When Andrew Mellon became treasury secretary in 1921, he asked Congress to cut tax rates to encourage investors to take their money out of tax shelters and invest it in the private economy to promote growth.
As a result, top tax rates were lowered from 73 percent in 1921 to 24 percent in 1929. The national debt decreased from $24 billion in 1921 to $18 billion in 1928, and unemployment rates ranged between 1.8 percent and 4.2 percent from 1925 through 1928.
When president Reagan took office in 1981, the top tax rate was 70 percent and it was 28 percent when he left office in 1989. However, the national debt had tripled from less and $1 trillion in 1981 to over $3 trillion in 1989, and unemployment rates reached over 10 percent at times during his tenure.
When George W. Bush assumed office in 2001, the top tax rate was 39.6 percent and he inherited a budget with a healthy surplus. When he left office in 2009, the top tax rate was 35 percent, the budget had a serious deficit and the national debt had doubled. In addition, the unemployment rate was close to 10 percent.
Why did tax cuts that seemed to work so well in the 1920s fail to work in the 1980s, President Reagan spent heavily on National Defense for The Cold War, and George W. Bush spent freely on the two wars in Afghanistan and in Iraq.
Will President Obama and Congress enact meaningful tax reform with the lessons learned from the past in mind? Namely, that cutting tax rates and increasing government spending at the time creates budget deficits that also increase the nation's debt.
Interestingly, The Great Depression and The Great Recession both occurred when low top tax rates helped to create a wide gap between the rich and the poor.
David L. Faust