Mellon's invention of the Laffer Curve

[william the wie]

Banker Andrew Mellon, secretary of the Treasury 1921-32 implemented a series of tax cuts to increase investment and tax revenues and 1921-27 it worked. In the book I'm writing I am arguing that increasing investment has several bad effects:

Overinvestment.

malinvestment and fraud.

misinvestment

and investment can and usually does outstrip the learning curve for new skills.

In the 1920s speeding up the adaptation of electricity, cars, planes, radio and movies led to a crash of epic proportions.

In 1983-present the product life cycle has sped up the product life cycle to the point where products go obsolete before reaching maturity and bubbles:

we have had three real estate bubbles 1983-9, 1993-2006 and late 2009-?

Four stock market bubbles: 1982-7, 1993-2000, 2003-7 and 2009-?

I am arguing that US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies.

Being the fourth largest country physically, third largest in population and largest economically our only true comparables are China, Brazil, Russia and India which doesn't do us a whole lot of good, being too small a sample and a lot poorer. (Japan nearly makes the cut.)

What that small sample does tell us is that the US is an extreme outlier and therefore more politically fragile than we would like to think.

Staying in the pack on tax policy among wealthy nations is what I think should be our tax policy goal. rebuttals?

 

[Publius1787]

Mellon was a great man who's character was assassinated by FDR and was only cleared after his death. He's been a punching bag for liberals ever since because his legacy goes against the liberal conventional thinking on progressive taxation and his policies worked.
Book Discussion on [Mellon: An American Life] - C-SPAN Video Library

Andrew W. Mellon - Wikipedia, the free encyclopedia

The administration of President Franklin D. Roosevelt subjected Mellon to intense investigation of his personal income tax returns. The US Justice Department empaneled a grand jury, which declined to issue an indictment. Roosevelt hated Mellon, as the embodiment of everything he thought was bad about the 1920s; Mellon vehemently denied the charges. A two-year civil action beginning in 1935, dubbed the "Mellon Tax Trial", eventually exonerated Mellon, albeit several months after his death.

Mellon plan

Mellon came into office with a goal of reducing the huge federal debt from World War I. To do this, he needed to increase the federal revenue and cut spending. He believed that if the tax rates were too high, then the people would try to avoid paying them. He observed that as tax rates had increased during the first part of the 20th century, investors moved to avoid the highest rates—by choosing tax-free municipal bonds, for instance. As Mellon wrote in 1924:[5]


The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.

If the rates were set more reasonably, taxpayers would have less incentive to avoid paying. His theory was that by lowering the tax rates across the board, he could increase the overall tax revenue. This is similar to the Laffer curve.

Andrew Mellon's plan had four main points:
1.Cut the top income tax rate from 77 to 24 percent – predicting that large fortunes would be put back into the economy.
2.Cut taxes on low incomes from 4 to 1/2 percent – tax policy "must lessen, so far as possible, the burden of taxation on those least able to bear it."
3.Reduce the Federal Estate tax – large income taxes tempted the wealthy to shift their fortunes into tax-exempt shelters.
4.Efficiency in government – lower tax rates meant few tax returns to process by few government workers; cutting the actual size of paper bills to fit into wallets saved expenses in paper and ink.

Mellon believed that the income tax should remain progressive, but with lower rates than those enacted during World War I. He thought that the top income earners would only willingly pay their taxes if rates were 25% or lower. Mellon proposed tax rate cuts, which Congress enacted in the Revenue Acts of 1921, 1924, and 1926. The top marginal tax rate was cut from 73% to 58% in 1922, 50% in 1923, 46% in 1924, 25% in 1925, and 24% in 1929. Rates in lower brackets were also cut substantially, relieving burdens on the middle-class, working-class, and poor households.

By 1926 65% of the income tax revenue came from incomes $300,000 and higher, when five years prior, less than 20% did. During this same period, the overall tax burden on those that earned less than $10,000 dropped from $155 million to $32.5 million.[6]

Mellon also championed preferential treatment for "earned" income relative to "unearned" income. As he argued in his 1924 book, Taxation: The People's Business[7]


The fairness of taxing more lightly incomes from wages, salaries and professional services than the incomes from business or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it. In the other, the source of the income continues; the income may be disposed of during a man's life and it descends to his heirs.

Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy, and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earning capacity is at an end.[8]

Mellon's policies helped reduce the overall public debt (the national debt skyrocketed from $1.5 billion in 1916 to $24 billion in 1919 because of World War I obligations) from $33 billion in 1919 to about $16 billion in 1929,[9] but then the Depression caused it to rise again because of reduced revenue and increasing spending. The top tax rate went to 80% by 1935 and the federal government increased excise taxes in an attempt to make up for the lost revenue.[6]

Note How Mellon got the National Museum of Art started and FDR, who hated Mellon, scurried on out to get some credit. He kind of reminds me of Obama.

 

[william the wie]

Yeah, Mellon did well at first but he went a little too far by not considering the effects on innovation and fraud of increasing investment rates so fast. now it is corporate tax rates that have become excessive. I advocate a reduction of maximum federal corporate income tax rates to 24% and a five year wait before reducing further to the middle of the pack.

I also think that maximum federal, state and local income tax rates combined reduced only at the federal level is the right middle of the pack target for maximum employment.

The 1% argument is asinine as in $250,000 for a family of four in NYC is barely get by money for two teachers and their kids. That's serious money 10 miles from the beach in FL.

 

[Publius1787]

Yeah, Mellon did well at first but he went a little too far by not considering the effects on innovation and fraud of increasing investment rates so fast. now it is corporate tax rates that have become excessive. I advocate a reduction of maximum federal corporate income tax rates to 24% and a five year wait before reducing further to the middle of the pack.

I also think that maximum federal, state and local income tax rates combined reduced only at the federal level is the right middle of the pack target for maximum employment.

The 1% argument is asinine as in $250,000 for a family of four in NYC is barely get by money for two teachers and their kids. That's serious money 10 miles from the beach in FL.

Will this be a historical argument (your book), an economic argument, or a policy/political argument?

 

[william the wie]

Yeah, Mellon did well at first but he went a little too far by not considering the effects on innovation and fraud of increasing investment rates so fast. now it is corporate tax rates that have become excessive. I advocate a reduction of maximum federal corporate income tax rates to 24% and a five year wait before reducing further to the middle of the pack.

I also think that maximum federal, state and local income tax rates combined reduced only at the federal level is the right middle of the pack target for maximum employment.

The 1% argument is asinine as in $250,000 for a family of four in NYC is barely get by money for two teachers and their kids. That's serious money 10 miles from the beach in FL.

Will this be a historical argument (your book), an economic argument, or a policy/political argument?

A bit of all three mostly a rebuttal of the idea that macro-economic policy has anything to do with actual economics. The Lancaster equations that drive military expenditures have to be considered by national governments so there is only one pack of, hopefully enlightened, thugs defending the same turf. The Hobbesian argument that the alternative to one gang running things is gang warfare is a hole in the classical an-cap assumptions of the Austrian school.

 

[Publius1787]

Yeah, Mellon did well at first but he went a little too far by not considering the effects on innovation and fraud of increasing investment rates so fast. now it is corporate tax rates that have become excessive. I advocate a reduction of maximum federal corporate income tax rates to 24% and a five year wait before reducing further to the middle of the pack.

I also think that maximum federal, state and local income tax rates combined reduced only at the federal level is the right middle of the pack target for maximum employment.

The 1% argument is asinine as in $250,000 for a family of four in NYC is barely get by money for two teachers and their kids. That's serious money 10 miles from the beach in FL.

Will this be a historical argument (your book), an economic argument, or a policy/political argument?

A bit of all three mostly a rebuttal of the idea that macro-economic policy has anything to do with actual economics. The Lancaster equations that drive military expenditures have to be considered by national governments so there is only one pack of, hopefully enlightened, thugs defending the same turf. The Hobbesian argument that the alternative to one gang running things is gang warfare is a hole in the classical an-cap assumptions of the Austrian school.

Then it is a policy/political argument. Historical arguments don't leave you much to criticize anything with respect to offering an alternative vision. You can use history to make a political/policy argument but you cannot use a latter day political/policy argument to write history. Economic arguments demand looking at the math and making an assessment but it does not afford you the opportunity to assess to any great deal of accuracy of what should have been before much of the economic data we enjoy today was collected.

In any case, I believe that Libertarians could learn a thing or two about international relations and geopolitics by reading Machiavelli. Libertarian policy can work domestically in a country that has long established security. Internationally, however, there is no such thing as rule of law and all considerations must be taken with respect to this fundamental truth at hand.

