Andrew Mellon, Taxes & the Mellon Plan

Andrew Mellon, Taxes & the Mellon Plan
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  • 0:01 Hiding From the Tax Man
  • 1:01 Mellon the Magnate
  • 1:40 Mellon's Problem
  • 2:33 Scientific Taxation
  • 4:20 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Do you feel good about a politician who cuts taxes for everyone, all while increasing government revenue? Chances are you'd feel pretty good about Andrew Mellon, then. That is, as long as you didn't own a business in the Great Depression...

Hiding From the Tax Man

Few people look forward to April 15 every year. After all, that is the day by which the IRS has said that people should turn in a tax return. For a lucky portion of us, that means a refund. However, for many others, it means that it is time to open your checkbooks to Uncle Sam. Often, especially that time of year, you'll see articles in the news about the super rich hiding their money in accounts overseas. Many people can't help but have divisive opinions, with some thinking that it must be nice to be able to stow away money, while others argue that it's not fair. Who knows, you may hold both opinions!

In any event, we owe our modern system of taxation to Andrew Mellon. He was one of the richest men in the country and recognized that rich people hid their money. He also recognized that the rest of the people hated when the rich did this. He would make it his greatest achievement to find a somewhat happy medium.

Mellon the Magnate

Andrew Mellon may have been born rich, but that doesn't mean that he wasn't incredibly talented as a businessman. By age 17, he owned a raw materials company. Within a few years, he had spread his business to include everything from shipbuilding to metalworking. In short, he was one of the most knowledgeable people about the business world in the United States. Of course, controlling such a significant part of the businesses in the United States means that you've got a special understanding of it, but that's not the point. By the 1920s, only two men were richer, and Mellon held much more diverse companies.

Mellon's Problem

Given his intimate knowledge of money and business, it's no surprise that President Warren G. Harding asked Mellon to be the Secretary of the Treasury in 1921. There, Mellon faced a real challenge. After World War I, the country was broke. Mellon knew from, ahem, the experience of friends that many wealthy people simply took their money out of the economy rather than pay higher taxes on it.

But wait, how high were these taxes? In the 1920s, the highest income tax bracket was 76%, and there were calls to make people pay 100% of income earned over a certain level. For reference, today the highest bracket is 39.6%. The ultra-rich simply had no desire to put their money in the economy, and without that injection of capital into the market, there was little chance that the economy would be able to recover.

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