fis200_week1_reading3 (1)

Was a violent drop in prices and wages of about 35

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was a violent drop in prices and wages of about 35 percent in the brief but intense recession of 1920–1921. The recession was exacerbated by high wartime tax rates, which had not been lowered after the return to peace. The top tax rate of 7 percent in 1913 had gone to 77 percent during the war. Total fed- eral debt had increased from $1 billion to $24 billion, at the time a staggering amount. In his 1919 State of the Union address, President Wilson argued for a lowering of wartime tax rates: The Congress might well consider whether the higher rates of income and profits taxes can in peace times be effectively produc- tive of revenue, and whether they may not, on the contrary, be destructive of business activity and productive of waste and ineffi- ciency. There is a point at which in peace times high rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures and pro- duce industrial stagnation with consequent unemployment and other attendant evils. 2 Wilson did manage a small cut in taxes in 1919, and the top rate fell to 73 percent. However, in the 1920 election Wilson’s Democratic Money in America 55
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Party stuck with keeping the rates high to pay off war debts, while Wilson’s tax-cut message was picked up by the Republican Party. Warren G. Harding won the presidency in a landslide on a platform of “return to normalcy” for the tax system, but managed only a reduction to 57 percent in the top rate and the elimination of the excess profits tax in 1921. It wasn’t much, but it was enough to help bring the economy out of recession. Rates were lowered again in 1923 and 1924, which brought the top rate to 46 percent. The eco- nomic boom of the Roaring Twenties began to be felt. The architect of the economic boom of the 1920s was Andrew Mellon, a wealthy industrialist who helped establish Alcoa, Gulf Oil, Union Steel, Pittsburgh Coal, and many other ventures. He became Treasury secretary under Harding in 1921. In April 1924, he pub- lished a wonderful little book, Taxation:The People’s Business , which explained in detail how Mellon would put the U.S. economy into high gear. The book begins with this passage, which is quoted at length to give a flavor of Mellon’s economic strategy: The problem of Government is to fix rates which will bring in a maximum amount of revenue to the Treasury and at the same time bear not too heavily on the taxpayer or on business enterprises. A sound tax policy must take into consideration three factors. It must produce sufficient revenue for the Government; it must lessen, so far as possible, the burden of taxation on those least able to bear it; and it must also remove those influences which might retard the continued steady development of business and industry on which, in the last analysis, so much of our prosperity depends. . . .
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