Tax Cuts

Perhaps the hottest financial question today is whether in the recent tax cut will pay for itself.  Proponents of “trickle down economics”  and the Laffer Curve claim it always works while opponents assert it never works.  As you might expect, the truth lies somewhere in between.

Do tax cuts pay for them selves?  Of course, I’m not an economist, but if we look to history, the simple answer is probably not.  I can give examples.

The biggest tax cut that I am familiar with has to be the Bourbon tax reforms of the 18^th century Spanish Empire.  (Relax, I will get to American examples soon enough.)  As the last Hapsburg king, Charles II, died, the empire was near economic collapse.  When Philip V, a French Bourbon import, took over, he slowly dismantled the complicated tax system that was strangling his empire.   He loosened trade restrictions, encouraging economic growth in the New World colonies. 

While results were sluggish at first, eventually the economies of the colonies—especially Mexico—rebounded and tax revenues to the mother country actually increased...At least for a while.  The easing of restrictions also drove the colonies to independence, cutting off the major share of Spanish income.  Spain might have been able to stop those independence movements had she not been constantly bankrupt.

What?  If revenues increased, why was Spain bankrupt?  Simply put: as Spain’s income grew, so did her spending.  Spain tried futilely to reverse the Protestant Revolution that was then sweeping across Europe and also tried in vain to stop the French Revolution.   Spain seemed to believe that her income was unlimited, so her spending was also unlimited.  As a result, the empire collapsed, the country was invaded, and the world’s mightiest empire collapsed into a third-rate power.

Moving to American tax cuts, I have somewhat arbitrarily decided to deal with only the major tax cuts of the last century.  There were tax cuts in the 19^th century, but I believe that the fiscal policy of a pre-industrial America has little to teach us today.  (But, what do I know?  I’m just a poor, dumb ol’ country boy pretending that history teaches us something about today.)

The first meaningful tax cuts occurred during the 1920’s.  Called the Coolidge tax cuts, they were actually the brain child of Treasury Secretary Andrew Mellon, who had been appointed by President Harding.  After Harding’s untimely death in 1923, Mellon continued to hold office for President Coolidge.  The top income tax rate was 77% for all income over $1 million.  Arguing that this rate discouraged investment and hurt jobs, the rate was cut in 1921, 1924, and 1926, eventually dropping the top rate to 24%.  The cuts, like more recent ones, actually made the tax plan more progressive, as the top earners paid a larger share of the total tax collected, and dropped millions of people from the tax rolls altogether.

At first, revenue to the government dropped, in part due to a recession, but as the recession ended, government revenue increased.   For most of the Coolidge years, the government had a surplus, something that ended with the start of the Great Depression.  The net results?  They are somewhat mixed.  The tax cuts did not cause the depression, they did spur a growth in the economy which did cover part of the loss of revenue from the tax cuts, but the income from a rejuvenated economy did not cover the total cost of the tax cuts.

If the Great Depression had not occurred, would the government eventually have recovered the cost of the tax cuts?  We will never know.

The Kennedy tax cuts are actually misnamed.  Kennedy proposed cutting the top income tax rate from 91% to 65%, but he did not live long enough to see these cuts implemented.  Johnson was successful, in 1964, in reducing the top personal rate to 70% and the corporate rate to 48%.  With a static economy, they reduced government income by $12 billion a year. 

Note.  It is difficult to compare tax rates from the fifties to those of today without also referencing what deductions were allowed.  While the rates were much higher under Eisenhower, so were the deductions.

After the tax cuts, the economy greatly expanded, but there are still arguments whether this was due to the tax cuts or from the expanded government spending during the Vietnam War.  Regardless of the cause, new income from an expanded economy recovered at best only 75% of the revenue due to the tax cuts. 

It important to remember that while the overall income to the government might have dropped because of the tax cuts, there were other benefits.  More people were employed, and their wages were higher.  Standards of living increased.  If all we do is look at the total income of the government, it is easy to forget that the government exists to help people, not the reverse.

