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?
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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.
Maybe the dems think they have the rich trapped. The Eurozone looks bad and partnering with China is not for money you can't afford to have taken away. Given the deficits at the state and local levels, muni bonds are more risk than return. I guess there is always some place like South America to go, though.
Big money is also willing to sit on the side line rather than submit to a riskier and smaller after-tax return. That seems to be the current trend. It can afford to do so for a little while before heading off to India.
But that's not the end of it. Those who envy the rich will, given the political power, enact laws to restrict and punish money movement, to tax foreign earnings, and to tax money just sitting on the side lines. All in the name of Obaman Investment which yields a negative return. Just like our old cold war enemies.
We can't raise taxes on the rich because they will exploit loopholes and other ways to avoid paying them anyways. Therefore, we should keep taxes really low so they will grace us with their money?
This makes sense but it's just not accurate. There are plenty of countries that actually get their tax money out of their super-rich. There is no reason, other than myths like this, that the government can't moderately raise taxes and also close these loopholes.
Sowell scores again. A good example: Rush Limbaugh, multimillionaire talk show host, moved from New York City to Florida because of the taxes in N.Y. state and city. Florida has no state income tax. And a Democrat governor said he was glad that Rush had moved!
Democrats have no understanding of basic economics and the same goes for the Harvard graduate in the White House! The illogic and stupidity is mind-blowing!
Let me get this straight: if taxes are raised, rich Americans will flee the country or park their money abroad?
1. United States citizens are already taxed on their entire worldwide income, unless they're criminals and hide it or take advantage of the "loopholes" that Democrats are trying to abolish. What loopholes wuld you like to abolish? The foreign tax credit? The holes in Subpart F?
2. Sowell is insinuating that rich Americans are less patriotic than the rest of their countrymen. Hmmm. How do you feel about that? At what point would YOU say to yourself, "It's too expensive to be an American -- I'm leaving"?
"1. United States citizens are already taxed on their entire worldwide income,"
The key word is income. I can make lots of money and have no income.
Money is smart and government is dumb. Big money is very smart indeed and big government is even dumber. If you think that a bunch of congressmen are going to get the better of these big money players I have a bridge to sell you.
"2. Sowell is insinuating that rich Americans are less patriotic than the rest of their countrymen."
Say what! How is deciding that the government taking a majority of the money I have unpatriotic. Unpatriotic is allowing the government to bankrupt the nation and destroy the wealth of the people through irresponsible management, feckless policies and gross inefficiency.
" Hmmm. How do you feel about that? At what point would YOU say to yourself, "It's too expensive to be an American -- I'm leaving"?"
When the government has more of the money I earn than I do.
BTW, yours was an argument used by the loyalists during the revolution. How can you evil people have so little regard for England? The likes of Jefferson and Adams did not buy it and neither do I.
I can love America and despise the current government and its pell mell rush towards financial and social ruin of the nation. I do it every day.
It is not just income, though, all US citizens must disclose ALL foreign bank deposits, investments accounts, retirement accounts, accounts of any kind (some private hedge funds being excluded).... look up the FBAR form.... "Tax the rich" is not a viable policy, but "the rich will flee high taxes" is a gross oversimplification and is naive.
No it is not. For example. Let us say that I examine my books and discover I am going to make 'too much' from a tax perspective. I can then take this excess money and invest in ways that will hide it in the business and keep the income there as retained earnings. I can get very rich and have no income. I can easily wait out the current tax regime and repatriate when things look better. BTW, that is exactly what is happening now. I am not talking about the little S corps and LLCs I am talking big money. The little guys are SOL.
A smart money manager (and big money has VERY smart money managers) can successfully hide more money than you can ever hope to find.
Only about 300-400 Americans surrender their citizenship in a given year, usually not for tax purposes.
Wealthy people do have overseas accounts in which to deposit their money to evade taxes. I don't blame them. They're no more criminal than Rosa Parks for doing so.
As for being less patriotic: How is it patriotic to bend over for your government when most of what they take goes into someone else's pocket?
JSDG, you're a smart guy. I ask you to reconsider.
Wealthy people who evade taxes are criminals. Respect for the law is an inseparable component of American patriotism.
Rosa Parks was challenging a law which, in the clarity of hindsight, was entirely unconstitutional. The law itself was illegal, not Rosa Parks' conduct. Surely you'll grant that.
The law that says US citizens are taxed on their entire worldwide income is nothing like that. Nothing unconstitutional about it at all.
The fact that so few Americans renounce their citizenship is testament to the depth of Americans' patriotism. That some of the people on NRO would attach a price tag to their patriotism is beyond shameful. It deligitimizes anything they may have to say. Go to hell, I tell them.
Given the government's willingness to willfully avoid enforcement of our immigration laws, to intentionally violate our creditor laws (GM bonds) - why should I feel any obligation to obey the tax laws?
The rich do not need to renounce their citizenship to move the income earning potential of their money outside of the country legally. Sure they can't bring it back into the US without paying taxes, but at that level of wealth, it really does not matter.
MikeB: I do concede the point on Rosa Parks. Segregation is unconstitutional and thus the law was illegal. Perhaps a better example is Frederick Douglas who stole himself from his master by running away from the plantation. Slavery was constitutional at the time. Surely you'll grant that.
The law is not an end in itself. It is a means to an end. The end is justice. When the gov't uses the 16th Amendment to extort more and more taxes from its citizens, it in effect runs afoul of the 13th Amendment. Therefore I still don't blame people for evading taxes. The law may say I must pay for someones else's college eduction, for example, but that doesn't make it right. The principles espoused in the Declaration of Independence show that there is a limit when we can tell gov't we've had enough.
I don't believe that anyone on NRO would ever actually renounce their citizenship, regardless of their venting here. This is still the greatest country in the world. Still, if they can find a better deal, take it. My grandparents did when they came through Ellis Island.
"At what point would YOU say to yourself, 'It's too expensive to be an American -- I'm leaving'?" As a man of relatively modest means, that point is not far away. An Obama 2012 re-election would be one obvious trigger. Why would I want to continue to give more and more money to a corrupt government to waste on debilitating vote buys and political cronies? Wouldn't I just be an enabler at that point?
They are already tightening the noose by requiring you to get a passport just to get out of the US to Mexico or Canada. They did that to slow capital flight. The provisions in the terrorist bills and Dodd-Frank are/will be used to further suck money out of you wherever you are. Please see America as it is, not as it used to be. We have been overrun by the Left. To them you are a milk cow. Maybe even a beef cow....
Oh please MikeB, don't hurt my feelings like that. And when you are left decimated by government monetary and fiscal policy gone mad, don't say you weren't warned. Millions of Germans had the same delusions in the 30's.
