finances

“Does cutting taxes really shrink government?”

Three weeks before the passage of the Revenue Act of 1928, the President was analyzing the results of his administration’s formula: cut taxes, enforce constructive economy and retire debt with surplus. The President was not pleased, however. The reason was not in making the case for cuts and shrinking expenditures. The reason was not in retiring the national debt, which would be reduced $5.4 billion over the course of five and a half years, a feat not replicated since. Had the rate of reduction been constant, the debt would have been eliminated in just over fifteen years. The reason was in the incessant temptation by those around him to spend the “surplus revenue.”

The administration’s plan had worked beyond everyone’s expectations. It had worked so well that Congress was eager to start spending all that extra money. The President wanted it returned in cuts and put toward the debt. It was becoming increasingly clear that tax cuts were going to be tougher and tougher to sell as surpluses grew larger and larger. Ironically, thanks to Coolidge being “too successful,” spending would be even harder to restrain in the future than it was in the present.

The fiscal year would yield a surplus of $398,000,000, well beyond even the President’s initial figures. But as Coolidge lists all the projects Congress wanted, it not only made future tax reductions impossible but would have overturned them with increases to cover government profligacy: the flood bill, $500 million, the farm bill, $400 million, the Boulder Dam bill, $125 million, the pension bill, $15 million, the salary bill, $18 million, the Muscle Shoals bill, $75 million, the Post Office pay bill, $20 million, a reduction of post payments costing another $38 million, the corn borer, $7 million, and $6 million for “vocational training,” just to name a few. Meanwhile, the President observed, tax reduction between $203 and $289 million remained before Congress as he spoke. “If all these bills went through and became law I should think it would not only endanger tax reduction at the present time, but would make necessary the laying of additional taxes.” This was an impermissible step backward, not forward. As the President reminded reporters early the following month, “the surplus was secured, of course, by very careful management of expenditures…” not by spending it all away.

The size of the surplus and the urge to spend it, however strong, did not make indulging the desire any more responsible with the people’s money than in lean years. Government, not unlike children, has to learn self-control. The existence of “more somewhere” does not free government to find it and spend it with impunity.

“We must have no carelessness in our dealings with public property or the expenditure of public money. Such a condition is characteristic either of an undeveloped people, or of a decadent civilization…We must have an administration which is marked, not by the inexperience of youth, or the futility of age, but by the character and ability of maturity. We have had the self-control to put into effect the Budget system, to live under it and in accordance with it. It is an accomplishment in the art of self-government of the very highest importance. It means that the American Government is not a spendthrift, and that it is not lacking in the force or disposition to organize and administer its finances in a scientific way. To maintain this condition puts us constantly on trial. It requires us to demonstrate whether we are weaklings, or whether we have strength of character” — President Coolidge, June 30, 1924.

Amity Shlaes’ thought-provoking piece recalls that even good policies can carry unintended side effects that have the potential to destroy the gains made. Tax cuts are but one part of the whole. President Coolidge knew this firsthand and if trends back toward expansive government are to be checked, it will demand from us, informed and engaged citizens, the same unwavering self-restraint and courage he demonstrated. The times also require statesmen, mature men and women, who take the whole task seriously of restoring limited government, not merely one element of tax policy. Tax cutting without the people’s determination for making government shrink can be cast aside when expediency calls it time to spend. Such was the bitter pill of the Reagan years. When what is easy is allowed to prevail over what is right, self-government suffers and liberty loses.

While the “Occupy Wall Street” mobs have subsided, having served their political purpose last year, the notion that banks are a device of the “excessively wealthy” is not new to our time. The image of fat, out-of-touch, greedy capitalists forming banks to “exploit” workers, the poor and the needy, robbing them of their hard-earned money was just as familiar in the early years of the twentieth century as it is now. Despite the verifiable fact that Secretary Mellon paid millions more in income taxes under his own plan, it did nothing to assuage the attempts throughout the twenties and thirties to finally “pin down” this “excessively wealthy tycoon” as guilty of something. If one keeps looking, they seemed to say, it can be found somewhere. Even F.D.R.’s tax “show trial” of Mellon yielded nothing but an unfairly demolished reputation. On the contrary, Vice President Coolidge addressed this very attitude about banks, a prejudice against capitalism and the myth that forceful redistribution of prosperity is both possible and virtuous. In a speech given on June 27, 1921, he said:

“There can be no permanent prosperity of any class or part. Such a condition can only be secured through a general and public prosperity. This means that to secure this end there must be a general distribution of the rewards of industry. Wherever this condition is maintained there you have the foundation for an increasing production and a sound financial and economic situation.

“One of the strongest reasons for supporting American institutions is that under them this condition is more nearly attained than under any other form of government that has ever met with any permanent success…

“…Too often the uninformed think of a bank as the possession of a few rich people, and as the creditor of the people at large. You who have had any experience with banking know that it is the opposite of this which is true. The resources of banks are not the resources of a few rich, but the resources of the people themselves, small perhaps in any individual instance, but, in the aggregate, very large. Nor are banks exclusively a creditor class. It is usually true that they owe to their depositors more than their borrowers owe to them. Every banker knows that to depend on the business and patronage of the rich would be in vain, that if any success attends his efforts it must be by serving and doing the business of the people. The stock is generally owned by the people, the deposits are always made by the people. This is the reason that banks partake of the nature of a public institution and perform real public service. They are the sole means by which modern commercial activities can be carried on. They afford the method by which the people combine their individual resources, providing a collection of capital sufficient to extend the necessary credit for financing the whole people of the nation…A bank is not a private institution, responsible to itself alone, or to a few. It is a public institution, under a moral obligation to be administered for the public welfare…Any power which is not used for the general welfare will in the end destroy itself…Such an institution is doing the work of the people.”

This simple explanation lays bare the ignorance of those who vilify banking and American capitalism as the instigators of what is wrong with the country. To go to war against these concepts is to war against the “common man,” the very person protestors claim to be helping. By calling for redistribution and the boycott of banks, the true perpetrators of class conflict, economic stagnation and human suffering are sought out as “saviors.” People like us, ultimately, are held responsible for this “unfairness” while those who create the climate are rewarded with more authority to solve problems they have no inclination or ability to resolve. While certain government officials are usually first and foremost this kind of “savior” sought, it is conveniently ignored that the capital on which banks are made possible belongs to “normal” people engaged in the daily use of what is theirs — buying, selling, saving, earning, investing, exchanging, lending, and borrowing. The complaint is with Washington not with regular folks.