Calvin Coolidge: He Created Supply-Side Economics

Ronald Reagan made history by cutting taxes, defeating the Evil Empire and making people proud to be Americans. Obama is making history by taking away your pay check your religious freedom and free speech and trying to love terrorists by hating Israel. Aside from the policies of Lincoln, Jefferson and Washington, the most important President in our history has been Calvin Coolidge—he understood the role of government was to be limited. To limit government he opposed all expansions of its powers.

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Supply side economics was not discovered by Art Laffer (he re-instituted them) but by Calvin Coolidge and his Treasury Secretary, Andrew Mellon.

“Anxious, the pair pored over the tax data to see if their theory of strong revenues after rate cuts held up. In 1923 the federal government took in $662 million in income tax. The next year the figure was $704 million, and the next, $735 million. By the late 1920s, revenues topped $1 billion. The progression upward was uneven, but impossible to deny.

Mellon and Coolidge saw their tax reform succeed in another way: The wealthy were paying more. Twenty-one people in 1921 declared a million dollars or more in income. By 1928 that figure was 511. The wealthy’s share of all taxes paid also grew. This fact should interest those who today focus on income inequality.”

‘Silent Cal’ Coolidge Has Plenty To Tell Us About Tax Cuts

BY AMITY SHLAES, Investors Business Daily,   7/10/15
Calvin Coolidge is in the news because the Washington Nationals this year added a Silent Cal mascot figure to join Jefferson and Washington in the baseball team’s Presidents’ Race.

The Presidents’ Race is a branding exercise, but there’s also an education component that the team is hoping to supply. As Nationals marketing executive Valerie Camillo put it, if kids “learn a little bit more about Silent Cal, that’s a win for us.”

Learning about Silent Cal is a worthy undertaking. The 30th president has much to offer the country today, including a pristine record of public civility.

One area in which Coolidge, who served from 1923 to 1929, emerges the absolute victor among presidents is the fiscal contest. The great fame of President Ronald Reagan is that he managed to cut the top marginal rate on the income tax to 28%. Yet Coolidge actually cut the top rate lower — down to 25%.

The story of how “30” beats “40” is all the more remarkable when you consider the results of that Coolidge tax cut. Today, pundits assume that cutting tax rates automatically will cut revenues by the same share, creating dangerous budget shortfalls that hurt the economy. The Coolidge evidence suggests the opposite.

America’s challenges as the 1920s began resembled our own. The country was coming out of a crisis, though in that case the crisis was a war — World War I — not a financial crisis. And, as now, any collective pleasure at recovery was diminished by a concern over the staggering national debt.

Neither party knew what to do. Typical was this ambivalent statement in the Grand Old Party 1920 platform: “In presenting a true statement of the situation, we must face the fact that, while the character of the taxes can and should be changed, an early reduction of the amount of revenue to be raised is not to be expected.”

In a fiscal fix of its own, Britain was actually considering forming a Harry Potteresque “Ministry of Thrift.”

The politicians wondered if America could outgrow its debt, but were not certain how such growth might be achieved. Perhaps paying off debt faster might work? With the top tax rate at 73%, raising tax rates to collect revenue for such a payment didn’t seem an option.

In 1921, revenues from income taxes and profits taxes were $719 million, a sickening dip from the $1 billion collected the year before.

The new president, Warren Harding, and his vice president, Calvin Coolidge, decided to focus on the income tax structure. Harding invited the magnate Andrew Mellon to join their team as treasury secretary.

Mellon nursed a private theory about taxes: They were like the tolls on the railroads. Though it might seem wise to raise a freight rate, sometimes raising tolls proved an error. When freight fees rose too high, customers became former customers and simply shifted their deliveries to the newfangled trucks.

The railroads, Mellon said, could charge only “what the traffic will bear.” The same rule might hold for taxes: Lower rates might encourage so much more business activity, or “traffic,” that Treasury would receive a flood of money.

Lowering tax rates might have another beneficial effect. A government that cut tax rates sent a positive signal to business, saying in effect: “We will stay out of your way.” Coolidge certainly agreed, labeling excessive taxation “legalized larceny.”

Harding, Mellon and Congress cut the top rate to 58%. And that might have been end of it, for Harding proved more interested in other projects. But Harding died suddenly in 1923.

Tax cuts suited Coolidge’s dry New England temperament, and he took to the project with grim determination. Mellon, glad to have an energetic partner, rallied and in April 1924 published a book, “Taxation: The People’s Business,” to share with the public the administration theories.

Mellon and Coolidge formed a sort of relay team, and together managed to bully a skeptical Congress into lowering the top rate to 46%. Not stopping there, Coolidge and Mellon agitated further. In 1926 Congress passed a law that lowered the capital gains rate to 25%.

Anxious, the pair pored over the tax data to see if their theory of strong revenues after rate cuts held up. In 1923 the federal government took in $662 million in income tax. The next year the figure was $704 million, and the next, $735 million. By the late 1920s, revenues topped $1 billion. The progression upward was uneven, but impossible to deny.

Mellon and Coolidge saw their tax reform succeed in another way: The wealthy were paying more. Twenty-one people in 1921 declared a million dollars or more in income. By 1928 that figure was 511. The wealthy’s share of all taxes paid also grew. This fact should interest those who today focus on income inequality.

What’s more, the wager that the general economy would speed up paid off. In the 1920s real growth averaged 3.6%. Because of the growth, and the tax revenues, the Federal Reserve was able to lower interest rates. By 1928 the wartime debt was down by one-third. Despite its Gatsby reputation, the ’20s was a good decade. Unemployment stayed low. Patents soared.

Why don’t we know more about the 1920s and its tax experiment? Some blame the tax policy, which we would today describe as “supply-side,” for the 10-year Great Depression, but that’s a stretch.

Another “Presidents’ Race,” the one in our history books, also tends to obscure Coolidge. Presidents Herbert Hoover and Franklin Roosevelt boldly undid the work of their predecessors, increasing the top tax rate to 63% and then 79%. Prosperity did not ensue. Fans of FDR, especially, don’t want to acknowledge the success of a policy opposite to that of the New Deal.

Baseball’s Nationals have the right idea. It’s time for a revival of Coolidge that goes beyond ballpark mascots. Presented clearly to the American people, Silent Cal can win.

• Shlaes, author of the best-seller “Coolidge” (HarperCollins, 2013) chairs the board of the Calvin Coolidge Presidential Foundation.