The Reagan tax cuts are difficult to analyze because, while Reagan did cut taxes in 1981, he also raised taxes eleven times.  These tax cuts also occurred just as the high inflationary period of the 1970’s ended.  When the first tax cut was being argued in Congress, no one argued that these cuts would produce enough economic activity to be revenue neutral, the bill’s sponsors said it would produce a drop in revenue of over $600 billion over five years.

While there was an initial drop in revenue, total government income over the next decade increased 28% adjusted for inflation.  

While the direct cause and effect can be argued, there are a few facts that can be stated unequivocally.  1.  The lowered taxes increased the incentive to invest and the economy expanded.  2.  Government spending increased faster than income, producing bigger deficits.  3.  The tax code was made more progressive, meaning that the top earners paid a larger share of the government budget.

So what is the bottom line?  First, tax cuts rarely pay for themselves even as they stimulate the economy.  Secondly, unless government spending is cut at the same time as the tax cuts, it is likely that deficits will  increase.  Indeed, even if the tax cuts do increase revenue, this usually encourages the government to spend more. 

Tax cuts do increase jobs.  The Kennedy tax cuts created over nine million new jobs while the Reagan tax cuts are credited with creating over 11 million jobs.  With all of the tax cuts, the economy expanded, more jobs were created, and the standard of living went up even as government income usually decreased.

Are tax cuts a good idea?  It’s up to you, but consider that until the presidency of John F. Kennedy, the Democratic Party was in favor of cutting income tax rates—it was actually the chief party plank that differentiated them from the Republican Party.  As we make these decisions, let’s be sure we are doing so on facts and not just to be contrary to the opposing party.

George Washington and Slavery

While teaching freshmen history classes, I would frequently remind my students that no matter when and where people had lived, our commonalities were more numerous than our differences.  It is only a lack of knowledge of their surroundings and their customs that prevents us from understanding why people of the past did what they did.

Even as I said this, I knew there were a few people I had trouble understanding, myself.  I have a little trouble understanding the Nazi leaders of World War II.  Frankly, I don’t want to read any more about them.  About halfway through Inside the Third Reich, by Albert Speer, I was, for at least a few chapters, almost sympathetic to the author’s desperate pleas for sympathetic understanding.  Then I suddenly remembered exactly who and what the author truly was, and the sympathy vanished.  I’ve spent enough time trying to get inside the heads of these madmen, and I’m finished with trying.

Similarly, I have trouble understanding the mindset of Southern slave owners.  I have read endless excuses about prevailing customs, misplaced religious convictions and so forth.  I understand these arguments, but I still have trouble understanding how men like Thomas Jefferson and George Washington could condone the owning of people.  I have not given up trying, so I was eager to read Erica Armstrong Dunbar’s new book, Never Caught, the story of Oney Judge Staines, a young slave woman who escaped from her masters, George and Martha Washington.

The book is excellent, and any failures I have to understand the peculiar institution of slavery are entirely mine, and not due the work of Erica Dunbar.  I have read enough books that tend to excuse Washington for owning slaves; thankfully, this work is far more honest. 

George Washington was not kind to his slaves, though most biographies take great pains to show that other slave owners were crueler.  The comparisons just don’t work.  Washington inherited slaves at the age of eleven and he owned slaves for over 56 years.  There is ample documentation—frequently from his own journals—of the mistreatment that the president’s slaves received.

There is no doubt that Washington had his slaves whipped, that he had them worked in freezing weather when Washington himself refused to leave the comfortable warmth of his home, that he forced elderly and crippled slaves to perform demanding physical labor, and that as a punishment designed to strike fear in his slaves, he sold slaves to the West Indies—a virtual death sentence.  While it is true that Washington did not break up slave families by selling a husband or wife to another plantation, he frequently split the families by sending spouses to different farms that he, himself, owned. 

There is ample proof that Washington forced a one-armed slave to hoe weeds with his remaining arm, that he forced women to dig out stumps in a frozen swamp, and that he traded one slave for a quantity of wine.  Despite the inevitably harsh punishments that awaited them if they were recaptured, dozens of his slaves attempted to escape bondage by running away.

