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Tax cuts for the rich?

June 3, 2016

President Obama’s speech on June 1 at Concord Community High School
Elkhart, Indiana is worth reading. It contains a defense of his administration’s policies and a critique of Republican policies.

June 1 Speech, Elkhart, Indiana

This passage in a very long speech caught my attention because it touches on arguments against Supply-side tax cuts that have been derided as “trickle down” economics:

“….the Republican nominee for President’s tax plan would give the top one-tenth of 1 percent — not the top 1 percent, the top one-tenth of 1 percent — a bigger tax cut than the 120 million American households at the bottom.”

During the Administration of Warren Harding, Secretary of the Treasury Andrew Mellon initiated a policy that he called “scientific taxation,” in essence a strategy for tax cuts in order to hasten the recovery of the American economy from the excesses of World War I.

With U.S. entrance into World War I, the top rate was pushed up to 67 percent in 1917 and 77 percent in 1918. The top rate was dropped slightly to 73 percent in 1919. During this period, real GNP barely grew in 1913 (0.9 percent), and then declined in 1914 and 1915 (-4.4 percent and -0.9 percent, respectively). After the war (with fighting ending at the end of 1918), the U.S. economy went into a depression, with real GNP declining by 3.6 percent in 1919, 4.4 percent in 1920, and 8.7 percent in 1921.

During the 1920 Presidential election campaign,  Warren Harding advocated and urged fiscal responsibility through reducing federal spending, substantial tax reform, and reducing regulation on business.  From 1921 to 1925, the top personal income tax rate was cut from 73 percent to 25 percent, with the lowest rate cut from 4 percent to 1.125 percent. But there was more, as a much lower capital gains tax was implemented, so the top individual capital gains tax rate plummeted from 73 percent in 1921 to 12.5 percent in 1922. As for federal spending, wartime expenditures registered $18.49 billion in 1919, and subsequently fell to $5.06 billion by 1921. But spending continued to decline, hitting $2.86 billion in 1927. When Coolidge left office in 1929, federal outlays stood at $3.13 billion, which was down by 38 percent compared to when Harding took office.

Here’s the rub. Mellon’s “scientific taxation” reduced taxes on the wealthiest Americans and it worked!  That era is called the “Roaring Twenties.” When the next President of the United States takes office in 2017, will we call the next four to eight eight years the “Roaring Twenties” of the 21st Century or will the American economy slip into depression?

For more information, read this essay by Emeritus Professor of Economics at Marquette University, Dr. W. Gene Smilley.

Smilley, FEE, October 1, 1996

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