Commentary

Does cutting taxes really shrink government?

Marketplace Contributor Apr 25, 2013
HTML EMBED:
COPY
Commentary

Does cutting taxes really shrink government?

Marketplace Contributor Apr 25, 2013
HTML EMBED:
COPY

Along with immigration, another issue Washington will be taking up soon is the federal budget. Republicans want to reduce the deficit by cutting spending, and they want to shrink the government by cutting tax rates. But it doesn’t always work out that way, as the thirtieth President, Calvin Coolidge found out.

No politician ever wanted to shrink government more than Calvin Coolidge. Silent Cal, the quiet Vermonter, was so parsimonious he even saved syllables by using short words. When Coolidge became vice president in 1921, he was appalled to find tax rates as high as 58 percent. “Legalized Larceny,” he crowed. And federal debt after World War I was so large it made Coolidge cringe. So when Coolidge became president following the death of Warren Harding in 1923, he decided to curb these excesses.
    
Coolidge and his Treasury Secretary, Andrew Mellon, studied the tax code and found the government wasn’t getting the revenue it was expecting — even with such high tax rates.

Maybe there were lessons for taxes in railroads. Railroad men set their freight rates to charge “what the traffic would bear.” The thinking was if you cut the freight rate, you get more traffic, and more revenue. Coolidge persuaded Congress to lower the top tax rate to 25 percent. And congratulated himself that he was on track to pay down the national debt. Debt obsessed, Coolidge was the president who fired the White House housekeeper because she spent too much on pork — literally.

 The tax experiment worked. In fact, too well. With lower tax rates, more money than expected flowed in. But to Coolidge’s horror Congress didn’t want to use the cash to reduce the debt. The other politicians of his day just wanted to spend. On farm supports. On veterans. On disaster infrastructure.

Coolidge worried that later presidents and lawmakers might also manipulate tax rates to get extra money.
 He left office in a dark mood. He guessed what would come. The legacy of the ultimate small-government president was a tax tool so powerful that it made big government inevitable.

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.