 

[william the wie]

I heartily concur but "The Discourses' is a better guide to a free society than "The Prince".

 

[Publius1787]

I heartily concur but "The Discourses' is a better guide to a free society than "The Prince".

I don't mean to get too far off topic, but the Discourses are great for their day with respect to domestic policies, but the Prince is more applicable to foreign policy. Remember that they lives in city states during their day and international relations meant simply dealing with the next city over. In any case, let me know if I am clogging up your thread and I'll delete my posts. it was not my intent.

 

[expat_panama]

...arguing that increasing investment has several bad effects: Overinvestment. malinvestment and fraud. misinvestment and investment can and usually does outstrip the learning curve for new skills...

It'd be good to know what we're talking about when we say 'investment'; I'd always thot the word refered to private capital expansion.

...electricity, cars, planes, radio and movies led to a crash of epic proportions...

The word 'led' is critical here; if it means 'preceded' that's obvious but if it means 'channelled events into' then the idea if controversial to say the least.

...US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies...

Please share numbers or more info here as to whether we're talking hikes, cuts, and how big.

 

[william the wie]

...arguing that increasing investment has several bad effects: Overinvestment. malinvestment and fraud. misinvestment and investment can and usually does outstrip the learning curve for new skills...

It'd be good to know what we're talking about when we say 'investment'; I'd always thot the word refered to private capital expansion.

...electricity, cars, planes, radio and movies led to a crash of epic proportions...

The word 'led' is critical here; if it means 'preceded' that's obvious but if it means 'channelled events into' then the idea if controversial to say the least.

...US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies...

Please share numbers or more info here as to whether we're talking hikes, cuts, and how big.

Yes, private investment as in the more than 100 carmakers in mid 1929 vs. the three US brands now. As to Radio RCA was 75% owned by three appliance makers most famously GE.

Joe Kennedy was the most famous of a long list of stock operators who ran the 25% of stock available to the public up and pretty much annihilated short sellers up until June of 1929 if memory serves. Likewise the first talkie was in 1929. But the use of radios and electricity in general set off an internet style boom including the first car radios. This in turn meant that when RCA became vulnerable in August of 1929 it was just a matter of time until the market crashed.

Supply outran demand in all of the new industries as saturation points were hit in all of the high tech areas. Similar shake outs were happening in planes and movie studios that could not afford to upgrade to audio. Radio was apparently the key high tech industry that drove the electification that made movie theaters and home appliances such boom industries and RCA was the driver of radio and electrification. So, RCA channeled the bust and the radio pool bailed at or very near the 90% saturation point when a crash was inevitable.

As to taxes slow gradual declines in rates to about 20% top marginal federal corporate and
individual rates. but it takes about 5-10 years to adjust attitudes to each drop to achieve higher revenues from lower rates and those revenues do not necessarily come from the same tax as is being cut. A cut in corporate taxes can easily lead to higher aggregate wages instead of higher corporate income. The law of unintended consequences also governs smart actions as well as stupid ones.

A good edit post on your part and thank you. Got to get in the kitchen and put up the stuff my wife can't reach since her back surgery. I hope we can get back to this tomorrow.

You too Publius and do focus on what doesn't make sense to you or is somewhat obscure. Thanks.

 

[oldfart]

Banker Andrew Mellon, secretary of the Treasury 1921-32 implemented a series of tax cuts to increase investment and tax revenues and 1921-27 it worked. In the book I'm writing I am arguing that increasing investment has several bad effects:

Overinvestment.

malinvestment and fraud.

misinvestment

and investment can and usually does outstrip the learning curve for new skills.

In the 1920s speeding up the adaptation of electricity, cars, planes, radio and movies led to a crash of epic proportions.

In 1983-present the product life cycle has sped up the product life cycle to the point where products go obsolete before reaching maturity and bubbles:

we have had three real estate bubbles 1983-9, 1993-2006 and late 2009-?

Four stock market bubbles: 1982-7, 1993-2000, 2003-7 and 2009-?

I am arguing that US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies.

Being the fourth largest country physically, third largest in population and largest economically our only true comparables are China, Brazil, Russia and India which doesn't do us a whole lot of good, being too small a sample and a lot poorer. (Japan nearly makes the cut.)

What that small sample does tell us is that the US is an extreme outlier and therefore more politically fragile than we would like to think.

Staying in the pack on tax policy among wealthy nations is what I think should be our tax policy goal. rebuttals?

