Tax Rates and the Local Economy

Some of the issues I pound on when it comes to the school board have to do with fiscal responsibility. With that comes the desire to reduce or lessen the growth of the tax burden on members of our community. That is not to say that the Board has the ability to reduce property taxes, I would never make that promise- not in an environment where property assessments are frozen at 2002 levels and where the District has contracts that increase every year. When I look out 2-5 years it is pretty easy to see what is coming down the pike. When you look at the more than $100 million high school, PSERs (which I will give an update on soon), and the contracts mentioned above, it is easy to see larger than 30% increases in property taxes here in Mt Lebanon. The only reason I say it probably won't be more than that is that I expect the State legislature will come up with a solution to address much of the PSERS expenses coming due in 2012. Call it wishful thinking if you like, but elected officials are in the business of getting re-elected and if they can't come to a solution on that single issue, there won't be many people getting re-elected in 2012. On many occasions I have opined about the coming tax increases and how we will compare to other Districts across the State. I have only touched on what the implications of such high taxes will be. It is those implications that I wish to address here.

To that end, I came across a speech given by Calvin Coolidge on February 12, 1924 in front of the National Republican Club. I don't know if I have ever read a speech by a President that so clearly illustrated the effects of high taxes on economic activity. While President Coolidge's speech was addressing the national economy, the effect of high taxes is the same whether at the federal level or local level. Below are some excerpts with my comments on sections that I think need highlighting:

In time of war, finances, like all else, must yield to national defense and preservation. In time of peace finances, like all else, should minister to the general welfare. Immediately upon my taking office it was determined after conference with Secretary Mellon that the Treasury Department should study the possibility of tax reduction for the purpose of securing relief to all taxpayers of the country and emancipating business from unreasonable and hampering exactions. The result was the proposed bill, which is now pending before the Congress. It is doubtful if any measure ever received more generous testimony of approval. Opposition has appeared to some of its details, but to the policy of immediate and drastic reduction of taxes, so arranged as to benefit all classes and all kinds of business, there has been the most general approbation. These recommendations have been made by the Treasury as the expert financial adviser of the Government. They follow, in their main principle of a decrease in high surtaxes, which is only another name for war taxes, the views of the two preceding Secretaries of the Treasury, both of them Democrats of pronounced ability. They are nonpartisan, well thought out, and sound. They carry out the policy of reducing the taxes of everybody, especially people of moderate income. They give to the country almost a million dollars every working day.

During World War I, taxes were raised to help fund the war effort. The United States still ended up borrowing billions of dollars to help fight the war, and we were also a major credit provider for our allies in that war. However, after the war ended, tax rates were not reduced to pre-war levels. President Coolidge in this speech is essentially calling for a return to the normalization of pre-WWI tax rates. As he said in his opening, he had no problem with financing a war with higher taxes, but in times of peace, he felt differently.

The proposed bill maintains the fixed policy of rates graduated in proportion to ability to pay. That policy has received almost universal sanction. It is sustained by sound arguments based on economic, social, and moral grounds. But in taxation, like everything else, it is necessary to test a theory by practical results. The first object of taxation is to secure revenue. When the taxation of large incomes is approached with that in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue. Experience is all in the other way. When the surtax rate on incomes of $300,000 and over was but 10 per cent, the revenue was about the same as when it was at 65 per cent. There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high tax rate went into effect.

The next year there were only 141, and in 1918 but 67. In 1919 the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21. I am not making any argument with the man who believes that 55 per cent ought to be taken away from the man with $1,000,000 income, or 68 per cent from a $5,000,000 income; but when it is considered that in the effort to get these amounts we are rapidly approaching the point of getting nothing at all, it is necessary to look for a more practical method. That can be done only by a reduction of the high surtaxes when viewed solely as a revenue proposition, to about 25 percent.

