Original Document

When the day unhappily arrives for Secretary Mellon's grateful fellow country men to erect a monument in his honor they will undoubtedly carve a surtax on its east face and a tax-exempt security on its east face and a text-exempt security in its west. Pending that time, they will read with interest the excellent little book that he has written by fitting together a number of papers, and that the Macmillan Company has published in five days from the receipt of the manuscript. Mr. Mellon knows naught of economics, and less of the shifting and incidence of taxation. His book omits a large part of the relevant facts, its reasoning is bad, and its practical conclusions in general are dead wrong, but these flaws do not in the least detract from its excellence. For in it the Secretary of the Treasury, a successful banker, sets forth succinctly and simply the reasons why he honestly believes that the best way to make the United States prosperous is to take disproportionate taxes of wealthy business men. This gives those who disagree with the Secretary a chance to say why.

Mr. Mellon's limitations, which he shares with many other successful business men, are irrelevant to the main issue; yet his underlying assumptions must be understood by the reader who would grasp his argument. First, then, the United States is a land of equal opportunity, "which presupposes the right of each man to enjoy the fruits of his labor [and capital, too, doubtless] after contributing his fair share to the support of the Government, which protects him and his property." Our country owes its greatness (enitirely, it appears) to the unfettered spirit of business adventure, and one learns with gladness that "any man of energy and initiative in this country can get what he wants out of life. "The Government," we discover, "is just a business, and can and should be run on business principles," and taxation is solely a means of getting the necessary revenue to run that business with as little disturbance to private enterprise as possible.

The Secretary has apparently never heard of the difference between taxes that can and those that cannot be shifted, for he tells us that "high taxes have always meant a high price level, for the taxes are paid, in a large measure, by consumers all over the country."

Further:
"No thoughtful person longer doubts that, irrespective of his income, he pays a part of the high surtaxes in the general high price level." Some of us must confess, then, to being thoughtless; for we are fairly satisfied that a graduated income tax stays put on the man who pays it. In a world where the old gold standard of Europe has crashed down in irretrievable disaster, as practically all competent monetary theorists now admit, the Secretary complacently approves our own better luck and suggests that Europe must follow our example–a fair indication, perhaps, of his real competence to deal with the problems of statesmanship that confront the modern finance minister.

One more preliminary, to illustrate the reasoning of the book:

Assuming that all inheritances, large and small, were taxed at 40 per cent, it would then be only two or three generations until private ownership of property would cease to exist. Since these taxes are used in the current operation of the Government, the result would be not that the Government had absorbed the wealth of the country, but that the wealth had been spent and none was left [I]

Was ever more preposterous nonsense soberly set down on paper? In the Secretary's world do no generations work and create new wealth in the intervals between dying? Estates on the average are transmitted not oftener than once in thirty years. Let Mr. Mellon the banker call in a young man from one of, his savings banks, and ask for a compound-interest table. He will discover that a depositor leaving a dollar in his bank today will get $3.24 out of the bank in 1954. Let the luckless inheritor of $10,000,000, then pay over $4,000,000 to a reckless and grasping government, and put the remaining $6,000,000 into Mr. Mellon's savings bank with a good conscience and a cheerful heart. In thirty years three alone out of his six millions will have multiplied to ten; ready for fresh government exactions, and on the remaining three the wretched capitalist may meantime for that thirty years, quite without work, have enjoyed $120,000 interest a year kind1y handed over to him by Mr. Mellon's bank–and even so he will leave thirteen millions to his son against the ten he received from a provident father. But perhaps Mr. Mellon never heard of the productiveness of capital; for all we know, he may be a Marxian, and believe that labor is the sole source of value. Even so he need not quote "three generations from shirt-sleeve to"–piffle! '

