Coolidge

by Amity Shlaes

Efficiency, Mellon taught, could be improved elsewhere in the tax code. Currently the code allowed full deductions for business losses; Mellon thought only a portion of the losses should be deductible; the traffic of business could bear that, in his judgment. Dividends went untaxed; Mellon wanted to treat them and some other forms of unearned income as taxable, and at a higher rate than wages. States were borrowing at rates that alarmed Mellon, enjoying the advantage of the tax protection for municipal bonds. Money that could be invested in private companies was going to those states. That protection ought to be reduced. One way was to pass an amendment to the Constitution ending the special tax status of all new municipal bonds, so that cash in the future might flow to private-sector companies. It was important to protect the old bonds because they were contracts, but by doing this prospectively, one could divert capital back to companies.