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Lower tax rates are needed to fight deficit

I could not agree more with your recent editorial regarding the debt limit deal ("We need an election," Aug. 2). Tough choices have simply been postponed. What I cannot understand is your persistent support for taxing the rich. Let's take a look at some of the historical factual information on taxation.

In the 1920s, Treasury Secretary Andrew Mellon pointed out that people with high incomes were simply not paying the high tax rates that existed on paper because they were putting their money into tax shelters. After the 73 percent tax rate for high earners was cut to 24 percent in 1925 as Secretary Mellon recommended, tax revenue increased as did investment, income and jobs.

The annual unemployment rate in the ensuing years never exceeded 4.2 percent. Moreover, the recovery from the 1920-21 recession was quick and without any other government intervention. As Mr. Mellon said at the time, "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 to the government as lower tax rates. When lower rates prevail, they make it safe to seek a higher rate of return on investments than provided by tax-exempt securities.

The facts are 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.

As output surged, joblessness plunged. It should not be surprising that the government collected more tax revenue under these conditions. Nor is it surprising that with increased economic activity resulting from more investment in the private economy, the annual unemployment rate from 1925 through 1928 ranged from a high of 4.2 percent to a low of 1.8 percent.

Similar results were produced by the tax cuts during the Kennedy, Reagan and George W. Bush administrations — namely, rising output, rising employment and rising incomes and rising tax revenues for the government.

Another consequence was that people in higher-income brackets paid not only a larger total amount of taxes, but a higher percentage of all taxes, after what were called "tax cuts for the rich." It was not simply that their incomes rose, but that this was taxable income, since the lower tax rates made it profitable to get higher returns outside of tax shelters.

The inescapable conclusion from history is that high tax rates that people don't actually pay do not bring in as much hard income as lower tax rates that they do pay. Hopefully, the committee to be formed under the recently-enacted debt ceiling bill will include much needed tax reform.

Benedict Frederick, Jr., Pasadena

Copyright © 2015, The Baltimore Sun
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