Posted on 09/05/2013 6:32:37 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 didn’t 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 today’s 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 couldn’t touch was larger than the federal government’s 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 Mellon’s 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.
Mellon’s 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.
Unfortunately, all of the current policy making position are occupied by socialist moron monkeys with hand grenades.
Just an observation...but the general argument here is that by taxing the rich...you will shift the newly found tax revenue to the needy.
No study...by any university or country...has ever shown that this occurs. I would welcome anyone who has noted such a survey or analysis....but to this day, newly created tax revenue...just falls into a bucket and becomes part of the old bucket of spending money.
So, my suggestion is simple. The next time you have some dimwits suggest taxing the rich...agree with them. But there’s this deal. You note what the new tax will create...a finite number. And you then want the government to just plain write out a check to every American over 21 who makes less than $20,000 a year.
You create a fancy tax on the rich worth $40 billion? Fine, every single penny falls from the gov’t’s pocket to a check....all within weeks, not years. No fancy programs, no statues, no bridges, no loans to Brazil, no solar panels....just plain write the stupid check out and dump the money onto the broke American.
Expectation? The congressman will be a bit worried...this wasn’t the method of disbursement or reallocation. All of this money needed to shuffle into programs....not a check. The resting spot of the money? That’s the curious thing...by using the check method...within two months...all of this newly created rich-tax revenue....has been pumped back into the real economy. Companies, businesses, and real America benefit. The poor guy bought some new tires, or a new used car....doesn’t matter...it was something that someone created and sold on the US market.
Odds of this happening? Zero. The wealth tax folks can’t allow you to screw up the billions-on-programs strategy that they’ve created.
I love Thomas Sowell. If he ever ran for office, I would move to his district just to be able to vote for him.
But “Vast sums of money ... far more jobs and far more tax revenue for the government” doesn’t really cut it as the proof at the end of an article on tax policy and economics. He should have told us how much is “vast” and how many is “far more”.
You make a great point
Libtards say they want to raise taxes to “help the poor” but all that happens is that the government gets the money- and the government is not poor.
I think you’ve started off in a great place in your argument; getting the liberal/progressive to pin in their good intentions into a solid dollar amount.
But, like all liberal Utopian fantasies, there are loads of unintended consequences with your scenario. Just like college tuition shot up in price when the Clinton-era, $1,000 college credits were available, (prices shot up by a thousand dollars a year, one might have discovered), with all the newly handed out money out in the low-wage earners hands, all those tires that cost $500 per set would magically inflate (oh man, pun not intended!) to $750.
So in the end, in the interest of assisting the little guy, all that actually happened was that the price for my tires increased - and I didn’t get any freemoney (SIC) because I earned $25,000 last year. (a fictional amount, but arbitrarily chosen just above the threshold you defined)
“taxable incomes of $300,000 a year or more — equivalent to far more than $1 million in today’s money —”
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Classic understatement! The truth is probably more like ten million than one million and I am probably still understating it by a large margin. Go to Biltmore in North Carolina and realize that the cost of the whole thing, including many square miles of mountain land cost only three million at the turn of the twentieth century. You couldn’t build the greenhouse for that now.
I love Thomas Sowell. Thanks for posting this.
According to The Inflation Calculator, $300,000 in 1921 is the equivalent of $3,728,886.20 in 2011 dollars. So when Professor Sowell says it’s equivalent to “far more than $1 million in today’s money,” he’s understating the matter greatly.
Yes, and in truth I think the inflation calculator greatly understates the truth. That is just six years after Henry Ford created a turmoil by raising his assemblers pay rate to five dollars a day for an eight hour day. That was a doubling of pay for them and they were already making what was considered a good wage in those days. Many people were happy to make five dollars a WEEK in those days. In fact my parents and others used to talk about working for fifty cents a day during the depression days of the thirties. That would have been ten days work to earn what Ford paid for eight hours in 1914. I have seen a report about this on TV and it seems that Ford actually sent people to teach his employees how to manage such a large paycheck and required them to live in a fashion befitting someone earning so much money.
I can vouch for the fact that I remember when my mother took a factory job in the late forties (I was born in 1944) and started for four dollars a day, after training her pay went up to six dollars a day, thirty dollars a week and she used to say that she hardly knew what to do with all that money! Thirty dollars then would easily buy groceries to feed a family for a month and for people who grew most of their own food as we did it was probably enough for our needs at the grocery store for a year. I recall that during the fifties if you found a dime and bought a ten cent candy bar you gave half of it to your brother or your cousin because only a pig could eat a whole candy bar that big at one time.
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