How Even Scholars Misread 90 Years Of Tax-Cut History

How Even Scholars Misread 90 Years Of Tax-Cut History
By THOMAS SOWELL
Posted 07/19/2011 06:49 PM ET

The arguments of the proponents and opponents of tax-rate reductions have been arguments about two fundamentally different things:

(1) The distribution of existing incomes and existing tax liabilities.

(2) Incentives to increase incomes by reducing tax rates, so as to get individuals and institutions to take their money out of tax shelters and invest it in the economy.

Proponents and opponents of tax-rate reductions not only had different arguments, they were arguments about very different things, and the two arguments largely went past each other untouched.

Empirical evidence on what happened to the economy in the wake of those tax cuts in four different administrations over a span of more than 80 years has also been largely ignored by those opposed to what they call "tax cuts for the rich."

Confusion between reducing tax rates on individuals and reducing tax revenues received by the government has run through much of these discussions over these years.

Famed historian Arthur M. Schlesinger Jr., for example, said that although Andrew Mellon, secretary of the treasury from 1921 to 1932, advocated balancing the budget and paying off the national debt, he "inconsistently" sought "reduction in tax rates."

Nor was Schlesinger the only highly regarded historian to perpetuate economic confusion between tax rates and tax revenues. Today, widely used textbooks by various well-known historians have continued to misstate what was advocated in the 1920s and what the actual consequences were.

According to the textbook "These United States" by Irwin Unger, Mellon, "a rich Pittsburgh industrialist," persuaded Congress to "reduce income tax rates at the upper-income levels while leaving those at the bottom untouched."

Thus "Mellon won further victories for his drive to shift more of the tax burden from the high-income earners to the middle and wage-earning classes."

But hard data show that, in fact, both the amount and the proportion of taxes paid by those whose net income was no higher than $25,000 went down between 1921 and 1929, while both the amount and the proportion of taxes paid by those whose net incomes were between $50,000 and $100,000 went up ­ and the amount and proportion of taxes paid by those whose net incomes were over $100,000 went up even more sharply.

Another widely used textbook, co-authorized by a number of distinguished historians, two of whom won Pulitzer Prizes, said of Mellon:

"It was better, he argued, to place the burden of taxes on lower-income groups" and that a "share of tax-free profits of the rich, Mellon reassured the country, would ultimately trickle down to the middle- and lower-income groups in the form of wages and salaries."

http://www.investors.com/NewsAndAnalysis/Article/578785/201107191849/How-Even-Scholars-Misread-90-Years-Of-Tax-Cut-History.htm