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September 17, 2008
Tax Cuts, Confidence, and Presidential Leadership
Joseph J. Thorndike

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Tax Cuts, Confidence, and Presidential Leadership

Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: jthorndi@tax.org.


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How should a president respond to economic turmoil? Sympathy or reassurance? Confidence or concern? Occupants of the White House have usually erred on the side of optimism, while candidates for the top job have shown a penchant for gloom. So what happens when a president becomes a candidate?

Herbert Hoover, 1929 (photo courtesy of the Library of Congress)Most have failed to thread the needle. Usually they end up looking out of touch (George H.W. Bush) or defeatist (Jimmy Carter), depending on their tack. And almost invariably, they go down to swift and ignoble defeat. The bully pulpit can be a poor platform for reelection.

Consider the unhappy fate of Herbert Hoover, the nation's 31st president and one of its most maligned public servants. He served a single term from 1929 to 1933 -- just long enough to preside over the darkest days of the Great Depression. While still in office, this progressive Republican -- once considered a national hero for his humanitarian work -- found himself vilified for his tepid response to the crisis. Contemporaries signaled their scorn by coining new words:

  • Hooverville -- one of the sprawling encampments of homeless Americans that grew up in the early thirties.
  • Hoover blankets -- newspapers used to cover people forced to sleep outside.
  • Hoover flags -- pants pockets turned inside out to signal poverty.1

Later generations were similarly unkind. In the modern political lexicon, Hoover's name has become a synonym for failure and ineptitude. Today the engineer from Iowa is best remembered for his empty optimism. "Prosperity," he famously predicted in the early days of the Depression, "is just around the corner."

Actually, the quotation is apocryphal. But it captures the essence of Hoover's rhetorical strategy. Like most incumbent politicians, he was something of a Pollyanna. He certainly made liberal use of reassuring platitudes:


    "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."2 (October 25, 1929 -- the day after the Black Thursday stock market crash.)

    "Any lack of confidence in the economic future and the basic strength of business in the United States is simply foolish. Our national capacity for hard work and intelligent cooperation is ample guaranty of the future of the United States."3 (November 15, 1929.)

    "I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."4 (May 1, 1930.)


By and large, Americans (and markets) were unconvinced. After a brief rally, Wall Street continued to sink. In fact, stock speculator Bernard E. Smith claimed that he made a fortune by selling short every time Hoover made hopeful comments about the economy.5

Hooverville, Seattle Washington, 1932 (photo courtesy of the King County Archives)For all his optimism, Hoover was not some sort of modern-day Nero, fiddling while the nation was engulfed by an economic conflagration. Rather, he worked assiduously and even creatively to promote recovery. Upbeat rhetoric played a key role in this effort, but so did more tangible policy innovation, including tax reform.6

Hoover's Tax Cut

When it comes to taxes, Hoover is best remembered for the Revenue Act of 1932, the largest -- and most poorly timed -- peacetime tax increase in American history. By almost any reckoning, it made the Depression worse, not better. But in that pre-Keynesian age, most policymakers -- including Hoover -- believed that deficits were an obstacle, not a means, to recovery.7 (For more on the 1932 revenue act, see Tax Notes, Sept. 1, 2003, p. 1201, Doc 2003-19534, or 2003 TNT 170-30.)

The 1932 act was not, however, Hoover's first venture into tax revision. In October 1929, just a few weeks after the great stock market crash, he asked Congress to cut taxes, not raise them. If the 1932 law in retrospect seems horribly misguided and counterproductive, then the 1929 act seems more consistent with modern theories of countercyclical fiscal policy.

And in some respects, it was. The Revenue Act of 1929 was designed to promote recovery. It marked a notable foray into fiscal activism, especially for a Republican administration. But the law's mechanism for promoting recovery was hardly Keynesian. Rather, it was rooted in traditional theories of public finance -- theories emphasizing the importance of balanced budgets and fiscal rectitude, not deliberate deficits and stimulatory spending.

On October 21, 1929, Hoover signaled his intention to ask for a tax cut. Treasury Secretary Andrew Mellon told lawmakers that he expected a budget surplus in each of the next two fiscal years. As a result, he suggested, Congress would have ample room to cut taxes. Ways and Means Chair Willis Hawley, R-Ore., responded warmly. "In the past," he told reporters, "each reduction in taxes has stimulated business and resulted in another surplus the subsequent year."8

Three days later, Wall Street took the first of several swoons. Mellon insisted that plans for a tax cut remained intact. It was, he implied, simply a routine refund of excess revenue to overburdened taxpayers.9

In fact, the tax cut had already become a vital element in Hoover's response to the market crash. In a series of extraordinary meetings, administration leaders and Federal Reserve officials agreed that a tax cut might promote growth by increasing private demand for goods and services. But even more important, they believed it would bolster "business confidence" -- that elusive sense within the business community that all was well with the world.

