Second Of Three Parts
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."
What Mellon actually said was that tax policy "must lessen, so far as possible, the burden of taxation on those least able to bear it." He therefore proposed sharper percentage cuts in tax rates at the lower-income levels — and that was done.
Mellon also proposed eliminating federal taxes on movie tickets, because such taxes were paid by "the great bulk of the people, whose main source of recreation is attending the movies in the neighborhood of their homes." In short, Mellon advocated the direct opposite of the policies attributed to him.
The very idea that profits "trickle down" to workers depicts the economic sequence of events in the opposite order from that in the real world. Workers must first be hired and paid before there is any output produced to sell for a profit, and independently of whether that output subsequently sells for a profit or at a loss.
With investments, whether they lead to a profit or a loss can often be determined only years later, and workers have to be paid in the meantime, rather than waiting for profits to "trickle down" to them.
The real effect of tax-rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.
Those who attribute a trickle-down theory to others are attributing their own misconception to others — including a highly successful businessman like Andrew Mellon — as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect.
There is no need to presume that the scholars who wrote these history textbooks were deliberately lying, in order to protect a vision. They may simply have relied on a peer consensus so widely held and so often repeated as to be seen as "well-known facts" requiring no serious re-examination.
The results show how unreliable peer consensus can be, even when it is a peer consensus of highly intellectual people, if those people share a very similar vision of the world and treat its conclusions as axioms rather than as hypotheses that need to be checked against facts.
These history textbooks may also reflect the economic illiteracy of even leading scholars outside the field of economics, who nevertheless insist on reaching conclusions on economic issues.
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=578785&p=1
No comments:
Post a Comment