The American Spectator : A Book for Republicans

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A Book for Republicans

By Thomas Sowell on 5.23.12 @ 6:07AM

The “tax cuts for the rich” demagoguery collapses like a house of cards when you subject it to logic and evidence.

Democrats have been having a field day with the cry of “tax cuts for the rich” — for which Republicans seem to have no reply. This is especially surprising, because Democrats made the same arguments back in the 1920s, and the Republicans then not only had a reply, but one that eventually carried the day, when the top tax rate was brought down from 73 percent to 24 percent.

What was the difference then?

The biggest difference is that Secretary of the Treasury Andrew Mellon took the trouble to articulate the case for lower tax rates, in articles that appeared in popular publications, using plain language that ordinary people could understand. Seldom do Republican leaders today even attempt to do any such thing.

In 1924, the ideas from these articles were collected in a book which Mellon titled “Taxation: The People’s Business.” That book has recently been reprinted by the University of Minnesota Law Library. Today’s Republicans would do well to get a copy of Mellon’s book, which shows how demagoguery about “tax cuts for the rich” can be exposed for the nonsense that it is.

People in the media could also benefit by seeing how the “tax cuts for the rich” demagoguery collapses like a house of cards when you subject it to logic and evidence.

Those who argue that “the rich” should pay a higher tax rate, and that the revenue this would bring in could be used to reduce the deficit, assume that higher tax rates equal higher tax revenues. But they do not.

Secretary Mellon pointed out that previously the government “received substantially the same revenue from high incomes with a 13 percent surtax as it received with a 65 percent surtax.” Higher tax rates do not mean higher tax revenues.

High tax rates on high incomes, Mellon said, lead many of those who earn such incomes to withdraw their money “from productive business and invest it in tax-exempt securities” or otherwise find ways to avoid receiving income in taxable forms.

That is even easier to do today than in Andrew Mellon’s time. The very same liberals who complain that Mitt Romney — among thousands of others — puts his money in the Cayman Islands nevertheless act as if raising the tax rates automatically raises tax revenues. It can instead drive money out of the country and drive jobs out of the country with it.

The United States has long been a place where foreigners from around the world have sent their money to be invested, more than offsetting the money that Americans invested abroad. But, in recent years, the net flow of investment is out of America to places overseas that don’t tax as much.

Mellon cited statistics that showed the opposite of what the high-tax advocates claimed. Although incomes in general were rising from 1916 to 1921, the taxable income of people earning $300,000 and up dropped by about four-fifths.

That didn’t mean that “the rich” were becoming poor. It meant that they had arranged to receive their incomes in forms that were not taxable. Mellon asked where the money of these high income earners went. He answered: “There is no doubt of the fact that much of it went into tax-exempt securities.” In today’s global economy, much of it can also easily be sent overseas — much more easily than workers can go overseas to get the jobs this money creates in other countries.

After Mellon finally succeeded in getting Congress to lower the top tax rate from 73 percent to 24 percent, the government actually received more tax revenues at the lower rate than it had at the higher rate. Moreover, it received a higher proportion of all income taxes from the top income earners than before.

Something similar happened in later years, after tax rates were cut under Presidents Kennedy, Reagan and G.W. Bush. The record is clear. Barack Obama admitted during the 2008 election campaign that he understood that raising tax rates does not necessarily mean raising tax revenues.

Why then is he pushing so hard for higher tax rates on “the rich” this election year? Because class warfare politics can increase votes for his reelection, even if it raises no more tax revenues for the government.

About the Author

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. 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.

Letter to the Editor View all comments (44) | Leave a comment Leave a comment

Appleby| 5.23.12 @ 7:04AM

There is no profit in explaining logically why "tax TheRich" is a stupid idea; most people cannot understand anything at all about how money is made, jobs are created, and progress is good for them. I have been trying for years to explain to my liberal sisters that the Rich Have Options, and if you try to take their money for your own use (which is commonly called "theft"), they just move their money to somwhere you can't find it. Put in socialist medicine in hopes that the rich people will die in line five minutes before you do, and you find that the rich people go to a non-socialist country and get their medical care anyway, and you don't. Charge them extra taxes for building a yacht, and they'll build it somewhere else and you will lose your job.

