William R. Alford

More than a century before many members of the current Congress debated how best to invest in emerging technologies, the U. S. government gambled that Edward Collins could beat the British in perfecting the steamship and lost that bet, to Cornelius Vanderbilt, who produced the leading steamship line without a federal subsidy.

Professor Burt Folsom, Jr., recalled that while serving on the Texas State Textbook Commission, he never saw any reference to the Vanderbilt story in any college-level course material. He asked the audience at AIA's Conservative University conference last summer if any of them had been taught this story in class. One attending student at the Georgetown conference raised his hand. Folsom responded excitedly, "That's wonderful! That's great - we're making progress! [laughter]

Folsom, author of The Myth of the Robber Barrons (Young America's Foundation), added. "The Wright Brothers' story is told, but not the part about how they were privately financed while their failed rival was subsidized."

Folsom recalled that during the process of working on his Ph. D. in history [specifically concentrating on economic history], he was only taught one of the above stories. All of the material that he discussed in his lecture, he learned after receiving his doctorate. He went on to say that he didn't think that his professors were hiding these stories from him specifically - 'Folsom is here, let's not tell him.' Imagine formulating public policy, especially whether or not to subsidize without this kind of historical knowledge, Folsom offered.

If this history were widely known, Folsom argued, debate favoring subsidized ventures wouldn't go anywhere. When we start taxing to support these subsidies another dynamic comes into play, added Folsom. An example: during the 1920s, the top tax rate was cut from the low seventy percentages to the low twenties. Federal revenue increased by over thirty percent. Treasury Secretary Andrew Mellon [founder of Gulf Oil and ALCOA] offered this explanation: "seventy percent of nothing is nothing, twenty-four percent of something is something." No one is going to invest if over seventy percent of a successful investment goes to the government, Folsom contended.

Textbooks do not inform students that starting in 1932, Hoover raised the top income tax from Mellon's 24 percent to 63 percent. In the middle of the Depression, Folsom remarked, they were in effect telling entrepreneurs, 'we'd sure appreciate if you built a factory and create jobs. Of course, we're going to take five eighths of your income…' FDR subsequently raised the top level to 79 percent. "I wonder why the Great Depression continued," mused Folsom.

Arthur Schlesinger does a periodic poll of other professional historians asking who they think is the best American president in history. Year after year, FDR is overwhelmingly chosen as the favorite. Folsom has gone before many groups issuing a challenge: "Show me a textbook that says that FDR instituted a 100 percent tax rate and I'll eat the textbook… [Folsom patted his flat stomach] You may be able to tell from my thin, trim physique that I've so far had a textbook-free diet!" [chuckles]

Many said that the top rate only applied to those with incomes over $100,000 - that's not very many people, Folsom commented. "Those at that level are the entrepreneurs," he added. "Not very many people have that much money to invest and those who do, you want out there starting and growing businesses. At a nearly eighty percent tax rate," Folsom declared, "you can't very well do that." Roosevelt responded to this by declaring 'the rich are letting this country down' and penalizing them with a 90 percent tax rate. In 1941 he proposed a rate of 99.5 percent for the second $100,000 of a person's income. That would leave $500, the rest going to Washington, Folsom pointed out.

Finally it seemed, offered Folsom, that Congress saw that the Emperor had no clothes. One congressman stood up and stated, 'we have a 3 percent state income tax…" [laughter] The proposal was quietly shelved. In April 27 1942, FDR issued an Executive Order mandating a 100 percent tax for incomes above $25,000. "That's a real incentive for entrepreneurs," Folsom scoffed. The Republicans won dramatically in the 1942 congressional elections [laughter, applause] and repealed the tax. Folsom added that he would like to give the GOP credit, but the tax rate was still at 90 percent.