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 and up — equivalent to far more than a million dollars in today's money — declined from more than a thousand people in 1916 to less than three hundred 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 pointed out 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 of the Treasury 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 which 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 from high tax rates at home.
Small businesses — hardware stores, gas stations or restaurants for example — 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 puts it. 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 in the upper brackets?
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 looking out for working people. It is a great political game that has paid off repeatedly in state, local and federal elections.
As for the 1920s, Mellon eventually got his way, getting Congress to bring the top 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 eventually prevails. But not always.
To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.
COPYRIGHT 2011 CREATORS.COM
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Mr. Sowell, why does Warren Buffet disagree with you? It would seem that he knows a thing or two about taxes and the rich and he thinks that it is not OK for his secretary to pay a higher portion of her income in taxes than he does. Your argument is a straw man argument. Nobody is suggesting that the top rate be increased to 73%. Suggesting that Warren Buffet pay the same portion of his income in taxes as does his secretary is considered reasonable by a majority of the American people. You know - the ones you refereed to when you quoted Bill Buckley's quip, about preferring to ruled by the first 500 names in the Boston phone book than the staff of Harvard, in one of your books.
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When Mr. Buffet suggested that congress stop coddling the rich, Eric Cantor"s office released a trite statement to the effect of "Warren Buffet can pay more taxes any time he likes". If you think about it, Cantor's office seems to be suggesting that ALL of his secretary's taxes should be mandatory, but that Warren's social class should have a significant part of their share of the taxes considered voluntary. The American people disagree.
Comment: #1
Posted by: Mark
Mon Sep 12, 2011 9:45 PM
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------Great piece, now, let's leave the '90's'
and get back to the present.
The Fukishima WORLD nuclear disaster and
DEPOP OP ---------------really needs attention.
From the HAARP-esque quality of the astonishlingly
'on cue' quakes (RED China and agenda 'friendly')
---following just a few years after that also
astonishingly 'on cue' 2005 SE Asian tsunami
---on Mao Tse Tung's Birthday ----------it would
certainly seem to be a grab bag of urgent issues.
Not even a single confrontation with the man who
runs the company which built the KNOWN design
flawed reactors ----GE's Jeff I-Melt-down.
----And of course absolutely NO notice or queries
around David Rockefeller's public calls, last November,
for RAPID and MASSIVE world DEPOP.
--------------------------------Just a coincidence we're sure.
Comment: #2
Posted by: free bee
Mon Sep 12, 2011 10:10 PM
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Re: Mark Mr. Buffet can talk about taxing his money for months and how much has it cost him in dollars and cents? Do you suppose that the same old, same old might be to his advantage in some way?
Comment: #3
Posted by: P. Long
Tue Sep 13, 2011 7:35 AM
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The reason Warren Buffet says millionaires should pay more taxes is because he knows he never will have to pay more taxes. Mr. Cantor's statement that Mr. Buffet can pay more when he wants to is actually the hard way. Mr. Buffet need only tell his accountants not to take advantage of the slew of loopholes that are available to him. It would simplify his tax return and cost him a whole lot less in legal fees from his numerous tax lawyers. But he never will, he's an opportunist and will continue to avoid taxes like the rest.
No tax plan will just tax the “rich”. There will be hundreds if not thousands of pages in the bill that will attempt to do that but there will also be added loopholes. Keep in mind this new bill to tax the “rich” is being written by the “rich” (almost all federal legislators are millionaires) and will include boat loads of goodies for special interests to whom they are beholden. However there must be new revenue generated so they lower the bar for who will have to pay more taxes and that is where Mr. Buffet's secretary comes in along with me and an awful lot of other hardworking people.
If you think not you must not have read about Mr. Obama's good buddy Mr. Immelt who helped doctor GE's books to the ultimate benefit of NO taxes on billions in sales. There are many individuals that manage the same trickery. Thing is that to dodge their taxes in this manner they have to hide their money instead of using it to perform work in the economy. People, like electricity, follow the path of least resistance. When taxes are high and complicated people look for ways to avoid them. When taxes are low and simple it's easier to pay taxes then to avoid them so government revenues increase. Wealthy folks can afford tax lawyers who develop sophisticated tax shelters for their clients based on current tax laws. Tax laws change shelters change, they pay less taxes even though they have to pay the lawyers handsomely. People like me and Mr. Buffet's secretary we have our own methods of avoiding taxes, we can work under the table or barter for things we need.
