities. But Congress was not about to set off a political firestorm by doing that.
Mellons Plan B was to cut the top income-tax rate, in order to lure money out of tax-exempt securities and back into the economy, where increased economic activity would generate more tax revenue for the government. Congress also resisted this, using arguments that are virtually unchanged to this day that these would just be tax cuts for the rich.
What makes all this history so relevant today is that the same economic assumptions and political arguments that produced the absurdities of 1921 are still going strong in 2011.
If anything, the rich have far more options for putting their money beyond the reach of the tax collectors today than they had back in 1921. In addition to being able to put their money into tax-exempt securities, the rich today can easily send millions or billions of dollars to foreign countries, with the ease of electronic transfers in a globalized economy.
In other words, the genuinely rich are likely to be the least harmed by high tax rates in the top brackets. People who are looking for jobs are likely to be the most harmed, because they cannot equally easily transfer themselves overseas to take the jobs that are being created there by American investments that are fleeing high tax rates at home.
Small businesses hardware stores, gas stations, restaurants are likewise unable to transfer themselves overseas. So they are far more likely to be unable to escape the higher tax rates that are supposedly being imposed on millionaires and billionaires, as President Obama calls them. Moreover, small businesses are what create most of the new jobs.
Why then are so many politicians, journalists, and others so gung-ho to raise tax rates on the rich?
Aside from sheer ignorance of history and economics, class-warfare politics pays off in votes for politicians who can depict their opponents as defenders of the rich and themselves as champions of the working people. It is a great political game that has paid off repeatedly in local, state, and federal elections.
As for the 1920s, Mellon eventually got his way, getting Congress to bring the top income-tax rate down from 73 percent to 24 percent. Vast sums of money that had seemingly vanished into thin air suddenly reappeared in the economy, creating far more jobs and far more tax revenue for the government.
Sometimes sanity prevails. But not always.
Thomas Sowell is a senior fellow at the Hoover Institution
Conservatives are those that believe history is still relevant and can teach you things.
In 1944-5 the top Federal marginal rate was 94%. From 1950 to 1963, it was either 91% or 92%.
Obama would love to match that! Combined with today’s State and municipal taxes, some marginal rates would exceed 100%.
Of course Dr. Sowell is right... no one would stick around for that, and those rates were on what today would be extraordinary incomes.
Irony is a beautiful thing: the notion that the “rich” would escape government taxation by buying (government-issued) tax-free bonds is indeed “rich” itself.
Gee, sounds like the ‘Fair Tax’ is looking better every day.
Warren Harding figured it out in 1920...
Congress and the Executive Branch have lots to do.
So far theyre not doin it right..
Harding cut the governments budget nearly in half between 1920 and 1922. The rest of Hardings approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserves activity, moreover, was hardly noticeable. As one economic historian puts it, Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction. 2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.
BTW..ole Warren ALSO fixed immigration...
Mr. Harding signed into law the Emergency Quota Act which sought to control immigration following World War I and preserve the distinctive American culture by ensuring the majority of immigrants came from the historically compatible cultures of Northern Europe. This law aimed to bring wages of hard working Americans under control by limiting immigration to 3% of the 1910 census. It was followed on by a similar act in 1924, after Mr. Hardings death.
A Warren Harding prescription...if filled ...would ignite the afterburners on the US job machine and the economy. However DC would have to yield on a tremendous amount of power. Our job as We the People...is to persuade them of the utility ..shall we say..of doing so. In all probability the same minds that made the mess...arent capable of the solution however.
BTW any takers that Bammy couldnt even tell you that Warren Harding was one of his predecessors in office?
Even more telling about what our betters in the RinoCracy think of a Constitutional President..
Or they will pass the taxes onto those who consume their products in the form of higher prices. But yes, those who do not offer goods and services would possibly flee. The rich do not live by the same rules as we slobs do. So who pays the bills? We the Slobs.
Are they linked in anyway?
People say Warren Harding was one of our worst presidents but he really wasn’t.
Instead of going after AQ leaders Obama will be using Seal Team Six to retrieve wealthy tax scofflaws
It isn’t just wealth fleeing the country, so are companies and engineering ideas. I own the patents to several key ideas that will take global navigation to the next level. Here in the US, regulations have made it extremely difficult to implement those ideas. It takes large amounts of money and years of regulatory paperwork. In China, however, these ideas can be put into place with limited regulations and far less money. China is very interested in these ideas and have initiated discussions. Sad that China might be able to get things rolling and I can make some money while here in the US such ideas are stiffled.
Ted Kennedy proposed a 75% Wealth Tax on those who said they were leaving the US when Clinton got elected. I believe that Castro also found away to avoid people leaving that worker’s paradise. I worked with a woman who’s family was allowed to leave Poland back in the late 70’s. They could take $5 with them.
I recall reading about a guy the IRS had jailed for a number of years because he had won a European lottery and had refused to tell them where he had hidden the money. I don’t know how that case was ever resolved.
He does not need a Seal Team. The tax cheats work for him.
RE: I recall reading about a guy the IRS had jailed for a number of years because he had won a European lottery and had refused to tell them where he had hidden the money. I dont know how that case was ever resolved.
Many wealthy and educated immigrants from other countries who have houses, bank accounts and other wealth they EARNED or INHERITED before they came to the USA are in effect, CRIMINALS in this country because they failed to declare these money/income when their green cards were approved.
I know of a brillant Taiwanese Engineer (graduate of MIT ) who is a green card holder and works in Silicon Valley who inherited money from his father back home... he failed to declare that inheritance. That money was made in Taiwan and China and never even came to the USA. Now, by virtue of his being a green card holder, he is now required to declare it and forfeit a huge portion of it via our death tax? Is that fair?
We are wasting so much time, tax payer money and resources trying to catch these people and make criminals out of them instead of leaving them alone and allowing them to be productive citizens.
Our entire class warfare tax system is so screwed up that I often wonder if we are really living in the land of the free...
BTW, did Charles Rangel (former chairman of the Ways and Means Committee) ever pay the taxes from the income he made overseas as a landlord? Or did the slap on the wrist via a Congressional censure suffice?