But how exactly was a tax cut supposed to boost confidence? Wasn't it a signal of worry and concern? Not for the Hoover administration. The psychological impact of the tax cut depended heavily on the personal and political reputation of Andrew Mellon. The dour Pittsburgh banker was a well-known champion of tax reduction, having orchestrated a series of sweeping tax cuts during his decade of service to GOP presidents. But he was even better known as a fiscal conservative, his party's most vigorous champion of debt reduction and balanced budgets. It was this latter element of Mellon's reputation that administration officials hoped to exploit.

Affordable or Imperative

In the weeks leading up to Hoover's budget address in early December, Mellon insisted repeatedly that tax cuts were affordable, even in the face of a market meltdown. "Our estimates indicate that the government should close both the fiscal years 1930 and 1931 with a surplus," he said in a formal statement to the press. (And in fact the government did finish 1930 with a surplus of $738 million. By 1931, however, shrinking revenues had created a deficit of $462 million.) "Taking all factors into consideration, the secretary of the Treasury, with the approval of the President, will recommend tax reduction to the Congress."10

Mellon proposed to Congress a 1 percent cut in corporate income tax rates, as well as a similar reduction in "normal" rates for individuals. (Individual taxes were then levied using both "normal" and "surtax" rates. Normal rates were designed to remain relatively low and more or less constant. Surtax rates were considerably higher, reaching 24 percent in 1929, and applied only to taxpayers in upper brackets.) For corporations, the promised cut meant a rate reduction from 12 percent to 11 percent; for individuals, rates would drop from 1.5 percent, 3 percent, and 5 percent to 0.5 percent, 2 percent, and 4 percent, respectively.

Sen. Reed Smoot (R-Utah), actress Mae Murray, and Rep. Willis Hawley (R-Ore.) at a tax cut rally on the steps of the U.S. Capitol, , December 7, 1929 (photo courtesy of the Library of Congress)The administration implied -- and many observers agreed -- that Mellon would never countenance a tax cut in the face of an uncertain revenue stream. If the secretary was confident that revenue would remain high in the years to come, then the economy must truly be sound. "The action of the government today," wrote one reporter commenting on the tax cut, "was taken as still another means of assuring the nation that the government was satisfied that business was on such a firm basis that revenues will continue to assure a comfortable surplus."11

The president added his own voice to Mellon's message of reassurance. And he did so by denying that he was engaged in happy talk. "My own experience," he told reporters, "has been that words are of no very great importance in times of economic disturbance. It is action that counts. The action of the Federal Reserve Board in establishing credit stability, ample capital, the confidence of the administration in undertaking tax reduction, with the cooperation of both political parties, speaks a good deal stronger than any number of statements" [emphasis added].

The Hoover-Mellon tax cut, in other words, was not designed to fix economic problems, at least not directly. Rather, it was intended to minimize them, thereby boosting confidence and promoting recovery. In fact, Mellon insisted specifically that the tax cut was not a response to the market crash. It was, rather, a signal that the crash was just a passing phenomenon, a temporary detour on the path to prosperity.12

Business leaders welcomed Mellon's plan. C.B. Clark, chair of the taxation committee for the National Retail Dry Goods Association, hailed it as "a stabilizing force that comes with great timeliness for the retailer." The principal value of the tax cut was symbolic, he pointed out. "The consumer who had no stock market losses was beginning to be afraid that hard times were coming and that 'Santa Claus was dead,'" he said. "The timely and convincing statement of Secretary Mellon removes this fear that something terrible was going to happen."13

Not everyone was convinced. Carter Field, writing in The Washington Post, suggested that the tax cuts were a sign of fear, not confidence. In normal times, Mellon would never have supported a tax cut premised on a probable surplus, waiting instead for an actual surfeit. If the secretary was willing to break with tradition and act on mere projections, then the situation must truly be grim.14

Hoover's Speech

In his State of the Union message, delivered December 3, Hoover stressed the virtues of cutting taxes. "We cannot fail to recognize the obligations of the government in support of the public welfare," he declared, "but we must coincidentally bear in mind the burden of taxes and strive to find relief through some tax reduction. Every dollar so returned fertilizes the soil of prosperity."15

Like Mellon, Hoover stressed the affordability of a tax cut. "Congress will be fully justified in giving the benefits of the prospective surpluses to the taxpayers," he told lawmakers, "particularly as ample provision for debt reduction has been made in both years through the form of debt retirement from ordinary revenues."16

A few days later, tax cut supporters mounted a rally on the Capitol steps. Speakers included film and radio stars, as well as civic leaders from around the nation. Actress Mae Murray (famous for her role in the Ziegfield Follies and later as a contract star for MGM) presented lawmakers with signed petitions in support of the Hoover cuts. Murray's former costar, comedian Ed Wynn, was also on hand to lend his support. (Wynn is best known to modern moviegoers as Uncle Albert in Mary Poppins, but he was a major radio star of the late 1920s.) "I feel like a piece of carpet, I am so kept down by taxes," Wynn told reporters at the rally.17

