by Thomas Sowell
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Classic songs from years past are sometimes referred to as "golden oldies." There are political fallacies that have been around for a long time as well. These might be called brass oldies. It certainly takes a lot of brass to keep repeating fallacies that were refuted long ago.
One of these brass oldies is a phrase that has been a perennial favorite of the left, "tax cuts for the rich." How long ago was this refuted? More than 80 years ago, the "tax cuts for the rich" argument was refuted, both in theory and in practice, by Andrew Mellon, who was Secretary of the Treasury in the 1920s.
When Mellon took office, there was a large national debt, the economy was stagnating, and tax rates were high, though the tax revenues were still not enough to cover government expenditures. What was Mellon's prescription for getting out of this mess? A series of major cuts in the tax rates!
Then as now, there were people who failed to make the distinction between tax rates and tax revenues. Mellon said, "It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue for the Government, and that more revenue may often be obtained by lower rates."
How can that be? Because taxpayers change their behavior according to what the tax rates are. When one of the Rockefellers died, Mellon discovered that his estate included $44 million in tax-exempt bonds, compared to $7 million in Standard Oil securities, even though Standard Oil was the source of the Rockefeller fortune.
For the country as a whole, the amount of money tied up in tax-exempt securities was estimated to be three times as large as the federal government's expenditures and more than half as large as the national debt.
In short, huge amounts of money were not being invested in productive capacity, such as factories or power plants, but was instead being made available for local political boondoggles, because this money was put into tax-exempt state and local bonds.
When tax rates are reduced, investors have incentives to take their money out of tax shelters and put it into the private economy, creating higher returns for themselves and more production in the economy. Andrew Mellon understood this then, even though many in politics and the media seem not to understand it now.
Mellon was able to persuade Congress to lower the tax rates by large amounts. The percentage by which tax rates were lowered was greater at the lower income levels, but the total amount of money saved by taxpayers was of course greater on the part of people with higher incomes, who were paying much higher tax rates on those incomes.
Between 1921 and 1929, tax rates in the top brackets were cut from 73 percent to 24 percent. In other words, these were what the left likes to call "tax cuts for the rich."
What happened to federal revenues from income taxes over this same span of time? Income tax revenues rose by more than 30 percent. What happened to the economy? Jobs increased, output rose, the unemployment rate fell and incomes rose. Because economic activity increased, the government received more income tax revenues. In short, these were tax cuts for the economy, even if the left likes to call them "tax cuts for the rich."
This was not the only time that things like this happened, nor was Andrew Mellon the only one who advocated tax rate cuts in order to increase tax revenues. John Maynard Keynes pointed out in 1933 that lowering the tax rates can increase tax revenues, if the tax rates are so high as to discourage economic activity.
President John F. Kennedy made the same argument in the 1960s — and tax revenues increased after the tax rates were cut during his administration. The same thing happened under Ronald Reagan during the 1980s. And it happened again under George W. Bush, whose tax rate cuts are scheduled to expire next January.
The rich actually paid more total taxes, and a higher percentage of all taxes, after the Bush tax rate cuts, because their incomes were rising with the rising economy.
Do the people who keep repeating the catch phrase, "tax cuts for the rich" not know this? Or are they depending on your not knowing it?
Songs that are "golden oldies" have much less pleasant counterparts in politics — namely, ideas and policies that have failed disastrously in the past but still keep coming back to be advocated and imposed by government. Some people may think these ideas are as good as gold, but brass has often been mistaken for gold by people who don't look closely enough.
One of these brass oldies is the idea that the government can and must reduce unemployment by "creating jobs." Some people point to the history of the Great Depression of the 1930s, when unemployment peaked at 25 percent, as proof that the government cannot simply stand by and do nothing when so many millions of people are out of work.
If we are going to look back at history, we need to make sure the history we look at is accurate. First of all, unemployment never hit 25 percent until after — repeat, AFTER — the federal government intervened in the economy.
What was unemployment like when the federal government first intervened in the economy after the stock market crash of 1929? It was 6.3 percent when that first intervention took place in June 1930 — down from a peak of 9 percent in December 1929, two months after the stock market crash.
Unemployment never hit double digits in any of the 12 months following the stock market crash of 1929. But it hit double digits within 6 months after government intervention — and unemployment stayed in double digits for the entire remainder of the decade, as the government went in for one intervention after another.
The first federal intervention in June 1930 was the passage of the Smoot-Hawley tariffs by a Democratic Congress, a bill signed into law by Republican President Herbert Hoover. It was "bipartisan" — but bipartisan nonsense is still nonsense and a bipartisan disaster is still a disaster.
The idea behind these higher tariffs was that reducing our imports of foreign goods would create more jobs for American workers. It sounds plausible, but more than a thousand economists took out newspaper ads, warning that these tariffs would be counterproductive.
