The Purpose of Tax CutsSpeaking of tax rates, in December 1923, Coolidge and Treasury Secretary Andrew Mellon launched a campaign to lower top rates from the fifties to the twenties. Mellon believed, and informed Coolidge, that these cuts might result in additional revenue. This was referred to as “scientific taxation”—an early formulation of the Laffer Curve. And Coolidge passed the word on: “Experience does not show that the higher rate produces the larger revenue. Experience is all the other way,” he said in a speech in early 1924. “When the surtax on incomes of $300,000 and over was but 10 percent, the revenue was about the same as it was at 65 percent.”
Mellon and Coolidge did not win all they sought. The top rate of the final law was in the forties. But even this reduction yielded results—more money flowing into the Treasury—suggesting that “scientific taxation” worked. By 1926, Coolidge was able to sign legislation that brought the top marginal rate down to 25 percent, and to do so retroactively.
Today’s Republicans tend to take pleasure when the Laffer Curve is vindicated and more money flows into government as a result of tax cuts. Indeed, this idea of “scientific taxation” is often used to attempt to get Democrats to go along with tax cuts, as if those cuts are an end in themselves. By contrast, the specter of increased federal revenue rendered Coolidge anxious, personally and politically—so much so that he considered foregoing the rate cuts: “While I am exceedingly interested in having tax reduction . . . it can only be brought about as a result of economy,” he said at one point. He would not put tax cuts before budget reduction, insisting on twinning the two goals. To underscore the point, twin lion cubs given to Coolidge by the mayor of Johannesburg were named “Budget Bureau” and “Tax Reduction.”
In short, Coolidge didn’t favor tax cuts as a means to increase revenue or to buy off Democrats. He favored them because they took government, the people’s servant, out of the way of the people. And this sense of government as servant extended to his own office. Senator Selden Spencer once took a walk with Coolidge around the White House grounds. To cheer the President up, Spencer pointed to the White House and asked playfully, “Who lives there?” “Nobody,” Coolidge replied. “They just come and go.”
This view of government and his attendant insistence on economy made Coolidge few friends in Washington—a fact illustrated by notes kept by White House usher Ike Hoover. These notes record the excuses given by lawmakers for not attending breakfasts hosted by Coolidge at the White House: “Senator Heflin: Regrets, sick. Senator Norris: Unable to Locate. Senator Pittman: Regrets, sick. Senator Reed, of Missouri: Regrets, sick friend.” But as unpopular as he was in Washington, Coolidge proved enormously popular with voters. In 1924, the Progressive Party ran on a platform of government ownership of public power and a return to government ownership of railroads. Many thought the Progressive Party might split the Republican vote as it had in 1912, handing the presidency to the Democrats. As it happened, Progressive candidate Robert LaFollette indeed claimed more than 16 percent of the vote. Yet Coolidge won with an absolute majority, gaining more votes than the Progressive and the Democrat combined. And in 1928, when Coolidge decided not to run for reelection despite the urging of party leaders who looked on his reelection as a sure bet, Herbert Hoover successfully ran on a pledge to continue Coolidge’s policies.
Unfortunately, Hoover didn’t live up to his pledge. Critics often confuse Hoover’s policies with Coolidge’s and complain that the latter did not prevent the Great Depression. That is an argument I take up at length in my previous book, The Forgotten Man, and is a topic for another day. Here let me just say that the Great Depression was as great and as long in duration as it was because, as economist Benjamin Anderson put it, the government under both Hoover and Franklin Roosevelt, unlike under Coolidge, chose to “play God.”
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Beyond the inspiration of Coolidge’s example of principle and consistency, what are the lessons of his story that are relevant to our current situation? One certainly has to do with the mechanism of budgeting: The Budget and Accounting Act of 1921 provided a means for Harding and Coolidge to control the budget and the nation’s debt, and at the same time gave the people the ability to hold someone responsible. That law was gutted in the 1970s, when it became collateral damage in the anti-executive fervor following Watergate. The law that replaced it tilted budget authority back to Congress and has led to over-spending and lack of responsibility.
A second lesson concerns how we look at tax rates. When tax rates are set and judged according to how much revenue they bring in due to the Laffer Curve—which is how most of today’s tax cutters present them, thereby agreeing with tax hikers that the goal of tax policy is to increase revenue—tax policy can become a mechanism to expand government. The goals of legitimate government—American freedom and prosperity—are left by the wayside. Thus the best case for lower taxes is the moral case—and as Coolidge well understood, a moral tax policy demands tough budgeting.
Finally, a lesson about politics. The popularity of Harding and Coolidge, and the success of their policies—especially Coolidge’s—following a long period of Progressive ascendancy, should give today’s conservatives hope. Coolidge in the 1920s, like Grover Cleveland in the previous century, distinguished government austerity from private-sector austerity, combined a policy of deficit cuts with one of tax cuts, and made a moral case for saying “no.” A political leader who does the same today is likely to find an electorate more inclined to respond “yes” than he or she expects.
http://www.hillsdale.edu/news/imprimis/archive/issue.asp?year=2013&month=02
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