The Free Market 9, no. 2 (February 1991)
In 1928 Herbert Hoover rode the coattails of Calvin Coolidge into the White House, and everyone thought he would hold the line on taxes, for he talked of “individual freedom” and criticized his opponents as “socialists.”
Despite his public rhetoric, however, Hoover was· a believer in the “new economics” and its “scientific planning.” He especially liked the inheritance tax, and when speaking on this issue, sounded more like Karl Marx than a supposed champion of individual freedom. And like most Republicans of the time, he favored taxes on consumption over taxes on production (though they amount to the same thing in the long run).
As Murray N. Rothbard has pointed out, Hoover launched “an unprecedented program of government intervention for high wage rates, public works, and bolstering of unsound positions that was later to be christened the New Deal.” That program included new regulations and controls on business enterprise, and in 1930, the highly protectionist Smoot-Hawley Tariff Act.
Yet through all these interventions, Hoover opposed higher taxes because of the depression. As late as May 26,1931, he maintained “flat opposition to any tax increases,” saying he was particularly concerned that liberal Democrats in Congress might “make an onslaught on the higher brackets of the income tax,” which would only “accentuate the present trouble.” Hoover also “recommended that Congress abolish or modify” the capital gains tax.
Late in 1931, however, a “new crisis” appeared: the federal budget deficit. Federal spending had risen by over $257 million that year, and because of the depression, tax receipts were falling. Treasury Secretary Andrew Mellon announced that the federal government would incur a budget deficit of $900 million in fiscal 1931. For 1932, he projected a budget deficit of more than $2 billion.
In his budget message on December 7, 1931, Hoover said the federal government was “face to face with a situation” where “the current revenues of the government under our existing laws have fallen below the amounts required to meet the absolutely necessary expenses.” “We cannot,” he said, “maintain public confidence nor stability of the federal government without undertaking some temporary tax increases. I recommend that Congress provide for an increase in taxation for a definite limited period.”
In his State of the Union address the following day, Hoover sought support for his deficit-reduction plan because of”the magnitude of the deficits which have developed and the resulting necessity for determined and courageous policies.” He called for reductions in federal spending and “temporary” higher taxes.
Secretary Mellon told the House Ways and Means.Committee that balancing the budget “involves not only self-denial but some measure of sacrifice.” The sacrifice wouldn’t be the government’s, however: “We are fully justified in calling on the people to make further sacrifice in order to supply their government with adequate revenue.” He also promised to “eliminate every unnecessary expenditure” in the federal budget.
The job of pushing the plan through Congress fell to Mellon’s replacement, the new Treasury Secretary Ogden Mills. He opened negotiations with the Democratic-controlled House Ways and Means Committee, and came out saying they were “in complete accord” about the “necessity of balancing the budget during the next fiscal year.” Many members of Hoover’s administration warned against increasing taxes a year after he had promised no increases whatsoever, especially with the 1932 election so close, but to no avail.
Supporting the tax package was the Republican administration, the Republican leadership in Congress, and the majority of the Democratic leadership in Congress. The Democratic Speaker of the House, for example, referred to a manufacturers’ sales tax as the “backbone”· of a “non-partisan” bill.
Working against this coalition were: liberal Democrats, who wanted excise taxes replaced with more progressive income tax rates, and conservative Democrats and Republicans who opposed any tax increase, particularly during a depression.
Opposition was far more radical at the grass roots. In cities all across America, a tax revolt had already broken out against property taxes. Hoover’s support for higher federal taxes fueled the rebellion. Reflecting the public mood, Congressman Claude Parsons lamented in the Congressional Record over the American taxpayer:
He was taxed on boots, was taxed on shoes, was taxed on suits and taxed on booze,
Was taxed on socks, was taxed on hose, was taxed on everything that grows.
A tax attacked him when he was born, attacked him till he felt forlorn.
If they increase, as in this bill, it won’t be long until they will
Impose a tax on growing corn and on the toots of Gabriel’s horn.
Business groups warned Congress against passage of higher taxes in the midst of a depression. “The primary emphasis,” said the U. S. Chamber of Commerce, “should be on balancing the budget by reduction of government expenses, not by increased taxation.” The St. Louis Chamber urged tax cuts.
Hoover dismissed the attacks on higher taxes as irresponsible, arguing that $2.5 billion in government spending is “fixed” and cannot be cut, and ifthe rest were cut it would leave the military at “one-half’ its “present strength,” prisoners would be released from jail, and “public health” would “be abandoned.”
Hoover had opened the door to higher taxes, and suddenly the debate shifted to the issue of “fairness”: that is, whose taxes should be raised and to what extent. Liberals in Congress argued for a bill to “conscript wealth” and “soak the rich.”
A manufacturer’s tax came up for vote and was defeated, and Hoover expressed “keen disappointment.” But he went on to reaffirm his belief in higher taxes: “Nothing will put more heart into the country than prompt and courageous and united action.”
What finally passed both houses of Congress was the Revenue Act of 1932, which increased income tax rates, imposed additional import duties on raw materials, and raised gasoline taxes.
It was Hoover’s swan song. Combined with years of inflationary Federal Reserve policies, higher spending, and new protectionist measures like the Smoot-Hawley Tariff Act, the tax bill was the final nail in the economy’s coffin.
Output fell by 26% in the following two years, and unemployment rose from 15.9% to 24.9% in 1933 . Even the federal budget deficit increased. The tax increase lowered net production, which reduced revenues by nearly 40% in one year. The spending cuts in the bill never materialized.
Hoover was soundly defeated in the 1932 election by Franklin Delano Roosevelt, who promised to cut taxes and balance the budget with lower spending.
Recently, George Bush signed the largest tax increase in U. S. peacetime history as the economy enters a recession, after extensive negotiations with the Ways and Means Committee. He said we must cut the deficit because it is a “cancer gnawing away at our nation’s health.”
Then, after hearing’ that the deficit will be going up dramatically, the domestic policy director of the White House called huge deficits “stimulative.” If the script written during the Great Depression is followed to the end, Bush will have changed his mind by the time his memoirs are written.
