This month’s featured article from TEF.

Budget and Tax Lessons from President Calvin Coolidge

By John Hendrickson

Today’s policymakers from both political parties can learn from President Calvin Coolidge’s budget and tax policy. Perhaps one of the most urgent domestic policy problems today is the federal budget and the enormous national debt that has reached $18 trillion, and this does not include the trillions in unfunded entitlement program obligations of Social Security, Medicare, and Medicaid. President Coolidge understood what he termed “economy in government” was essential not just for a sound economy, but was a moral and constitutional responsibility. During the 1920s President Warren G. Harding and President Coolidge made “economy in government” a centerpiece of their administrations. Economy in government stood for a balanced budget, tax rates that were low and reasonable, and paying down the national debt.

In November, the Calvin Coolidge Presidential Foundation hosted a budget conference in Washington, D.C. to discuss the urgent need to address spending and tax reform. Senator Jeff Sessions (R-AL), who is the Chair of the Senate Budget Committee, provided the keynote address to the conference. Senator Sessions rightly argued that one of the main problems obstructing the economy is the policies of President Barack Obama. As Senator Sessions argued:

One reason this economy has been so slow to recover is that very bright people have promoted aggressive policies that they said would advance the economy. But, in truth, these actions have hurt the economy. We have lived for six years under an economic model of spend, tax, borrow, regulate. Our surging federal debt now exceeds our nation’s entire economic output.[1]

Sessions further described the national budget crisis when he stated that “interest payments alone last year amounted $231 billion — that’s six times more than our federal highway budget.”[2] “In just eight years’ time one single year’s interest payment on our debt will exceed our entire national defense budget,” explained Senator Sessions.[3]

For Coolidge, reforming the budget by cutting government spending and lowering tax rates were both moral issues. He believed that both were equally vital to the success of the economy. Coolidge directed his administration to work to achieve the goals of reduced government spending and lower tax rates. Coolidge described his goal when he stated:

securing greater efficiency in government by the application of the principles of constructive economy, in order that there may be a reduction of the burden of taxation now borne by the American people. The object sought is not merely a cutting down of public expenditures. That is only the means. Tax reduction is the end.[4]

He further described excessive taxation as “nothing more or less than a restriction upon the freedom of the people.”[5] Coolidge also understood that the task of spending and tax reduction was a “gigantic task” for his administration, but was also essential and crucial.[6] As he argued:

We are seeking to let those who earn money keep more of it for themselves and give less of it to the Government. This means better business, more of the comforts of life, general economic improvement, larger opportunity for education, and a greater freedom for all the people. It is in essence restoring our country to the people of our country. It reendows them not only with increased material but with increased spiritual values.[7]

Tax rates during the 1920s had already started to be lowered by President Harding, but it was also important to lower government spending at the same time. Coolidge believed in a limited government and rejected the progressive philosophy that argued for a larger central government managed by an administrative regulatory bureaucracy. Coolidge believed that this was unconstitutional. “Government extravagance is not only contrary to the whole teaching of our Constitution, but violates the fundamental conceptions and the very genius of American institutions,” noted Coolidge.[8]

In other words reckless spending by the federal government was irresponsible and unconstitutional. President Coolidge also argued that cutting government spending was a priority if tax rates were to be reduced. “Economy in the cost of government is inseparable from reduction in taxes. We cannot have the latter without the former.” stated Coolidge.[9]  Even though Coolidge’s administration was before the emergence of the welfare state (pre-New Deal and Great Society), it was still a challenge to fight the progressive impulse to expand the size and scope of the federal government. President Coolidge’s veto of the McNary-Haugen and veterans Bonus Bills were just two examples of his battle against this progressive impulse.