Inside the Capitol, the Hoover-Mellon plan was well received. Republicans were broadly supportive, and even many Democrats signed on. Like many of his party colleagues, Sen. David Walsh, D-Mass., promised to support the tax cut. "Apparently it will have a desirable psychological effect upon the business public," he said, "now somewhat disconcerted and apprehensive by reason of the collapse of the stock market."18

Smoot, Hawley, and supporters present tax cut petitions on steps of the U.S. Capitol. (photo courtesy of the Library of Congress)Sen. James Couzens, a maverick Republican from Michigan, offered similar thoughts. "On the basis of the merits of the joint resolution, I would be unalterably opposed to it," he acknowledged, "but based on this indeterminate psychology, I hesitate to put my judgment against the judgment of any others who claim it will have a great psychological effect."19

But at least one lawmaker balked. Sen. George Norris, R-Neb., ridiculed psychological arguments for the cut. Perhaps the government should fire its fiscal experts and replace them with psychologists, he suggested wryly: "They ought even to discharge the Senate chaplain and hire a psychologist to lecture to us instead of having a preacher to pray to us."20

Such skepticism fell on deaf ears, and both houses soon passed Hoover's tax cut without major changes. But of course it had no discernible effect on the economy. And as revenues began to shrink, Hoover and Mellon -- both fiscal conservatives to the core -- decided that deficits were the most serious threat to business confidence. Where once they had placed their faith in rosy assessments of the economy, they soon offered steely resolve instead. Beginning in late 1930, both began agitating for a tax hike.

Still, Hoover's tax cut is worth remembering for at least two reasons. First, it underscores the dilemma facing incumbent presidents (or the candidates of incumbent parties, like Sen. John McCain, R-Ariz.). As they walk the tightrope between concern and confidence, it's easy to overemphasize the latter. Hoover was not the first president to make that mistake, and he almost certainly won't be the last. It may even be an occupational hazard.

Historically, Hoover's 1929 experiment in confidence-building is important to reviving his reputation -- which remains in tatters with the public, if not with historians. Hoover was a fascinating and creative politician. Indeed, some modern-day conservatives revile him as a proto-New Dealer, indulging in some of the same governmental activism that Roosevelt embraced in the 1930s. He was not, to be sure, a good president; among other things, he was a hopeless communicator in an age that needed a great one. But he was not a do-nothing president. And that's worth remembering.


FOOTNOTES

1 Examples drawn from Michael E. Parrish, Anxious Decades (New York: W.W. Norton, 1992), p. 240.

2 John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California, available at http://www.presidency.ucsb.edu/ws/?pid=21979.

3 John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California, available at http://www.presidency.ucsb.edu/ws/?pid=22005.

4 John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California, available at http://www.presidency.ucsb.edu/ws/?pid=22185.

5 Parrish, Anxious Decades, note 1 supra.

6 Over the last 30 years, historians have tried to revive Hoover's reputation, giving him credit for good intentions, if not effective performance. For one of the more influential assessments of his presidency, see Joan Hoff Wilson, Herbert Hoover: Forgotten Progressive (Boston: Little Brown, 1975).

7 E. Cary Brown, "Fiscal Policy in the Thirties: A Reappraisal," American Economic Review 46 (1956).

8 "Federal Taxes Due for Slash," Los Angeles Times, Oct. 22, 1929, p. 3.

9 "Treasury Officials Blame Speculation," The New York Times, Oct. 25, 1929, p. 1.

10 Arthur Crawford, "Unite on 160 Million Tax Cut," Chicago Daily Tribune, Nov. 14, 1929, p. 1. Surplus and deficit figures from Office of Management and Budget, Historical Tables, Budget of the United States Government for Fiscal Year 2009 (Washington: Executive Office of the President, Office of Management and Budget, 2008), p. 21.

11 "Mellon Outlines Plan," The New York Times, Nov. 14, 1929, p. 1.

12 "Cut in Tax Under Way," Los Angeles Times, Nov. 15, 1929, p. 1.

13 "Tax Cut Welcomed by Retail Expert," The New York Times, Nov. 17, 1929, p. N6.

14 Carter Field, "Tax Cut Prophecy Seen as 'Lifeline' to Administration," The Washington Post, Nov. 17, 1929, p. M15.

15 John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California, available at http://www.presidency.ucsb.edu/ws/?pid=22021.

16 Id.

17 "Parade for Tax Cuts," The New York Times, Dec. 8, 1929, p. 20.

18 "Predicts the House Will Speed Tax Cut," The New York Times, Nov. 16, 1929, p. 1.

19 "Senate Votes Big Tax Cuts," The New York Times, Dec. 15, 1929, p. 1.

20 Id.


END OF FOOTNOTES