The actual results of the cuts in tax rates in the 1920s were very similar to the results of later tax-rate cuts during the Kennedy, Reagan and George. W. Bush administrations — namely, rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, though the tax rates had been lowered.
Another consequence was that people in higher-income brackets paid not only a larger total amount of taxes, but a higher percentage of all taxes, after what were called “tax cuts for the rich.” It was not simply that their incomes rose, but that this was not taxable income, since the lower tax rates made it profitable to get higher returns outside of tax shelters.
The facts are unmistakably plain, for those who bother to check the facts. In 1921, when the tax rate on people making over $100,000 a year was 73%, the federal government collected a little over $700 million in income taxes, of which 30% was paid by those making over $100,000.
[…]By 1929, after a series of tax-rate reductions had cut the tax rate to 24% on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65% was collected from those making over $100,000.
There is nothing mysterious about this. Under the sharply rising tax rates during the Wilson administration, fewer and fewer people reported high taxable incomes, whether by putting their money into tax-exempt securities or by any of the other ways of rearranging their financial affairs to minimize their tax liability.
Under Wilson’s escalating income-tax rates to pay for the high costs of the First World War, the number of people reporting taxable incomes of more than $300,000 — a huge sum in the money of that era — declined from well over a thousand in 1916 to fewer than three hundred in 1921. The total amount of taxable income earned by people making over $300,000 declined by more than four-fifths in those years.
Secretary Mellon estimated in 1923 that the money invested in tax-exempt securities had tripled in a decade, and was now almost three times the size of the federal government’s annual budget and nearly half as large as the national debt. “The man of large income has tended more and more to invest his capital in such a way that the tax collector cannot touch it,” he pointed out.
Getting that money moved out of tax shelters was the whole point of Mellon’s tax-cutting proposals. He also said: “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.”
Empirical evidence on what happened to the economy in the wake of those tax cuts in four different administrations over a span of more than 80 years has also been largely ignored by those opposed to what they call “tax cuts for the rich.”
Confusion between reducing tax rates on individuals and reducing tax revenues received by the government has run through much of these discussions over these years.
Famed historian Arthur M. Schlesinger Jr., for example, said that although Andrew Mellon, secretary of the treasury from 1921 to 1932, advocated balancing the budget and paying off the national debt, he “inconsistently” sought “reduction in tax rates.”
Nor was Schlesinger the only highly regarded historian to perpetuate economic confusion between tax rates and tax revenues. Today, widely used textbooks by various well-known historians have continued to misstate what was advocated in the 1920s and what the actual consequences were.
According to the textbook “These United States” by Irwin Unger, Mellon, “a rich Pittsburgh industrialist,” persuaded Congress to “reduce income tax rates at the upper-income levels while leaving those at the bottom untouched.”
Thus “Mellon won further victories for his drive to shift more of the tax burden from the high-income earners to the middle and wage-earning classes.”
But hard data show that, in fact, both the amount and the proportion of taxes paid by those whose net income was no higher than $25,000 went down between 1921 and 1929, while both the amount and the proportion of taxes paid by those whose net incomes were between $50,000 and $100,000 went up — and the amount and proportion of taxes paid by those whose net incomes were over $100,000 went up even more sharply.
President Kennedy, like Andrew Mellon decades earlier, pointed out that “efforts to avoid tax liabilities” make “certain types of less-productive activity more profitable than other more valuable undertakings” and “this inhibits our growth and efficiency.” Therefore the “purpose of cutting taxes” is “to achieve a more prosperous, expanding economy.”
“Total output and economic growth” were italicized words in the text of Kennedy’s address to Congress in January 1963, urging cuts in tax rates. Much the same theme was repeated yet again in President Reagan’s February 1981 address to a joint session of Congress, pointing out that “this is not merely a shift of wealth between different sets of taxpayers.”
Instead, basing himself on a “solid body of economic experts,” he expected that “real production in goods and services will grow.”
Even when empirical evidence substantiates the arguments made for cuts in tax rates, such facts are not treated as evidence relevant to testing a disputed hypothesis, but as isolated curiosities. Thus, when tax revenues rose in the wake of the tax-rate cuts made during the George W. Bush administration, the New York Times reported:
“An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”
Expectations, of course, are in the eye of the beholder. However surprising these facts may have been to the New York Times, they are exactly what proponents of reducing high tax rates have been expecting, not only from these particular tax rate cuts, but from similar reductions in high tax rates at various times going back more than three-quarters of a century.
It’s Thomas Sowell – the official economist of the Tea Party.