They’ll flee the country before you can.
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.
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