Coolidge was fighting a two-front war against special interest spending and policy encroachments that were not within the enumerated powers of the federal government granted in Article 1, Section 8 of the Constitution. As Coolidge argued:

Unfortunately the Federal Government has strayed far afield from its legitimate business. It has trespassed upon fields where there should be no trespass. If we could confine our Federal expenditures to the legitimate obligations and functions of the Federal Government a material reduction would be apparent. But far more important than this would be its effect upon the fabric of our constitutional form of government, which tends to be weakened and undermined by this encroachment.[10]

Coolidge lamented the efforts to abandon limited government and traditional federalism and he argued that ultimately the people must solve this problem. As he stated:

The cure for this is not in our hands. It lies with the people. It will come when they realize the necessity of State assumption of State responsibility. It will come when they realize that the laws under which the Federal Government hands out contributions to the States is placing upon them a double burden of taxation — Federal taxation in the first instance to raise the moneys which the Government donates to the States, and State taxation in the second instance to meet the extravagances of State expenditures which are tempted by the Federal donations.[11]

All too well did Coolidge understand the tendency of the government to expand even in areas outside the traditional bounds of the Constitution, and this was the challenge that confronted both Harding and Coolidge in the aftermath of the governmental centralization of World War I. In addition, Coolidge is prophetic in his words which have captured the crisis of federalism today as states have become increasingly administrative districts of the federal government.

The dual policy objectives of cutting government spending and tax rates would not only restore constitutional government, but also create economic expansion. The two pillars of Coolidge’s economy in government consisted of a commitment to constitutional government and sound economic policies. The benefits of a balanced budget and low tax cuts as Coolidge argued would create business expansion:

From some sources the statement has been made that this continuing drive for economy in Federal expenditures is hurting business. I have been unable to determine how reduction in taxes is injurious to business. Each tax reduction has been followed by a revival of business. If there is one thing above all others that will stimulate business it is tax reduction. If the Government takes less, private business can have more. If constructive economy in Federal expenditure can be assured it will be a stimulation to enterprise and investment.[12]

Historian Burton W. Folsom, Jr. wrote that Coolidge “lowered tax rates, cut federal spending, and had budget surpluses every year of his presidency.”[13] In addition, Coolidge “finished his second term with the lowest misery index (unemployment plus inflation) of any President in the last one hundred years,” noted Folsom.[14]

Coolidge’s budget and tax polices unleashed a period of economic growth and expansion. It also resulted in low unemployment and an increase in the standard of living for the middle-class. Under Coolidge the federal budget fell from over $5 billion in 1921 to $3 billion by the end of his administration.[15] The Coolidge tax cuts also lowered tax rates and helped the business expansion which occurred during the 1920s.

Policymakers can learn a lesson from Coolidge when considering ways to address our nation’s current budget problems. Coolidge described his task as a “worthy motive” and that is no less true for policymakers today.[16] Responsibility, as Coolidge stated, also belongs with the American people, who must come to a realization that the only way to resolve the current fiscal crisis is to restore constitutional government. As a nation let us learn from the lessons of President Calvin Coolidge.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Senator Jeff Sessions, “Keynote Address at the Calvin Coolidge Presidential Foundation’s National Budget Conference,” United States Senate Committee on the Budget, Republicans, November 12, 2014, <http://www.budget.senate.gov/republican/public/index.cfm/press-releases?ID=352c9ef9-4f71-46a8-853d-f10b57606832>  accessed on December 1, 2014.

[2] Ibid.

[3] Ibid.

[4] Calvin Coolidge, “Address of the President at the Meeting of the Business Organization of Government, Monday Evening, June 22, 1925, at 8 o’clock p.m., Washington, D.C.,” Commerce Papers, Box 606: File Treasury Department, Bureau of the Budget, Lord, H.M. 1924-1928 and undated, Herbert Hoover Presidential Library and Museum, West Branch, Iowa.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Burton W. Folsom, Jr., “Who was the last President to have a great second term?” Burt Folsom: Where History, Money, and Politics Collide, November 26, 2012, <http://www.burtfolsom.com/?p=1985> accessed on December 1, 2014.

[14] Ibid.

[15] David Pietrusza, editor, Calvin Coolidge: A Documentary Biography, Church & Reid Books, 2013, p. 368.

[16] Coolidge.