Some biographies point out that in his will, Washington "freed" his slaves.  While true, this is only part of the story.  Only one slave was immediately freed at the president’s death.  The rest of Washington’s slaves were promised eventual freedom—meaning that they were to remain slaves until the death of Martha Washington, his wife.  (However, upon his death, Martha wrote Abigail Adams that she feared his slaves might murder her to gain their freedom early and after several suspicious fires at Mount Vernon, she freed them early.)

This gradual emancipation was only for the 123 slaves that George Washington had personally owned and it did not affect the majority of the slaves at Mount Vernon, who were dower slaves, making them the property of the Daniel Parke Custis estate, from Martha Washington’s first husband.  Upon her death, the dower slaves were divided up among her heirs  (In many cases, husbands were separated from wives and children separated from parents).  George Washington could not have freed those slaves without compensating the Custis estate—something the president could not financially afford to do.  And while Martha couldn’t legally manumit those slaves, either, it is evident from reading her letters that she would have refused to do so even had it been within her power.  (She even refused to associate with Benjamin Franklin, who from benign neglect allowed all of his slaves to escape and then helped found an abolitionist group.)

Perhaps the best evidence for Washington’s harsh treatment of his slaves came during the Revolutionary War when a British Frigate, the H.M.S. Savage, anchored near Mount Vernon and threatened to burn the estate unless given food and supplies.  While Lund Washington, the general’s cousin and temporary estate manger, eagerly met the British terms and furnished chickens, sheep, hogs and other supplies, seventeen slaves fled to the warship and asked to be ferried to freedom.  Among the slaves were several elderly men who, despite their age, were eager to leave the comparative safety of the plantation for freedom.

When Washington became president, he took slaves with him, first to New York, then to Philadelphia, which served as the nation’s temporary capital.  Upon arrival in Philadelphia, Washington was dismayed to learn that while he could take slaves into Pennsylvania, if they remained there for six months, they could claim freedom.  Washington immediately took steps to keep this information secret from his slaves, and when this proved futile, spent the next six years carefully shipping his slaves either back to Mount Vernon or to New Jersey every five months for a short “visit”.  While this did not satisfy the spirit of the law, it did meet the letter of the law and prevented his slaves from establishing a legal residence that would lead to their freedom.  Washington's slaves were not unaware of his subterfuge.

Oney Judge was Martha Washington’s “body servant”, who was a trusted slave who prepared the First Lady’s clothes and attended to her personal needs.  As a member of the extended family, Judge got better treatment than most slaves—the work was less physically demanding, she had better clothes, and she received kinder treatment.  Judge might not have ever run away from the Washingtons had not Martha decided to “gift” the young slave as a wedding present to her granddaughter.  Insulted and fearful of a new master well known to be temperamental, Judge made the courageous decision to escape.

While the Washingtons ate supper, Judge fled and made her way to Portsmouth, New Hampshire, where she remained for the rest of her life.  While Judge and her children were technically still slaves, and subject to being physically returned to Mount Vernon (a course of action Washington knew could not be taken because of bad publicity), Judge eventually married and made a life for herself in a small town.  It is a fascinating story and I urge you to read Dunbar's book.

Meanwhile, George Washington never accepted the loss of his "property" and not simply because he was financially responsible to the Custis estate for the loss.  For the rest of his life, he attempted to convince Judge to return to Mount Vernon, refusing to believe that anyone would prefer the impoverished life of a freed slave to being the personal servant to the president of the country.  Washington refused to believe that Judge preferred freedom, convincing himself—despite all evidence to the contrary—that Judge had been enticed to escape by a mythical white French abolitionist.

Nor would Washington allow his agents to negotiate terms with the escaped slave.  Washington knew exactly where Judge lived, and sent agents to try to convince her to return, but refused to allow those same agents to promise her eventual emancipation, stating that such action would be “impolitic & dangerous precedent.”