It's a no-win situation, especially when you have a country in which envy and jealousy are commonplace behaviours and not sinful and ill mannered. But the same people who think they're going to win the Powerball Jackpot continue to think that nobody has a right to be Rich when they consider themselves to be Poor.

Nancy in NC| 5.23.12 @ 9:04AM

No harm in shaming them for bad behavior. Most people may internalize the shame, but you have laid the ground work. Of course there's a better than average chance some people are incapable of feeling shame. It's been bred out of them.

Richard Ryan| 5.23.12 @ 9:16AM

There is absolutely nothing shameful about demanding all of the social benefits that you are ENTITLED to. It used to charity and "welfare". Now it's a right.

For a reminder about how our values have changed regarding self-sufficiency, I give you the film Cinderella Man.

Mike G| 5.23.12 @ 11:02AM

Shame?? Very few Americans feel shame anymore. There no longer any shame associated with anything--not learning anything in school, having babies with no father to help raise them, spending time in jail for committing a crime, making a fool of yourself on a "reality" show simply because you want to be famous, the list goes on--there is no shame because we have been told over and over and over that we "shouldn't judge". So now, anything a person does is okay. It goes back to the time when educators decided that "self esteem" was more important than anything. Personally, I thing a little shame can be a great motivator.

Albert Constantine Jr.| 5.23.12 @ 11:08AM

BINGO.

Things that are taxed or that are stigmatized, you tend to get less of. Things that are lauded or subsidized, you tend to get more of.

Butch| 5.23.12 @ 5:48PM

Every time a leftist uses the word "greed," he or she should get the word "envy" used back ten times. I can assure you that the average 21-year old has not heard the word five times in his whole life. It is simply not used in the educational process, although "greed" is as common as "and" and "the." Envy issues from inferiority, and everybody knows it. That stuff will dry up a lot if the speakers are properly labled as envious. It is a form of shaming.

Alan Brooks| 5.23.12 @ 3:56PM

There ought to be a defense tax, though.\; and when America loses its bases overseas, it appears then we will need a defense tax.

Alan Brooks| 5.23.12 @ 5:10PM

... and with all the doom 'n gloom, could it be postulated (some of you are True Believers) God is going to punish America?

Von Mises Jr| 5.23.12 @ 7:08AM

Actually, high marginal tax rates and inflationary policies simply redistribute wealth from the small businesses (today's bourgeoisie) to the wealthy and the poor.
The middle class gets squeezed by the higher tax rate since they receive their income as personal income taxed at the higher marginal tax rates. The inflation eats away at the purchasing power of the remaining income.
But the wealthy can take much of their income in stock options, and have accountants and lawyers to create trusts and buy tax-free investments. They also buy land, companies, commodities and jewelry that increase in value with inflation.
The poor get redistributed wealth to buy their vote in the short-term. But in the long-term, they have it eaten up by inflation and corruption while selling their liberty in return.
So the ultimate losers are the middle class and the poor, while the ruling class amasses government and personal control of the resources and property.
This has been going on since the Industrial Revolution where the Aristocrats and Nobles have been trying to take back the bourgeoisie's newly created wealth and subjugate both them and the poor back to serfdom. Hayek didn't title his book "Road to Serfdom" for nothing.

Nancy in NC| 5.23.12 @ 9:06AM

Excellent post. Romney should press this issue as it would sell in Preoria. Of course it might be too complicated for some of the clueless, but you and I know you are so on target.

scotchieguy| 5.23.12 @ 10:20AM

Brilliant. Maybe YOU should be running for prez, Von Mises JR.

Von Mises Jr| 5.23.12 @ 10:30AM

The GOP surely feels the same way about me as they do Congressman and Col. Allan West?
You see what they did to Perry, Cain, Santorum and Bachmann for not joining the elitist cabal?

Al Adab| 5.23.12 @ 11:08AM

Under Article IV Sec. 3 we could form a new State and make Dr. Sowell the Governor. Just think a free market, capitalist State.