Any new tax laws make assumptions based on people behaving the same way after the law is passed as they did before the law was passed. They won't, never have, never will. Maryland found out after they passed their “millionaires tax”. It was projected to generate $150 million but revenues actually decreased by nearly $200 million and the number of millionaires decreased from nearly 3,000 to about 2,000. We will never generate “enough” revenue. No matter how much we raise they will always want more. Scale back government (its being asked to do too much), cut spending and simplify the tax code.
Comment: #4
Posted by: Ed Boyle
Tue Sep 13, 2011 10:24 AM
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Re: Mark
With all due respect, Mr. Buffet knows about investing. He probably has a team of tax attorneys do his taxes for him, and while he may understand money, he likely doesn't understand taxes, since his attourneys shield him (and his investments) from taxes. When he can stand up and honestly state he's done his own taxes for the last several decades and he is actively involved and understands the tax accounting at Berkshir Hathaway, then I might given him credit for understanding tax policy. Until then he's a hyper-wealthy investor who won't notice a whit if the tax rate changes on his investment income, since there so darn much of it.
Also- what is his actual taxable-income? What does he actually draw as a salary from Berkshire Hathaway? Maybe he gets a low tax rate because he draws a low salary? Is he being honest with himself and others about his aggregate tax obligation? His individual income tax rate might not be high, but what of his obligations as an owner?
Mr. Buffet is wealthy- which is far different animal than having a large income. At any point, he could donate however much per year to the treasury that he wanted to, and be an example to his fellow weatlhy investors. To date, I have not seen him or either Bill or Sr. Gates do so. He could also do as suggested and not take any deductions, or take standard deductions and pay the result. He could have his attourneys remove all the shelters they have found for his investments. There is a lot he could do that would raise his own tax rates. Maybe it's time to stop coddling himself, or to order his attourneys and accountants to stop coddling him and Berkshire Hathaway? The same goes for Bill Gates and his dad.
Also- to possibly belabor a point- the super rich are wealthy, which is not taxed. When you talk about taxing $250K and above, a large percentage of that will be medium business owners, such as members of my family. They have an LLC, and by the time they pay WA state business taxes, federal taxes, L&I, their portion of SS and medicare, etc, their aggregate rate is quite high- i want to say in the 40% range. Most people seem to conviently forget that the income tax is not the only tax that business owners pay. Not by a long shot.
Those of my family that own a business are lucky to be in a state without an income tax (until Sr. Gates gets his way), as that would add to their burden. Raising their rates more means less income to save in their capital reserve, which is important to have if you own your own business- you need new machinery, updates to a building and infrastructure, capital investments for expansion, etc, you need reserves for.
It also means less income to give to employees in terms of benefits, bonuses, raises, etc. Less income to use to start a second or third business and create more jobs, both long term in the way of hiring, and short term in the way of capital expenditures and equipment purchases. It also means less reserves to weather price changes in costs of materials (i.e., protect customers from price increases), or weather temporary downturns in the economy. And yes, it also means less for their personal consumption, which has led to their own housing improvements (employment for contractors- one of the harder hit professions in the recession) and puchasing of capital goods (they scrimped and saved for 20 years to get their business going, so don't get fussy about what they spend now).
What you and the rest of the 'tax the rich' seem to fail to understand is that you'll actually be taxing the working incomes of small and medium business owners, and slowing job growth and economic activity. Taxing the rich won't tax the bloody rich, since they are wealthy. You might take a bit out of their investment income, but again, when you are a multi 100 million or multi-billionaire, that hardly matters. This is why Mr. Buffet is basically being disingenious, and the rest of you worshiping his every word being less than thoughtful.
Comment: #5
Posted by: ChristopherD
Mon Sep 19, 2011 5:59 PM
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