There is no doubt that throughout the 1780’s and 1790’s, Washington’s views about slavery slowly changed.  As president, he once told a British diplomat that the issue of slavery had “to be rooted out” for the nation to survive.  And as the only Founding Father to "free" his slaves—a deliberate message to the nation—he should be commended.  But, there is also no doubt that those theoretical views on slavery were secondary to his very real attempts to recapture all of his escaped slaves.

I have heard all the arguments attempting to explain Washington’s attitude about slavery.  Feet of clay, the culture he was born into, the prevalent customs, a product of his time and so forth.  Yes, Washington was a complex man—he was an essential element in the Revolutionary War and a great president.  But, I still can’t quite climb into the man’s mind and I still can’t understand his participation in something he privately came to know as wrong.

We’ve Met the Enemy

The Indian chief was worried about the future of his tribe as the flow of White Settlers moving westward across his land seemed to increase daily.  For a while, the almost constant arrival of new Whites had stopped, but when the great war the chief had heard rumors about stopped, the White men returned in numbers even larger than before.  Already, it was impossible for the Chief to move his tribe far enough away from the settlements of the Whites to avoid trouble.

Knowing that war would mean his tribe’s destruction, the chief tried a desperate move.  If he was to make peace with the White men, he must learn more about them, and in particular, some of his tribe must learn the White Man’s language.  Accordingly, he made an agreement with a nearby settlement—he would send three young men to work for a local rancher in exchange for language lessons.  The chief was determined to learn to live with his new neighbors.

A year later, when the young men returned, they could indeed speak with the nearby settlement.  Unfortunately, it made very little difference for the future of the tribe.  The chief had unknowingly picked the wrong local community, for the young Indian men had learned to speak German.

Strangely enough, the above story is actually true—it happened it Kansas in the 1870’s.  From 1860 to 1890, 14 million immigrants moved to America.  So many immigrants arrived that nativist political groups sprang up all over the country, fearful that so many new arrivals would destroy the culture of the country.   Without a doubt, these new immigrants did produce some changes.

By 1890, 80% of New York City was foreign stock.  The country was reaping the benefits of a large and successful industrialization, in part due to a large pool of unskilled labor willing to work at reduced wages.  The new production was, at least in part, purchased by the new consumers.

Still, immigration spurred complaints.  The “new” immigrants were not like the “old” immigrants.  They were too young, too many were unmarried men, and too few had skills. In addition, they didn’t speak English, they had no education, and they weren’t farmers—instead, they settled in slums in the rapidly growing cities.  These people were not capable of becoming Americans.  Political groups began screaming for reform, something had to be done!

Most of the complaints could be summarized as simply saying, “These new people are not like us!”

As industrialization and the changes in agriculture moved eastward across Europe, small peasant farmers took advantage of the drop in transportation costs and moved to America.  The waves of Irish and English immigrants were replaced with Germans and Italians, who in turn were replaced with Poles and Russians.  And as the ethnicity of the immigrants changed, the former immigrants, now assimilated, screamed, “They are not like us!”

Eventually, President Theodore Roosevelt succumbed to the political pressure and appointed the Dillingham Commission to gather facts about immigration.  The Dillingham Commission was far from unbiased:  all but one of the members were on the record as openly favoring imposing restrictions on immigration.  Nor were the members good at statistics, either.  They tended to reject information that did not back up their preexisting beliefs and generally misinterpreted the data they did accept. 

The Dillingham Commission was openly hostile towards Catholics and Jews, reporting racist nonsense such as over 60% of Jewish school children were retarded.  The report was a masterpiece of twisted statistics.  (Remember, for over 99.9% of her flight time, the Hindenburg was NOT on fire.)

I won’t bore you with the all the findings, since the final report is a massive 42 volumes.  And the data didn’t really matter since the biased commissioners interpreted the data to fit their own needs.  In a nutshell, the report said that immigration from Eastern Europe and Italy posed a real harm on the future of the country and that steps should be taken to restrict entry from those areas.

