numonex on 02 December 2010
The Mellon plan
Mellon came into office with a goal of reducing the huge federal debt from World War I. To do this, he needed to increase the federal revenue and cut spending. He believed that if the tax rates were too high, then the people would try to avoid paying them. He observed that as tax rates had increased during the first part of the 20th century, investors moved to avoid the highest rates—by choosing tax-free municipal bonds, for instance. As Mellon wrote in 1924:[4]
The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.
If the rates were set more reasonably, taxpayers would have less incentive to avoid paying. His controversial theory was that by lowering the tax rates across the board, he could increase the overall tax revenue.
Andrew Mellon's plan had four main points:
Mellon plan was a huge success. Highest tax rate around 24%, lowest tax rate around 0.5%. Reducing taxes encouraged more tax payers to pay tax and government became more efficient. Low taxes for all tax payers who would say no to that?
Flat tax system may actually work, more efficient government and more people would be willing to pay taxes. Businesses would grow, more investment and lower unemployment due to businesses having more money to create more employment opportunities for low to middle income workers.
