Thomas Sowell

Guess who said the following: "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 his Government should remain unaltered."

Franklin D. Roosevelt? Ted Kennedy? Nancy Pelosi?

Not even close. It was Andrew Mellon, Secretary of the Treasury under conservative Republican President Calvin Coolidge.

What was Mellon's point? That high tax rates do not necessarily result in high tax revenues to the government. "It is time to face the facts," he said. Merely having high tax rates on large incomes will not bring in more tax revenues to the treasury, because of "the flight of capital away from taxable investments."

This was all said in 1924, in Mellon's book, "Taxation: The People's Business." Yet here we are, more than 80 years later, still not facing those facts.

It is not just a question of what Andrew Mellon said. It is a question of hard facts, easily checked in official documents available to all-- and ignored all these years.

Internal Revenue Service data show that there were 206 people who reported annual incomes of one million dollars or more in 1916. But, as the tax rate on high incomes skyrocketed under the Woodrow Wilson administration, that number plummeted to just 21 people reporting a million dollars a year in income five years later.

What happened to all those millionaires? Did they flee the country? Were they stricken with fatal diseases? Did they meet with foul play?

Not to worry. Right after Congress enacted the cuts in tax rates that Mellon had been urging, there were suddenly 207 people reporting taxable incomes of a million dollars or more in 1925. As Casey Stengel used to say, "You could look it up." It is on page 21 of an Internal Revenue publication titled "Statistics of Income from Returns of Net Income for 1925."

Where had all the income of those millionaires been hiding? In tax-exempt securities like state and local bonds, among other places. Mellon had urged Congress to end tax exemptions for such securities, even before he got them to cut tax rates. But he succeeded only with the latter, and only after a political struggle with those who made the same kinds of arguments that are still being made today by those who cry out against "tax cuts for the rich."

Still, one out of two is not bad, when it comes to getting Congress to do something that makes sense economically, rather than something that looks good politically.


Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

Creators Syndicate