That was because other countries would retaliate with their own import restrictions, reducing American exports, thereby destroying American jobs. That is exactly what happened. But there are still people today who repeat the brass oldie that restricting imports will save American jobs.
You can always save particular jobs in a particular industry with import restrictions. But you lose other jobs in other industries, not only because other countries retaliate, but also because of the economic repercussions at home.
You can save jobs in the American sugar industry by restricting imports of foreign sugar. But that results in higher sugar prices within the United States, leading to higher costs for American candy producers, as well as American producers of other products containing sugar. That leads to higher prices for those products, which in turn means lower sales at home and abroad — and therefore fewer jobs in those industries.
A study concluded that there were three times as many jobs lost in the confection industry as were saved in the sugar industry. Restrictions on steel imports likewise led to an estimated 5,000 jobs being saved in the steel industry — and 26,000 jobs being lost in industries producing products made of steel.
Similarly, the whole idea of the government itself "creating jobs" is based on regarding the particular jobs created by government as being a net increase in the total number of jobs in the economy. But, since the government does not create wealth to pay for these jobs, but only transfers wealth from the private sector, that leaves less wealth for private employers to create jobs.
Songs that are golden oldies bring enjoyment when they return. But brass oldies in politics just repeat the original disasters.
A statistical analysis by economists, published in 2004, concluded that federal interventions had prolonged the Great Depression of the 1930s by several years. How long will future research show that current government interventions prolonged the economic crisis we are living through now?
Politics is not the only place where some pretty brassy statements have been made and repeated so often that some people have accepted these brassy statements as being as good as gold.
One of the brassiest of the brass oldies in the law is the notion that the Constitution creates a "wall of separation" between church and state. This false notion has been so widely accepted that people who tell the truth get laughed at and mocked.
A recent New York Times piece said that it was "a flub of the first order" when Christine O'Donnell, Republican candidate for senator in Delaware, asked a law school audience "Where in the Constitution is the separation of church and state?" According to the New York Times, "The question draw gasps and laughter" from this audience of professors and law students who are elites-in-waiting.
The New York Times writer joined in the mocking response to Ms. O'Donnell's question, though admitting in passing that "in the strictest sense" the "actual words 'separation of church and state' do not appear in the text of the Constitution." Either the separation of church and state is there or it is not there. It is not a question of some "strictest" technicality.
The First Amendment to the Constitution of the United States begins, "Congress shall make no law respecting an establishment of religion." There is absolutely nothing in the Constitution about a "wall of separation" between church and state, either directly or indirectly.
That phrase was used by Thomas Jefferson, who was not even in the country when the Constitution was written. It was a phrase seized upon many years later, by people who wanted to restrict religious symbols and has been cited by judges who share that wish.
There was no mystery about what "an establishment of religion" meant when that phrase was put into the Constitution. It was not an open-ended invitation to judges to decide what role religion should play in American society or in American government.
The Church of England was an "established church." That is, it was not only financed by the government, its members had privileges denied to members of other religions.
The people who wrote the Constitution of the United States had been British subjects most of their lives, and knew exactly what an "established church." meant. They wanted no such thing in the United States of America. End of story — or so it should have been.
For more than a century, no one thought that the First Amendment meant that religious symbols were forbidden on government property. Prayers were offered in Congress and in the Supreme Court. Chaplains served in the military and presidents took their oath of office on the Bible.
But, in our own times, judges have latched onto Jefferson's phrase and run with it. It has been repeated so often in their decisions that it has become one of the brassiest of the brass oldies that get confused with golden oldies.
As fundamentally important as the First Amendment is, what is even more important is the question whether judges are to take it upon themselves to "interpret" the law to mean whatever they want it to mean, rather than what it plainly says.
This is part of a larger question, as to whether this country is to be a self-governing nation, controlled by "we the people," as the Constitution put it, or whether arrogant elites shall take it upon themselves to find ways to impose what they want on the rest of us, by circumventing the Constitution.
Congress is already doing that by passing laws before anyone has time to read them and the White House is likewise circumventing the Constitution by appointing "czars" who have as much power as Cabinet members, without having to go through the confirmation process prescribed for Cabinet members by the Constitution.
Judges circumvent the Constitution by reading their own meaning into its words, regardless of how plain and unequivocal the words there are.
The Constitution cannot protect us and our freedoms as a self-governing people unless we protect the Constitution. That means zero tolerance at election time for people who circumvent the letter and the spirit of the Constitution. Freedom is too precious to give it up in exchange for brassy words from arrogant elites.
October 28, 2010
Thomas Sowell is a senior fellow at the Hoover Institution at Stanford University. His Web site is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page.
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