But to come to the main argument. High surtaxes crush the spirit of business adventure; and drive our cowed capitalists with broken spirits tamely to shift their funds into tax-exempt federal, state, and municipal securities, thus encouraging an orgy of governmental waste and starving productive, that is profitable, private industry. All this is supported by indubitable figures showing the decline of revenues from the upper brackets of the surtaxes. To the uncritical mind, to which variety, it must be confessed, the Secretary appeals, the conclusion seems irresistible that there is nothing to do but reduce the wicked surtaxes to the sacred maximum of 25 per cent, a figure apparently ordained of God at which good capitalists will put their good money into productive private enterprises and not shift it in discouragement and despair into unproductive and wasteful state and municipal undertakings like good roads and water and light plants and schools and such foolishness. The Secretary's evidence consists essentially in figures showing the progressive decline in the number of taxable incomes above $300,000 from 1,296 in 1916 to 246 in 1921, and in their amount from $993,000,000 to $154,000,000, together with a statement from Henry Ford, and letters from Daniel Guggenheim and a dressmaker in Kentucky saying that the high surtaxes are discouraging them from further investment in business, not to speak of much assertion and some facts concerning the amount of tax-exempt securities outstanding, estimated at $12,300,000,000, and increasing by about a billion a year since 1918.

Now, those who have followed the debate on Mr. Mellon's proposals, instead of simply listening to the chorus of praise in the Eastern newspapers, know that both his statements and his argument have emerged from the fray pretty badly tattered. Of course, the incomes subject to surtax declined from 1916-17, the period of "war brides" and fabulous fortuitous profits, to 1921, a year of profound depression and speculative losses; but all indications are that the surtaxes will yield 50 per cent more in 1923 than in 1921. Of course there has been dodging of the high surtaxes, and as an army of venal lawyers has been put to work finding ways of legal evasion, plenty of holes in the tax law have been found. But how, in the name of common sense, if you cannot collect a surtax of 50 per cent, can you collect one of 25? To an untutored intelligence, the moral would seem to be to stop the holes in the tax, and the Secretary himself offers some excellent suggestions to that end.

But what of the starving of private business by capital going into tax-exempts? It is nonsense, and the facts show it clearly. True enough, issues of state and municipal securities for functions that suffered during the war have constituted since 1919 a distinctly larger proportion of all security issues than before the war, but the Secretary's' own table shows that such issues fell from 28.7 per cent of the total in 1921 to 20.7 per cent in 1923. Such percentages, however, prove nothing. According to Mr. Mellon's own table, 1923 shows the largest issue of new corporate securities in our history, and 1922 was exceeded only by the wild year 1920, when the surtaxes stood at 65 per cent. Does this prove that capital is withdrawing into the tax-exempt field? 1923 was the greatest building year that we have ever known; the railroads disposed of a billion dollars in extensions; public utilities grew at a tremendous rate; automobile factories boomed. There was no difficulty in finding the necessary capital, and the present slackening of business suggests the ever-recurring disagreeable question whether during the boom period we have not overdone the business of producing new plant in private profit-making industries. The brute fact is that the damping down of the spirit of enterprise and the starvation of private business as a result of the surtaxes does not exist outside the fiery imagination of the Secretary and his claque. The whole structure of fact built up to support the dream crumbles upon examination.

What, then, remains? An instructive exhibit. Mr. Mellon honestly believes that the best way to make the United States prosperous is to give her big business men a free hand to make all the profits they can, paying meanwhile as light taxes as possible in running a government whose functions are to be limited to the protection of life and property. In that faith he has already got rid of the excess-profits taxes and has cut the surtaxes from their war maximum of 65 per cent. The big-business community in too large part is in the same medieval state of economic knowledge and fiscal theory that is set forth in the Secretary's book. But most intelligent theorists, and the body of responsible European statesmen as well recognize that, whether we realize it or not, taxation is, in fact a mighty engine of economic and social policy, and that present day conditions demand its use by men with eyes and minds wide open to its effects on the distribution as well as the production of wealth. Mr. Mellon is not such a man.



Credit: Henry Raymond Mussey, "'Andrew Mellon's Ignorance.' Review of Taxation: The People's Business. By Andrew W. Mellon, The Macmillan Company," The Nation, May 28, 1924.