While the conclusions (and interpretations of some of the data) were flawed, the immigration data, once collected, was useful, however; a review of the information decades later did reveal some surprising results.  When comparing “new” (Eastern European) and “old”  (Western European) immigration, the two groups had some surprising similarities.  Both groups had roughly the percentage of single men, both groups had the same rate of literacy, both groups had the same rates of skilled labor, both came from rural backgrounds and both groups settled, at least for the first generation, in the cities. 

Regardless of geography, most of the immigrants came to America because of their desire for economic improvement.  Both groups were attracted by the opportunity to acquire farmland—something that was impossible in Europe.  The data reveals truths that the official conclusions denied: the simple facts are that all immigrants—regardless of where they came from—were far more like each other, and like the people of their new country than they were different from either group.  Or, as Pogo put it, “We have met the enemy and he is us.”

When the Dillingham Commission's report was published, it was trashed in the press.  The flaws in the statistics were promptly exposed, the overt racism was revealed, and its obvious biases criticized.  Then, Congress—in usual fashion, ignored the criticisms and reality, and promptly passed laws limiting immigration from Asia and Eastern Europe.

The fears of 1900 seem ridiculous today.  It was widely believed then that Germans and Italians were from collectivist cultures, so that it impossible for them to embrace individual freedom.  Catholics were supposedly instilled with a deep sense of anti-republicanism that made the concept of liberty impossible, while the Chinese were believed  incapable of assimilation and would remain displaced foreigners for generations.  These ideas seem so absurd to us today (Well...to some of us, anyway!).

When cultures meet, there is a blending of ideas that usually benefits both groups.  I live in New Mexico where it is almost impossible to count the various cultural contributions that I benefit from.  (I’m eating Ranch style beans and turkey bratwurst while drinking a Dos Equis.)  Of course, not all cultural blends are good, (Taco Bell), but I choose to be optimistic, and believe that the current concerns about immigration are just as baseless as they were in my grandfather’s time.

A century from now, the current concerns about immigration will seem absurd, too.  If my great-grandchildren read this, they will probably say, “Why were they worried about us?

Sculptures Carved in Snow

The out-of-date reference was almost fifty years old when it was written, and the book containing it had been out of print for eighty years when I ran across the phrase, “roared like Booth and Barrett.”  This is one of the downsides to being a historian, references in old books are frequently so obscure as to lose all meaning.

Booth and Barrett?  This didn’t ring any bells.  I knew that a "Booth" killed Lincoln and that a "Barrett" is a type of rifle with such a ridiculously large recoil that you would swear you had put the wrong end of the rifle up to your shoulder.  Obviously, this turned out not to be the right answer. 

In the last decades of the nineteenth century, combines and trusts were common.  Large groups of businesses combined to control a market, to set prices, and to eliminate the competition.  The Booth-Barrett Combine was sort of like that, but in a unique field.  Edwin Booth and Lawrence Barrett were the two greatest actors of their day, and when they combined to form a partnership, they were an unbeatable combination that established traditions on the stage that live on.

Edwin Booth was perhaps the greatest actor of his day.  His father, Marcus Junius Booth was a famous English tragedian who, after moving to the United States in 1821, became the most famous actor of his day.  He was equally famous, or perhaps, infamous, for his alcoholism and drunken exploits (including a sadly prophetic death threat on the life of his personal friend, President Andrew Jackson).  His sons, Edwin, John Wilkes, and Junius Jr., would all become famous as actors before the Civil War.

The most accomplished actor of the Booths was Edwin, who performed on stages across the United States and Europe, and was famous for portraying Hamlet and Macbeth.  Edwin Booth was a world-renowned actor, but a horrible businessman.  He attempted to run his own theater in New York, but—despite his popularity with theater-goers—his bad management and spectacularly bad judgement in hiring brought him bankruptcy in just a few years.

Which brings us to Lawrence Barrett, another Shakespearean actor, who had also performed in both Europe and America.  Barrett said the theater was an art form where the actor carved "sculptures in snow".  While Barrett was also recognized as a great actor, even he admitted that he was no Booth, and his finely tuned business sense told him that the American theater market was not developed enough to sustain two great Shakespearean actors.  Since there wasn’t enough business for two separate touring acting companies, he offered a partnership to Booth in order to create one great acting company.

