April 2008

Mellon’s Principles of Taxation

By John Hendrickson

In 1924, Andrew Mellon, Secretary of the Treasury under Presidents Warren Harding, Calvin Coolidge, and Herbert Hoover, published Taxation: The People’s Business, a small, but eloquent, analysis of the principles of taxation. Mellon, with his business and financial background, engineered a series of sound economic policies that reduced taxes, federal spending, and the deficit. Mellon’s principles on taxation, which he wrote about in 1924, should be utilized and applied to tax policy by all levels of government.

Mellon argued three essential elements to a sound tax policy:

It must produce sufficient revenue for the Government; it must lessen, so far as possible, the burden of taxation on those least able to bear it; and it must also remove those influences which might retard the continued steady development of business and industry on which, in the last analysis, so much of our prosperity depends.[1]

Mellon understood that a large tax burden would cause unnecessary harm to the economic livelihoods of both individuals and businesses:

Any man of energy and initiative in this country can get what he wants out of life, but when that initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.[2]

Mellon not only understood that the power to tax is the power to destroy, but he also understood that high rates of taxation did not translate into more revenue for the government. “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates,” wrote Mellon.[3]

Mellon also argued the “politically incorrect” view that government should be administered just as a business. “The Government is just a business, and can and should be run on business principles,” noted Mellon.[4] He also understood that at the heart of the economy was individual initiative. As Mellon explained:

The most noteworthy characteristic of the American people is their initiative. It is this spirit which has developed America, and it was the same spirit in our soldiers which made our armies successful abroad. If the spirit of business adventure is killed, this country will cease to hold the foremost position in the world. And yet it is this very spirit which excessive surtaxes are now destroying.”[5]

In 1921 Republicans under the direction of Warren Harding won the White House and began to cut away at the progressive policies that dominated the administration of President Woodrow Wilson. In fact Harding and Coolidge cut government expenditures by an estimated 40 percent.[6]  Mellon continued his policy of tax, spending, and deficit reduction in the Coolidge administration. Robert Sobel, the noted economic and business historian, stated that Coolidge’s “goal was to hold the line on spending, and if possible roll it back, while at the same time reducing taxes, for he expected that this would result in greater personal freedom, continued prosperity, and a more moral population.”[7]

Mellon implemented his ideas of sound tax policy and his ideas received a warm welcome from the presidential administrations that he served, especially Harding and Coolidge. Historian Burton Folsom has noted that “Coolidge in fact, had the lowest misery index (3.3% average unemployment and 1 percent inflation) of any president in the twentieth century.”[8]  In addition, Folsom stated that “when the Harding-Coolidge administration came into office in 1921, the tax rate on top incomes was 73 percent; when Coolidge left the presidency eight years later it was 25 percent. The rates on the lowest incomes were also slashed.”[9]

Mellon’s market approach to taxation resulted in the economic prosperity of the 1920s. It resulted in the reduction of tax rates, government spending, and the deficit. Mellon understood that lower taxation will result in more revenues for the government and applying that with reducing government expenditures will result in a healthy economic policy. “Between 1922 and 1929, real gross national product grew at an annual average rate of 4.7 percent.”[10] In addition, as Cal Thomas wrote, “[Coolidge] cut taxes four times and reduced the national debt by one-third while maintaining a surplus every year in office.”[11]

The Mellon economic record speaks for itself, and it is a blue print for policy leaders to use to create economic prosperity. The income tax is inefficient, but political reality suggests that it may be awhile before the income tax is seriously reformed by a flat tax or abolished altogether with a national sales tax. In the meantime, Andrew Mellon has left an economic plan which consists of cutting taxes, cutting government, and reducing the deficit.

“Andrew Mellon never made an investment without knowing the relevant facts; his business success demonstrated his grasp of financial situations. In similar fashion, modern politicians, businessmen, and historians would do well to learn the facts of American tax history before they try to plot its future,” noted Folsom.[12] A good starting point would be studying Mellon’s career and reading Taxation: The People’s Business.

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] Andrew Mellon, Taxation: The People’s Business, New York: The MacMillan Company, 1924, p.  9.

[2] Ibid., 12.

[3] Ibid., 16.

[4] Ibid., 17.

[5] Ibid., 18.

[6] Paul Johnson, A History of the American People, Harper Perennial, New York, 1997, p. 708.

[7] Robert Sobel, Coolidge: An America Enigma, Regnery, Washington, D.C., 1998, p. 391.

[8] Burton Folsom, Progressives and Leviathan, Speech given at Hillsdale College’s Free-Market Forum, September 27-30, 2007.

[9] Ibid.

[10] Veronique de Rugy, Tax Rates and Tax Revenue: The Mellon Income Tax Cuts of the 1920s Tax & Budget Bulletin, No. 13, CATO Institute, February 2003.

[11] Cal Thomas, The Wit & Wisdom of Cal Thomas, Promise Press, Uhrichsville, Ohio, 2001, p. 115.

[12] Burton W. Folsom, The Myth of the Robber Barons: A New Look at the Rise of Big Business in America, Third edition, Herndon, Virginia, Young America’s Foundation, 1996, 120.