On Taxation

The Revenue Act of 1932 was the single largest peacetime tax increase up to its time. It raised the top rate from 25% to 63%, doubled the estate tax, increased the corporate tax 15%, and ushered in taxes on numerous items that had never before been charged. A tax on gasoline, now taken for granted, began that year. Sales taxes were imposed on candy, toiletries, refrigerators, tires, cars, checks, stamps, telephone messages and numerous other items. All this was intended to save the country from the first deficit to occur in ten years. The loss of revenue from the Smoot-Hawley Tariff combined with the repeated hemorrhage of expenditures on everything from “work-sharing” programs to Veteran’s bonuses to maintaining wage and price rates to launching the National Credit Corporation and other government-driven actions gave the country a $2 billion deficit in 1931. Hoover had to correct the correctives by stopping the outflow of capital and “balance” the budget with more revenues. In marked contrast to 1921, 1922, 1924, 1926 and 1928, the “balance” was to be achieved not by cutting down the spending of government but by raising revenue to meet those expenditures. In his annual message to Congress in December of 1931 he presented the coming rate increases as the measure to restore “balance” and “cushion the violence of liquidation.” As Secretary Mellon had urged though, liquidation was exactly the medicine required for a sound economy to return. The marked differences between the President and his Treasury Secretary by this time were publicly known. President Hoover no longer permitted Mellon to set policy, as he was allowed to do under President Coolidge. Instead, he was instructed, managed and kept on a shortening leash. It was the Assistant Secretary Ogden Mills who had the President’s ear and confidence. Mellon was no more than a face to “sell” the tax increases. He had lost the internal battle in Hoover’s Administration for continuing what had been achieved during his two predecessors. Virtually being shown the door, Mr. Mellon was about to experience the price of crossing Hoover: Go before Congress and propose what would become the rate increases of 1932. He, with Ogden Mills as the principal speaker, did. By then, however, no one was interested in what Mr. Mellon thought on the subject. He was a liability now to the Administration. The Democrat majority in Congress would pass the Act decisively and while it stopped the flow of capital, Mellon’s predictions for high rates would come true. Revenue fell even more to $1.9 billion, suffering spread more equally and a decade of tax reform was repealed. But, as Mr. Cannadine observes in his biography of Mellon, “[E]ven before the measure was passed, Mellon had ceased to be even nominally responsible for it” (p.449). Commenting on what the looming decisions of Congress from his embattled friend’s department, former President Coolidge recalled the danger at work when taxes are increased, “Secretary Mellon has convincingly stated the approaching necessity of devising a tax system when business becomes normal to make national revenues more nearly depression proof. Assessing taxes where they can best be borne is sound enough. The rich are necessarily the immediate source of the income taxes. But mixed up with our tax laws have been certain social theories for dispossessing the rich in the name of reform rather than for revenue.” The former President then elaborated a warning that rings true in our current “tax the rich” redistribution climate, “Now, when we especially need surplus money for relief purposes, we find Treasury receipts greatly reduced. The vacillating income of persons and corporations does not supply certain sources of revenue. Taxes should provide a sure income and a balanced budget for the government without reference to social theories. It would be cheaper for the people of small incomes to pay one direct tax to the government than many indirect taxes on what they consume. A broad base of income assessments enabled Great Britain to balance its recent budget with little increased taxes. If government is to be able to relieve future depressions and encourage business it must first provide a revenue system that will not itself be depressed and also demonstrate ability to pay its own bills from current receipts” (May 28, 1931).

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