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Email L. Henry Platt, Jr.
  Henry Platt

THE LAW of diminishing returns

The Law of diminishing returns was not written by Congress or decreed by a king or emperor; it is a Law of economics. For a few years when our republic was still young, an investment fad in tulips engulfed Europe and North America. Everyone was willing to pay higher and higher prices for tulips and tulip bulbs.

This frenzy continued for several years until the market was saturated, and then the price crashed like Enron. As prices began to level off at the top of the market, the profit margins also began to wane. This was an example of diminishing returns.

During the early years of the twentieth century President Theodore Roosevelt created the Food and Drug Administration. During the first decade of this Agency great strides were made in the health and food safety of our nation, but today the FDA works hard just to maintain and possibly slightly improve the high quality of protection Americans enjoy today. This is another example of diminishing returns.

In the 1960's Congress began to pass laws to clean the air we breathe. In fifteen years 85% of pollutants were removed from the air Americans breathe at modest expense. but today the cost of removing the last 5% of pollutants from the air Americans breathe is astronomical (especially when China is not required to clean its air at all even though it has five times as many people as the United States and produces twenty times as much pollution.) The high costs of further reducing air pollution in the air we breathe are another example of diminishing returns on more dollars we spend to reduce pollution.

Taxes are another example of diminishing returns. Around the time of the American Revolution, William Pitt, the younger, Chancellor of the Exchequer, faced a revenue problem of smuggling. He decided to reduce the rate of taxation (customs duties) on tea from 3d (threpence) to just a penny per pound. This took all the profit out of smuggling, and the revenues to the crown doubled.

Pitt never again reduced the tax on tea. Smuggling had stopped, and there could be no further fiscal gain, but the concept of reducing taxes to increase tax receipts had been written into history.

Around the time John F. Kennedy began to serve as a Senator from Massachusetts the biography of William Pitt, the younger was published. Reading that scholarly text would have provided concepts and ideas for conversations John had with family and companions, especially his Vice President, Lyndon B. Johnson. Whereas JFK was a brilliant scholar, LBJ was a real in the trenches man of action and accomplishments.

When JFK was inaugurated as President, the U.S. tax code was taking 91% of all ordinary income a person might earn in excess of $341,000. Two years later many popular magazines featured stories of how many wealthy Americans avoided paying these confiscatory taxes. The Law of Diminishing Returns was siphoning off the dollars needed to wage the war in Viet Nam. In 1965 LBJ proposed and got a reduction in tax rates. These lowered rates increased revenues to the treasury and to the portfolios of the Johnson and Kennedy families.

When Ronald Reagan became President, he led the movement for simplified taxation. In 1980 Americans were writing off taxes on cigarettes, tires, jewelry, and both state income and sales taxes, as well as interest on credit card bills. Today these and many other deductions may no longer be claimed, but the tax rates were reduced to compensate for the nickel and dime deductions which have been eliminated. Simplification has benefited almost everyone, but Congress continues to pass more burdensome requirements for more and more reports and records.

President George W. Bush implemented a tax reduction plan which coincided with economic growth. Cause and effect were minimal at best in understanding these dynamics, but a radical end to current tax rates would definitely undermine our current economic situation. If Pitt had further reduced the tax on tea, he wouldn't have increased payments to the crown not even a farthing. Further U.S. tax reductions will not benefit our nation unless we can generate annual treasury surpluses to pay for the tax reductions. We need to stop inappropriate spending. What does an ice hockey stadium in Miami have to do with Health Care?

Congress has reduced Social Security Taxes to stimulate the economy. This is definitely foolish. We need to stabilize the Social Security System - not bleed it dry. Baby boomers are standing at the gates, and they are expecting a hand out. Congress has reduced Social Security Taxes when I would have increased them one full percentage point. Remember Bastille Day.

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© L. Henry Platt, Jr.