I think when you check out the numbers, the United States is in the middle of effective corporate tax rates and one of the lowest personal effective tax rates in the OECD, which makes better comparison IMHO. There is not a lot of variation in tax policies in the Euro zone, a bit more in the EU. OECD and EU make better comparables than BRICs.

 

[CrusaderFrank]

Banker Andrew Mellon, secretary of the Treasury 1921-32 implemented a series of tax cuts to increase investment and tax revenues and 1921-27 it worked. In the book I'm writing I am arguing that increasing investment has several bad effects:

Overinvestment.

malinvestment and fraud.

misinvestment

and investment can and usually does outstrip the learning curve for new skills.

In the 1920s speeding up the adaptation of electricity, cars, planes, radio and movies led to a crash of epic proportions.

In 1983-present the product life cycle has sped up the product life cycle to the point where products go obsolete before reaching maturity and bubbles:

we have had three real estate bubbles 1983-9, 1993-2006 and late 2009-?

Four stock market bubbles: 1982-7, 1993-2000, 2003-7 and 2009-?

I am arguing that US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies.

Being the fourth largest country physically, third largest in population and largest economically our only true comparables are China, Brazil, Russia and India which doesn't do us a whole lot of good, being too small a sample and a lot poorer. (Japan nearly makes the cut.)

What that small sample does tell us is that the US is an extreme outlier and therefore more politically fragile than we would like to think.

Staying in the pack on tax policy among wealthy nations is what I think should be our tax policy goal. rebuttals?

Your book sucks and is as wrong as Krugman. You should ask Krugman to write the forward and mention how "insightful" and "accurate" your fucking nonsense is

 

[william the wie]

Banker Andrew Mellon, secretary of the Treasury 1921-32 implemented a series of tax cuts to increase investment and tax revenues and 1921-27 it worked. In the book I'm writing I am arguing that increasing investment has several bad effects:

Overinvestment.

malinvestment and fraud.

misinvestment

and investment can and usually does outstrip the learning curve for new skills.

In the 1920s speeding up the adaptation of electricity, cars, planes, radio and movies led to a crash of epic proportions.

In 1983-present the product life cycle has sped up the product life cycle to the point where products go obsolete before reaching maturity and bubbles:

we have had three real estate bubbles 1983-9, 1993-2006 and late 2009-?

Four stock market bubbles: 1982-7, 1993-2000, 2003-7 and 2009-?

I am arguing that US tax policy should be to have average slightly plus marginal tax rates compared to other trillion plus economies.

Being the fourth largest country physically, third largest in population and largest economically our only true comparables are China, Brazil, Russia and India which doesn't do us a whole lot of good, being too small a sample and a lot poorer. (Japan nearly makes the cut.)

What that small sample does tell us is that the US is an extreme outlier and therefore more politically fragile than we would like to think.

Staying in the pack on tax policy among wealthy nations is what I think should be our tax policy goal. rebuttals?

I think when you check out the numbers, the United States is in the middle of effective corporate tax rates and one of the lowest personal effective tax rates in the OECD, which makes better comparison IMHO. There is not a lot of variation in tax policies in the Euro zone, a bit more in the EU. OECD and EU make better comparables than BRICs.

While the Euro zone is a possible comp as is Japan, treating small and mostly homogenous countries such as Austria and similar OECD and EU nations as being comparable to the US and China when it comes to economic policy is a bit of a stretch.

Even seemingly trivial differences in starting state can make a huge difference in outcomes. To take my own two comps of Mellon vs. Laffer/Reagan using the same policy to get radically different results. The reason I called radio a driver of the 1929 crash is that off-grid radios of the time used wet cell batteries that exposed pets and children to dilute acid. So, in Mellon's case, he knowingly or unknowingly, triggered a much stronger motivation than did Reagan of getting wet cells out of houses with pets and/or small children and safer metered electricity into those houses.

I know you have mentioned running a restaurant chain so I suspect you have more upto date information than I do about the cost of running wiring to a scenic location that will pack in the customers. Last time I ran the numbers on such a project at Lake Martin it was close to being a deal killer even with wealthy buyers. The 1920s electrification boom was a huge driver of investment and consumption not to mention the housing bubble of 1923-6.

And thanks for the post.

 

[jwoodie]

What is the point of this discussion? That U.S. policy should always be to maximize tax revenues?