I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden. If, on the other hand, the rates are placed where they will produce the most revenue from large incomes, then the small taxpayer will be relieved. The experience of the Treasury Department and the opinion of the best experts place the rate which will collect most from the people of great wealth, thus giving the largest relief to people of moderate wealth, at not over 25 per cent.

This part of his speech perfectly illustrates the soundness of the Laffer Curve which was "discovered" in the 1970's by economist Arthur Laffer. The Laffer Curve suggests that there are two tax rates that will produce the exact same revenue. Think about it this way, at 0% tax, the government realizes no revenue and at 100% tax, there is no incentive to work and therefore the government again realizes no tax revenue. At various points along the graph coming down from 100% and up from 0%, there are points at which government can realize the same revenue. This is illustrated perfectly when Coolidge points out that tax receipts at the 65% tax rate were the same as when tax rates were at 10%.

A very important social and economic question is also involved in high rates. That is the result taxation has upon national development. Our progress in that direction depends upon two factors; personal ability and surplus income. An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if the rewards of such action are very largely taken away by taxation. If we had a tax whereby on the first working day the Government took 5 percent of your wages, on the second day 10 per cent, on the third day 20 per cent, on the fourth day 30 percent, on the fifth day 50 per cent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week? It is the same with capital. Surplus income will go into tax-exempt securities. It will refuse to take the risk incidental to embarking in business. This will raise the rate which established business will have to pay for new capital, and result in a marked increase in the cost of living. If new capital will not flow into competing enterprise the present concerns tend toward monopoly, increasing again the prices which the people must pay.

Taken altogether, I think it is easy enough to see that I wish to include in the program a reduction in the high surtax rates, not that small incomes may be required to pay more and large incomes be required to pay less, but that more revenue may be secured from large incomes and taxes on small incomes may be reduced; not because I wish to relieve the wealthy, but because I wish to relieve the country.

President Coolidge here is suggesting that allowing people to keep their surplus capital (and not the government) will lead to better economic growth. People will employ this capital in the most efficient way possible, in a way that gets them a return on their investment. His stated goal is to secure the largest possible amount of revenue to the federal government but not at the expense of stifling production. His plan to do this, under the guidance of Treasury Secretary Mellon, is to reduce the top marginal tax rates to 25%.

This legislation was past shortly after this speech and so began the "Roaring 20's". There were tremendous increases in overall GNP from just under $70 billion to over $103 billion in just over five years. And this happened without a jump in inflation, indeed, prices actually went down while GNP increased.

The point of this is to say that for decades (perhaps more) we have seen the impact that high taxes have on consumption and production. Many of those in favor of a large high school project here in Mt Lebanon like to say that an extra $60 per month is just a cup of coffee a day, or that its just one less dinner out per month. If that is the case then let me ask the obvious question. What if this actually turned out to be true? What if the residents of Mt Lebanon decided to give up their morning cup of joe or their monthly night out at dinner? What is the impact of that decision? How many people from Mt Lebanon do you think go to Aldo's or the Uptown each morning for coffee? How many people hit one of the restaurants on Washington Road or Beverly Road once a month or even once a week? What happens if all of these people actually DO reduce how much coffee they drink or how often they eat out? An increase of $60 a month in tax has the potential to take money directly from the productive part of our local economy (the coffee shops, the florists, the restaurants) and places it directly in the non-production part of local economy (debt service for a high school construction project).

This money will not go to hire more teachers to reduce class sizes. It won't expand programs. It won't make the District magically find ways to become more efficient. There most likely will not be an increase in student achievement and/or test scores due to a newly renovated building- although with our new Superintendent I hope this will happen anyway. The fact is that research does not show that constructing a new building will add anything to our ability to ready our kids for college and life after school. Isn't that what this should be all about?

The question that needs to be addressed has to do with how best to prepare our students for a constantly changing and ever more demanding future. Spending $100 million on bricks and mortar does not seem to be the best answer.

Thanks for reading.

James