JimH| 5.23.12 @ 12:48PM

Galt's Gulch?

Al Adab| 5.23.12 @ 1:59PM

Article II Sec. 10, gold and silver coinage.

Von Mises Jr| 5.23.12 @ 2:34PM

I'll see you boys in TN or SC, or perhaps TX. As soon as some sucker buys my house in the Northeast, I am out of here.

Al Adab| 5.23.12 @ 3:23PM

I'll look forward to that.

Al Adab| 5.23.12 @ 3:24PM

PS: Bring the Scotch.

Cobalt| 5.23.12 @ 4:11PM

Southwestern North Carolina is also a great place to live. Hendersonville, Brevard, Waynesville, Bryson City, Franklin, etc.

http://www.franklin-chamber.co.....rfalls.php

Von Mises Jr| 5.23.12 @ 4:25PM

My best friend just moved from Kernersville near Winston Salem to Myrtle Beach. I love the Carolinas.
Did you see the article a couple weeks ago where the "Green" Nazis want to close the bridge to Hatteras Island. They want to restrict access to the birds and turtles. Agenda21 in action!

Al Adab| 5.23.12 @ 6:17PM

Jr:
My niece was a "bankster" in Charlotte and she loved the place.

Cobalt| 5.23.12 @ 6:27PM

Yes, the "Green Nazis" don't like bridges to the Outer Banks, and they don't like Highway 12. They would like for hurricanes to cut the Outer Banks into multiple islands that could only be reached by boat or ferry. Then they could control everything, including who gets to catch a fish. The hell with the people who live on the Outer Banks, and depend on the highway and bridge for tourist traffic.

Now, enviromentalists are protesting a proposed 11,000 acre windfarm in rural Beaufort County, that supposedly would provide power for 15,000 homes. These people think the proposed windfarm might disturb the bald eagles who nest in the area, and that from 4 to 20 bald eagles a year might be killed. If there were no nesting bald eagles in the area, they would probably say that the windfarm would make the local snakes nervous, or make the geese constipated.

Indy| 5.23.12 @ 7:36PM

That battle has been going on for a long time. Unemployment in that area is quite high. The Green Movement drives the agenda of the Left and it is on a global scale beyond what most imagine. I know you are aware but most are not.

PolishKnight| 5.23.12 @ 10:51AM

I've long thought the same thing that "income" tax is a red herring. Most of the wealthy's income isn't really taxed. Consider Zuckerman whose "income", in the form of stock and bonds, largely will not be taxed unless he sells it off and then what? He'll put it into a 1% interest (taxable) savings account?

If he leaves the "money" where it is, it's protected.

While property is oftentimes literally brick and mortar and easily defined for tax purposes, income is not and the wealthy can also play games with that as well. GE can afford to spend a billion dollars on a floor full of lawyers and lobbyists at Manhattan and DC to come up with ways to define their "income" and tax burden away. However, the buildings they work in, whether owned by themselves or someone else, could far more easily be taxed.

Property tax is also much more progressive than an income tax. The poor and even the middle class bourgeoisie "own" relatively little property (if you account for morgages) while the wealthy simply cannot hide their income producing property. Wherever it resides, it could be taxed by the authorities even if it's "smurfed" into smaller increments.

Can the rich still flee overseas, in effect, for cheaper tax rates on property they hold there? Certainly. But then they'll pay higher rates effectively in inflation and deflation since as more property is bought up overseas it would increase the rate it costs for them to buy there while decreasing it here. (This is largely happening here but the government is spending trillions reinflating the real estate bubble.)

c. j. acworth| 5.23.12 @ 8:23AM

For folks like Obama and his crew it isn't about revenue it's about "fairness", or "social justice" or some such. The fact that high taxes do not raise revenue and drive jobs overseas is is irrelevant to them. "Everybody benefits when you spread the wealth around" as he famously said to Joe the Plumber.

Cobalt| 5.23.12 @ 8:59AM

As usual, in the United States the middle class gets screwed.

We will eventually have a tax on consumption forced upon us, and this will be in addition to the income tax we pay now.