Together, they toured the country, giving over 250 performances in the thirty-week season (roughly Fall through Spring) and divided the proceeds, with Booth receiving 60% of the profits.  Barrett, besides acting alongside Booth, managed the entire tour: hiring actors and support staff, managing bookings, arranging travel and hotels, and providing the publicity—quite an undertaking in a time of limited communications.

As Booth would later admit when complimented on his good work under Barrett’s management:

Good work, eh?  Well, why should I not do good work, after all Barrett has done for me.  Why I never knew what c-o-m-f-o-r-t spelled before....I go in and dress, and smoke, and then act.  That’s all, absolutely all, that I have to do, except to put out my hand and take my surprisingly big share of the receipts now and then.  Good work, eh?  Well, I’ll give him the best that’s in me, he deserves it.

It was a rather large touring company with fifteen actors, six actresses, a child actor and his mother, a manager, four advance men, a treasurer, and a valet for Mr. Booth.  Minor actors, stagehands, and seamstresses would be hired locally as needed.  Booth and Barrett would travel in a specially-prepared Pullman car that included a dining room, sleeping compartments, and a library, while the rest of the company traveled in coach.  Despite the logistical nightmare, Barrett proved to be a genius in managing the touring company, and the profitable partnership lasted five years.

Barrett, sensing that the public would be eager to see the two famed actors, immediately raised the price of admission to the theaters from the usual price of $2 a seat, to $3.  A private box could be secured for $10 to $30.  Whenever possible, Barrett would book theaters that promised a percentage of the gate instead of a flat fee.  Barrett’s confidence in the public response paid off handsomely, the pair of actors, who would alternate roles every night, played to sold out performances with people paying as much as $1 each for standing room in the aisles.  Booth received the unheard-of salary of $250,000 a year.  (Neither Booth nor Barrett ever received nearly as large a salary touring independently.). 

Wherever Booth and Barrett played, the theaters were sold out.  On occasion, the orchestra was moved behind the stage in order to put in additional seats out front.  Don't think of this as Kenneth Branagh and Patrick Stewart play Macbeth—think of it as a rock concert with both the Beatles and the Rolling Stones. 

According to the newspaper reviews from the towns where the two actors performed, the plays were wondrously received.  In many ways, these performances permanently fixed the popularity of classical theater in America.  In places far removed from the eastern theater markets, local performance companies staged annual Shakespeare revivals long after Booth and Barrett had  stopped touring.

Not surprisingly, the Booth-Barrett Combine was not popular with other professional actors.  Not only did business drop at competing theaters in the towns where the duo performed, but theater business dropped for weeks before and after the two performed.  The performances became highly-anticipated events, where theater-goers hired coaches, bought new clothes, and staged parties after the plays.  Since most theater-goers were middle class, this annual extravagance meant saving funds for weeks before and after the actual event.

When advertising posters went up showing Booth as Hamlet, standing with his right arm extended with three fingers pointing skyward, Maurice Barrymore—a rival actor and patriarch of the famous acting clan—joked that it was Booth announcing the new price of tickets.

With his newfound wealth, Edwin Booth bought a brownstone on Gramercy Park in New York City, where he established a permanent club for actors, men of letters, and patrons of the arts.  The founding fifteen members of the Players Club included Booth, Barrett, Mark Twain, and William Tecumseh Sherman.  The club, still at the same location, recently celebrated the 184th birthday of Booth.

After they toured for five years, the health of both men had declined and they left the stage.  Booth spent his last years in his private apartment at the The Players Club, where his apartment remains as both a shrine and a museum to the founder.  It includes a poker table much favored by Mark Twain, and the skull Booth used to portray the remains of Yorick.  The skull once sat atop the neck of a horse thief whose last request—just before he was to be hanged—was that his skull be given to Junius Booth for use in Hamlet.