In a book, Benjamin Anderson tells the story of how a wealthy entrepreneur reacted to the imposition of much higher income-tax rates in 1935 at the bottom of the Great Depression. Anderson's Economics and the Public Welfare, a highly regarded study of the Great Depression, was based on his personal experience as an economist for the Chase Manhattan Bank and the editor of the Chase Economic Bulletin. Anderson recounts the case of one rich man who,
at the age of 25, had inherited an estate of about $12 million — some thirty years before these 1935 taxes came. He had nursed his $12 million into an estate of about $30 million during those thirty years.
He had done it by a kind of activity particularly helpful and useful to the country....
He had taken many risks, knowing that many of them would turn out badly, but counting on a few of them to turn out well enough so that the profits on the successful ones would offset the much more numerous losses on the unsuccessful ones....
In the individual ... a vigorous man fifty-five years old, the effects of the new taxes were paralyzing. More than three-fourths of any profits which he might have [made] from a new venture would be taken away from him by income taxes. Any losses which he might incur ... would be his own.
But further, if he should die, his estate would have to pay the federal government and to the state of New York ... $19,602,500, or 65.342 percent of the estate. How could an estate pay this tax if it were spread out in new ventures, in assets for which no ready market existed, in assets which could not be liquidated without great loss?
It was a painful thing to watch him turn his energies from creative production to consultation with tax lawyers as to how he could save as much as possible for his heirs. It was a painful thing to watch a vigorous man of fifty-five turning from creative activities to preparation for death....
He withdrew as far as possible from illiquid investments, and turned to investments of a high degree of liquidity.
Anderson then made a most pertinent observation: “One may well raise the question as to just what good it did to the people of the United States to put this typical man in this position.”
What good, indeed? Right at the very bottom of the worst depression the country had experienced since its founding was an entrepreneur with capital and a willingness to risk it in an attempt to gain profits in ventures which, had they proven successful, would have hired the very people most dreadfully impacted by that depression. Instead, he withdrew from the markets altogether, and retired.
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