This will be a VAT (value-added tax) like Europe employs to generate revenue.

Obamacare is going to be real expensive, and a VAT will be very attractive to our dear government. Also, at some point, we are going to have the rationing of health-care forced upon us.

We are screwed.

Appleby| 5.23.12 @ 11:10AM

We have HST (which is a VAT type hoodoo) on us in Ontario, and it has spawned the Seven Last Words of Canada: "I will buy it in the States."

TrueBlue | 5.23.12 @ 11:21AM

You say it like it only happens here. Same thing happens in Europe. Of course, in most other parts of the world there is no middle class, you're either the ruler or the peon, which is where we're headed.

Indy| 5.23.12 @ 7:43PM

The VAT is my worry. Not one candidate running used the campaign to force Romney into a firm "NO" on the VAT and the media did nothing, even Fox didn't ask a question on this, too much on social issues. The WSJ had a piece in Januray which raised the red flag...Romney has never ruled out a VAT. Your post raises one of my biggest concerns. First we must vote BHO out of office, vote for as many conservatives as we can and we will have to work hard to force Romney to conservative positions. There is nothing wrong with lining up a 2016 challenger early if his progressive side drives the agenda. Oh wait, Romney said he was severely conservative so nothing to worry about...

I wish Dr. Sowell had run for office.

Peter Pumpkin Eater| 5.23.12 @ 10:40AM

American business executives compete everyday in a global marketplace.

American policymakers do not, but they should.

I live in a foreign jurisdiction with salaries and corporate profits taxed at a flat 17%, with no capital gains tax, no dividend tax and no estate tax.

Tax evasion is minimal, government coffers are overflowing and let's not even mention the relief of completing a one-page tax form.

American government policy must COMPETE on tax policy and regulations, but as the John Wayne character in John Ford's classic Western, The Searchers, says, "That'll be the day".

Petronius| 5.23.12 @ 12:07PM

Most people only know one thing about money. It's for spending. That includes all politicians. And knowledge of economics, as I said many times is summed up in three words; have, get, and benefit. Nobody talks about Earning or Value. The fact is, the only free markets which are unregulated are the ones involving luxury goods and new gadgets from tech companies that the pols haven't taxed or restricted yet.
But the problem with the income tax is that it was and is designed to prevent the middle and lower classes from accumulating wealth. This leads the lower class to look to taxation as a weapon of social reprisal. They believe that "the rich" should give it to them or pay them like they pay themselves. It's the sand box mentality. These people should not be allowed to "get ahead" of them, or taxation. And no argument will penetrate that predisposition. There is only one solution. End the income tax and all entitlement spending except for Veterans and those who cannot make a living due to infirmities. This situation will only worsen until we either quit subsidizing peoples deficiencies or hit bottom. And the way they vote, the latter will come first.

Trinacria| 5.23.12 @ 3:27PM

Spot on, Petronius, all the way up to the point where you granted exceptions for entitlement spending. Exceptions, unfortunately, always prove to be the crack in the door that gets exploited to the point where the masses eventually make their way in.

It sounds harsh (hell, it might even be harsh), but there are other viable alternatives for caring for those who are unable to care for themselves. With respect to Veterans, they have performed an invaluable service to the nation; therefore, anything they receive is earned and - in my view - emphatically not an entitlement.

Petronius| 5.23.12 @ 4:13PM

Point taken. Just didn't want to leave an opening for the pitymongers.

Trinacria| 5.23.12 @ 7:04PM

I hear you, brother...

Jimbo the Coastie| 5.23.12 @ 12:38PM

Can someone please send a copy of the book to Kevin Williamson at National Review? Last time I looked, he had bought into the whole higher tax rate arguement by trying to distinguish between income & capital gains revenues to the federal government. Since money is fungible, it'll just go where its loved and people will structure their income & assets to avoid taxation. It usually takes time, but make no mistake, they make the changes they need to make to lower their tax bills.

ansonheath| 5.23.12 @ 12:53PM

The people aren't stupid. They might be ignorant, because all they hear is the Dem argument. If anybody is stupid, it is the GOP. They haven't been able to make a cogent argument in understandable language since Ronaldus Magnus made it. Example: Try to make sense from anything Boehner or McConnell says. You'll fall asleep within 30 seconds!

