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March 24, 2003
Was Andrew Mellon Really the Supply Sider That Conservatives Like to Believe?
Joseph J. Thorndike

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Andrew Mellon has long been the patron saint of supply side tax cutters. Their devotion is understandable. Not only did Mellon champion a series of dramatic tax cuts in the 1920s; he also justified them with a supply side argument, predicting that lower rates would yield additional revenue.

In a recent statement, the Cato Institute lionized Mellon for his sophisticated understanding of fiscal policy. "Secretary Mellon knew that high tax rates caused the tax base to contract and that lower rates would boost economic growth." According to Cato analyst Veronique de Rugy, Mellon's tax cuts "allowed the U.S. economy to grow rapidly during the mid- and late-1920s."

Cato might think twice before making Andrew Mellon the poster boy for tax cuts. True, Mellon did engineer some of the most dramatic tax cuts in American history. And he did believe that lower rates might actually raise revenue. But Mellon was also a devoted believer in balanced budgets. When times turned tough, and red ink began to flow, he was a loud and insistent voice for tax hikes.

It seems likely that today's tax cut plans -- offered in the midst of large and growing deficits -- would have scandalized this paragon of fiscal virtue.

Mellon is often described as the second greatest Treasury Secretary of all time -- trailing Alexander Hamilton by a comfortable margin. He was certainly a dominant force in the 1920s, shaping economic policy for more than a decade. Indeed, a Democratic senator once quipped that three presidents served under Mellon -- Warren Harding, Calvin Coolidge, and Herbert Hoover. Mellon's tenure stretched from 1921 to 1932.

Without doubt, Mellon was a devoted tax cutter. “Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”

Mellon championed a series of tax cuts in 1921, 1924, and 1926. He managed to reduce income tax rates across the board, and even won some victories in his campaign to reduce the estate tax. He offered a consistent and politically compelling case for such reductions, impressing even his opponents. “There was a mystical righteousness about tax reduction,” noted Randolph Paul, a leading tax expert of the era.

Mellon's tax cutting zeal extended to various special interest provisions. He supported breaks for specific industries with an eye toward encouraging growth. The 1921 revenue act was rife with such provisions, and lawmakers quickly came to appreciate that tax incentives could be used to reward friends and political allies. Today's penchant for tax favoritism and "corporate welfare" has important roots in the Mellon era.

For all his tax cutting ardor, Mellon was not singleminded. His support for lower taxes was tempered by a profound commitment to balanced budgets, as well as a concern for some degree of tax progressivity. On both counts, his ideas differed from those of today's tax cut advocates.

Mellon spelled out his budget balancing creed in 1932, just as the Great Depression began to wreak havoc with federal revenues. "A fundamental thought which I wish to present to you is that the current receipts and expenditures of the government should be brought into balance," he told members of the House Ways and Means Committee. "This is essential not merely for maintaining unimpaired the credit of the government, but also for reinvigorating the entire credit structure of the country."

Mellon insisted that spending cuts should play a major role in balancing the budget, but he did not shy from tax increases. "I realize," he told lawmakers, "that arguments can be advanced against every increase in rate or additional tax proposed. This is true of all measures looking to an increase in the public revenue. But I trust that on this occasion the attitude of taxpayers will be different from that which, knowing human nature, we would expect under normal circumstances. We are in the midst of a grave emergency. It is essential to raise additional revenue, not just to cover current expenditures but to maintain unimpaired the credit of the United States Government."

Mellon believed in fiscal "soundness." His deputy, Ogden Mills, explained it succinctly. The world, he warned, was gripped by "the fear that instead of meeting our needs through legitimate, sound means, afforded by taxation, we propose to attempt to issue billions of dollars of securities to the public." The only alternative, he contended, was to take the "courageous step" of raising taxes.

Defending the Income Tax

Many of today's tax cutters are no fan of the income tax -- instead supporting some sort of consumption base for the federal tax system. Mellon, however, proved to be an unlikely friend to this controversial levy, coming to its defense in an hour of great peril.

In 1921, a group of GOP stalwarts suggested that a national sales tax should replace the income tax. Mellon came to the latter's defense, insisting that it remain a central feature of the federal revenue system. He believed that a moderate income tax lent legitimacy to the revenue system as a whole. His argument carried the day, ensuring that the income tax would remain a pillar of federal finance. It seems fair to say that, just a few years after Woodrow Wilson fought to make the world safe for democracy, Andrew Mellon battled to make it safe for the income tax.

Mellon also believed that the income tax should remain progressive, albeit with lower rates than those enacted during World War I. Even more striking, he championed preferential treatment for "earned" income relative to "unearned" income. As he argued in his 1924 book, Taxation: The People's Business:

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.
Surely we can afford to make a distinction between the people whose only capital is their metal and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.

Not exactly the sort of argument popular among today's supporters of President Bush's dividend tax cut.

Mellon was an ardent foe of the estate tax, but when the depression forced his hand, he suggested raising rates on this tax, as well as others. "I have frequently expressed my opposition in principle to the levying of excessive taxes on estates of decedents," he told Congress sadly. "Notwithstanding the views which I have expressed, I believe that in the existing emergency, estates should contribute some additional revenue to the government."

Anyone at Cato want to make a similar suggestion in the midst of today's budget "emergency"?

In a follow up to their Mellon hagiography, Cato released an indictment of "the Hoover-Roosevelt tax increases of the 1930s." Fingering Hoover is only fair; the Revenue Act of 1932 -- loaded with a vast number of tax hikes -- took shape on Hoover's watch and established the basis of federal taxation throughout the 1930s. But Hoover had help in crafting these tax hikes: Andrew Mellon suggested them in his 1931 annual report.

The point is this: be careful who you lionize. Historical comparisons are always difficult, and parallels always tenuous. Andrew Mellon may have been a devoted tax cutter. He may even have been a proto-supplysider. But he was nothing like the tax cutters of today.