12:30 PM EDT, September 22, 2011
In his latest backpedaling to raise taxes on the rich, President Obama says "This is not class warfare — it's the math."
So let's look at the math, together with history.
First the math: Obama's "Buffett Rule" millionaire's tax fails to take into account that Berkshire-Hathaway CEO Warren Buffett by choice draws a salary of only $100,000, which is subject to the regular income taxes we all pay.
But the majority of Mr. Buffett's income comes from capital gains and dividends on the investments he owns, which are taxed at 15 percent — as they should be, since that tax is on money that has already been taxed once before.
Now the history: After the 73 percent tax rate on the highest income earners was cut to 24 percent in 1925 — on the advice of former Treasury Secretary Andrew W. Mellon — tax revenues actually increased.
At the same time, investment returned to private businesses, producing high output, rising incomes and more jobs. The annual unemployment rate over the following four years never exceeded 4.2 percent.
Moreover the recovery from the 1920-1921 recession was quick and without any other government intervention.
Mellon added: "Just as labor cannot be forced to work against its will, so it can be taken for granted that capital will not work unless the return is worthwhile. It will continue to retire into the shelter of tax-exempt bonds, which offer both security and immunity from the tax collector."
In other words, high tax rates that many people avoid paying do not necessarily bring in as much revenue as lower tax rates that more people are in fact willing to pay.
The math is evident: There were 206 people who reported annual taxable incomes of $1 million or more in 1916. But as tax rates rose, that number fell to 21 by 1921. After a series of tax-rate cuts in the 1920s, the number of individuals reporting taxable incomes of $1 million or more rose again, to 207 by 1925.
The actual results of the tax cuts in the 1920s were very similar to the results of later tax-rate cuts during the Kennedy, Reagan and George W. Bush administrations — rising output, rising employment, rising incomes and rising government revenues, even though the tax rates had been lowered.
Why does the present administration ignore the lessons history has taught us? Can it be its purpose isn't to help the economy but to push into voters' minds a false image of the GOP as obstructionists in a "do-nothing Congress" before the 2012 elections?
Benedict Frederick Jr., Pasadena
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