Indy| 5.23.12 @ 7:48PM

The sad thing is, we can make all of the arguments for them, all they have to do is study just a little. The problem as you noted is the leadership, look at these charts, they paint the picture, this is an easy argument. Paul Ryan, Rand Paul, Mike Lee get it as do a few others. Argh, our Republic is falling off the cliff and we are stuck with Boehner and McConnell, they are a huge part of the problem.

http://directorblue.blogspot.c.....every.html

Boehner / McConnell are too weak to even take on Eric Holder, the most corrupt AG in my lifetime.

Pat| 5.23.12 @ 2:47PM

Yesterday, one of the usual suspects among the media interviewed a middle aged Greek woman about Greece leaving the Euro zone or embracing a hated austerity program. Her prescription was simple and straightforward: “Tax the rich more, they could easily solve Greece’s problems if they paid their fair share”. Discounting the Greek accent, sounds like an Obama solution proposed by one of Chief Obama’s many village idiots.

And why not, except for stuffing grape leaves, this Greek lady could easily be one of Obama’s constituents. She’s poor, she’s bewildered and she’s angry she can’t have her kinder and gentler socialism without complex problems forcing her to think. Solutions for such people are always simple because they’re simple people. Yet their vote counts the same as the brightest think tank scholar.

When our world was less complex, such simpletons were considered the “salt of the earth”. Their peasant wisdom saw through to the core of our problems and their words were valued. Nowadays, they and their peasant wisdom are more like “dust bunnies under the couch”. They want what they want and their elected leaders should quickly arrange it for them. Democracy means their voices must be heard and heeded, even when they have nothing much to say. And they’re fully conscious of being foot soldiers in the “Class Warfare” army – no regrets, no concerns beyond their immediate needs.

Their intellectual ancestors brought down Russian Tsars and French aristocrats, they executed their wealthy oppressors, along with their oppressor’s wives and children and then announced to the world a glorious new day had arrived. But being simple, they found it far easier to execute Russian princes then to make self-government work. Because self-government means your leaders can’t simply fix things, you the citizen must decide between options, weigh ideas and take risks. Where’s the fun in that? So, the solutions never really change, each new generation simply re-discovers them.

Petronius| 5.23.12 @ 4:18PM

Oh so Right Pat
People do not care how heavily their wallets are taxed so long as their minds are not.
The other book to recommend is The Great Roob Revolution, by Roger Price: Random House, 1970.

Purp| 5.23.12 @ 9:37PM

What an idiotic train of events and nonsense. Lower tax rates didn't create more tax revenue. It never does.
What created more tax revenues in the 1920's was the bubble economy that, wait for it, that led directly to the Great Depression when the bubble burst. Lax regulation, bubble economics and financial bubble bursting - Hmmmm, now where I have heard that lately? Where was it again - oh, yeah, the GW Bush crash of 2008, when 2 bubbles burst.
Will people never learn? OMG how dumb.

Riff Raff| 5.24.12 @ 12:34AM

Your comment is false. Demonstrably false. As is everything you claim you know about economics. Get a clue.

Bob S| 5.24.12 @ 3:14AM

You mean the GW Bush crash caused by the subprime mortgage crisis, which only happened because liberal politicians strong-armed banks to give loans to people who had a snowball's chance in hell of paying them off?

Bob S| 5.24.12 @ 3:12AM

"Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve."

Hello, is anyone in Congress? Anyone? Anyone? Bueller?

allen69 | 5.30.12 @ 10:53AM

A couple of diabetic sneakers are a lesser amount of high-priced than a stay in hospital to deal with troubles due to sneakers that don't in shape very well.What's the distinction involving a gratis pair of person struggling from diabetes footwear and shoes or boots which might http://www.freerunningnike.org.....-c-10.html be keep acquired? To begin with, only diabetics are generally professional to get these kind of no cost Medicare sneakers.

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