There is a solution, but we’ve been chasing the wrong target.
By Mike Kapic October 15, 2018
Why do Democrats (and some Republicans) insist on increasing taxes when history shows us that lowering tax rates increases revenues to the government? Politician’s on both sides of the aisle have proved the thesis over the last century. President’s Hoover (R) and FDR (D) raised taxes and revenues went down. Harding (R), JFK (D), and Reagan (R) lowered tax rates and revenues increased.
But there is a problem with increasing revenues as John Tamny explains in his book, Who Needs the Fed?
The late Nobel Laureate Milton Friedman didn’t get everything right on the economic front, as future chapters will reveal. However, he was quite correct in asserting that when tax cuts lead to higher federal revenues, taxes haven’t been cut enough. The Laffer curve, which correctly asserts that a lower rate of taxation leads to greater growth and higher federal revenues, is a tautological reality, as the 1920s, 1960s, and 1980s make plain.
Andrew Mellon was treasury secretary appointed by President Harding in 1921. He focused on the budget and paying off the WW I debts during the Depression of 1920-21.
John Tamny reports that Mellon,
…argued that taxes had to be slashed “to attract the large fortunes back into productive enterprise.” He added, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.” Henry Ford, he pointed out, made more money by reducing the price of his cars from $3,000 to $380 and increasing his sales than he would have earned by keeping high the price and profit per car.
John Tamny further illustrates how revenues to the government increased when tax rates were reduced. Yet, there are those who choose to ignore historical facts and believe that only a large government strapped to poor taxpayers’ backs will affect the changes that Progressives believe are needed.
Secretary of the Treasury, Andrew Mellon relentlessly pressed Congress to cut taxes across the board, for all brackets. By 1929, when Congress passed his sixth tax cut of the decade, the top rate had been lowered two-thirds, from 73 percent to 24 percent. Those in the lowest income bracket (earning under $4,000 annually) saw their rates fall by an even greater percentage—from 4 percent to 0.5 percent. So many exemptions were introduced or raised that between 1921 and 1929 the number of Americans who paid federal income taxes fell by one million. Barely 2 percent paid any federal income tax at all by the end of the decade. Mellon also worked to repeal the federal estate tax but secured just half the loaf; Congress cut it from 40 to 20 percent. At his urging, the gift tax was abolished.
At the same time, it’s well past time to consign the Laffer curve to the proverbial dustbin of history. While the fiscal focus should always and everywhere be on reducing the tax burden, it should be on reducing it so much that revenues actually decline. If they don’t, then stringent rules must be put in place to ensure that the revenues are returned to the taxpayers, used to pay off any existing federal debt, and so on. If these revenues are handed to politicians, the singular result is more economy-sapping federal spending that grows and grows. Odds are Arthur Laffer would agree with this.
Tamny argues that supply-siders,
…must rewrite a portion of their otherwise correct message. Government is a barrier to production, and its waste enriches the political class, all the while destroying limited credit that would otherwise fund huge economic advances. Higher federal revenues represent a hideous bug in the supply-side tax-cutting argument, not a feature.
It’s time to cut taxes to a rate that actually pushes revenues well below the Laffer curve.
The Mellon Plan was, as Burton W. Folsom points out in The Myth of the Robber Barons,
“a startling triumph.” The budget was in surplus year after year. Personal income tax revenues soared from $719 million in 1921 to more than $1 billion in 1929. The national debt was halved. The economy grew by 59 percent, America was awash in new inventions, and American wages became the envy of the world. Soak-the-rich class warriors cried foul anyway. During the debate over the 1926 tax cuts, Senator George Norris of Nebraska charged that if the administration had its way, Mellon himself would reap “a larger personal reduction [in taxes] than the aggregate of practically all the taxpayers in the state of Nebraska.” Norris never mentioned that Mellon was paying more in taxes than all the people of Nebraska combined. Senator James Couzens of Michigan, a fellow Republican, fought the Mellon Plan as well. He conducted witch-hunting investigations in an attempt to embarrass Coolidge and Mellon. He publicly charged that the Treasury Department was secretly giving refunds to rich, politically favored businessmen. The effort backfired: the investigation revealed that the refunds were the result of nothing illegal or unethical. None of Mellon’s congressional enemies made much of a dent in the treasury secretary’s program in the 1920s. Until President Hoover in 1930 began jacking up tax rates, the great majority of what Mellon wanted he got, and very little of what he opposed ever passed.
Leaders in Congress have openly admitted that only by their good character and moral strength have they been able to control their inhibitions to unlimited spending and taxing.
An amendment to the Constitution controlling Congress’ spending and taxing is imperative if we want to avoid our country’s pending bankruptcy. Americans can have control over their debt responsibility given to us by Congress if we insist on an amending convention to place limits on taxing and spending in the Constitution. Congress won’t limit itself…We the People must insist that our state legislatures apply the second clause of the Constitution’s Article V. It’s as simple as that.