FDR and the IRS
Burton W. Folsom, Jr., Hillsdale College
“My father,” Elliott Roosevelt observed of his famous parent, “may have been the originator of the concept of employing the IRS as a weapon of political retribution.” Not before Franklin D. Roosevelt had the federal government taken so much individual income. In 1935, when Roosevelt hiked the top income tax rate to 79 percent and the top estate tax rate to 70 percent, millionaires searched for deductions and loopholes to protect their private property. During the 1930s, FDR began experimenting with the IRS, which had been placed under the treasury department, as a means of attacking political enemies and generating more revenue for his New Deal programs.
The first person to incur Roosevelt’s wrath and thereby receive a long sustained investigation by the IRS, was Huey Long. As a flamboyant and clever politician—some would say demagogue—Long became governor of Louisiana and built a successful political machine. He promised free textbooks, cheap health care, and other benefits to voters of Louisiana, and he fulfilled some of his promises through high corporate taxes. Also, Long and his political cohorts took kickbacks from oil companies, highway builders, and other service providers. Long built up a strong enough cash base to sustain his minions in office in Louisiana while he was elected to the U. S. Senate.
In Washington, Long became the sharpest thorn in Roosevelt’s flesh. Long supported the president at first, but gradually came to criticize almost all of his New Deal programs as inadequate or misdirected. He castigated the AAA and argued for inflation, not for paying farmers not to produce. Of the NRA Long said, “Every fault of socialism is found in this bill, without one of its virtues.” He also ridiculed Roosevelt’s New Deal administrators as charlatans and incompetents. He regularly baited Joe Robinson, the Senate majority leader, and made it hard for Roosevelt to get his bills passed.
Roosevelt, after denouncing Long as one of the two most dangerous men in the country, searched his arsenal for weapons to deploy against the Louisiana senator. At first, Roosevelt tried to check Long by denying him federal patronage. The president made Louisiana unique by appointing a director from outside the state to come in and administer federal relief programs. Roosevelt also sent federal patronage to Long’s political enemies, led by ex-governor John Parker. The order came down from Roosevelt: “Don’t put anybody in and don’t help anybody that is working for Huey long or his crowd. That is 100 percent.”
Long responded by refusing to take federal programs when possible. Harold Ickes, director of the PWA, then criticized Long publicly for refusing to take about half the federal money allocated to the state for highway construction. Such refusal to accept federal funds was unprecedented, Ickes said, and would cripple economic development in Louisiana. Long simply denounced the men appointed to use such money as crooks. “[P]ay them my further respects up there in Washington,” Long told reporters. “Tell them they can go to hell.”
T. Harry Williams, who has written an exhaustive biography of Long, thoroughly researched the patronage dispute between Roosevelt and Long. Williams concluded as follows:
He [Long] was not greatly concerned about the practical effect of his loss of patronage: the number of federal jobs involved was relatively small, and the number of state jobs at his disposal was more than sufficient to enable him to sustain his power. But it was humiliating to him that his enemies should control the [federal] patronage and then boast about it. It would encourage them to continue their opposition to him.
Long’s solution was to go national, and recruit a national base of supporters, perhaps for a future presidential run himself. In February 1934, Long, in a national radio speech, announced his “Share Our Wealth” clubs with the slogan, “Every Man a King.” He promoted a steeply progressive income tax to guarantee every family a “homestead” and a guaranteed annual income. Long’s crusade generated 60,000 letters weekly, mostly from fans eager to start Share Our Wealth (SOW) clubs in their communities. As Long encouraged the national membership in his clubs, Roosevelt tested Long’s potential presidential support. Postmaster General James Farley, Roosevelt’s accurate pollster, estimated Long’s national vote at four million and possibly six million votes by 1936—easily large enough to swing an election to the Republicans.
Farley’s estimates were confirmed when Long traveled around the nation to promote SOW clubs and explore a presidential run. The Carolinas, for example, became a testing ground for Long. “South Carolina is the strongest state for Roosevelt,” Long discovered. “If I can sell myself here, I can sell myself anywhere.” In March, Long toured South Carolina. Governor Olin Johnston tried to ignore Long, especially because Roosevelt had telephoned him earlier threatening to cut off all federal patronage if he helped the Louisiana senator. Even after Johnston’s snub, Long spoke on the University of South Carolina campus, at the capitol, and throughout the state. He attracted huge crowds and 140,000 voters in South Carolina signed cards of support for Long if he would run for president.
Long’s budding national support and his ability to overcome Roosevelt’s denial of federal funds were a major threat to the president. Roosevelt wanted a second term. If Long ran for president, he might siphon enough votes from the Democrats to elect a Republican. (9) Also, Long’s ability to hold Louisiana without federal patronage could spur other rebels to challenge Roosevelt’s allies, who were distributing patronage in other states. Much was at stake, and Roosevelt turned to the IRS to investigate Long and give the president an advantage.
We can’t tell for sure when Roosevelt decided to use the IRS against Long, but we do know this. Henry Morgenthau, Roosevelt’s long-time friend, became secretary of treasury in January 1934. Three days after his Senate confirmation, Morgenthau called in Elmer Irey, head of the special intelligence division of the IRS. “Why have you stopped investigating Huey Long, Mr. Irey?” Morgenthau asked. Irey explained that any investigation of Long was on hold. “Get all your agents back on the Louisiana job,” Morgenthau then ordered. “Start the investigation of Huey Long. . . .” Morgenthau further asked Irey to report to him once a week. Irey did so for almost a year. When he failed to schedule an appointment one week—for lack of new information—Morgenthau made a phone call to him and said, “You haven’t been to see me in eight days.” Irey sent dozens of agents into Louisiana, and one of them even infiltrated the Long organization. In the course of the investigation, Irey also spoke with Roosevelt face to face, and they worked together to get the right lawyer to prosecute Long and his cohorts.
Roosevelt’s (or Morgenthau’s) decision to use the IRS on Long was a logical move. Long was not independently wealthy. Yet he somehow had enough money to hold the loyalty of his state even though his opponents were endowed with federal funds. How could this be? The Roosevelt administration logically concluded that graft and kickbacks from state contracts were enough to keep Long in power. Here, however, Long had a dilemma. Most state officials and contractors had to pay the Long machine to keep their jobs and their state contracts. If Long refused to report these kickbacks on his tax return, the IRS could prosecute him for tax evasion. If, however, Long did itemize this cash, and did report it as income, then Roosevelt could publicize Long’s use of politics to extort wealth and preserve power. Those who gave the kickbacks to Long would also be publicly embarrassed.
Long naturally resented the swooping down of the IRS into Louisiana. On the floor of the Senate, he protested the “hordes” of agents, 250 at least, on his trail and that of his friends. “They did not try to put any covering over this thing,” Long said. They just boasted he and his friends “were all going away.” At one level, Irey had an agent infiltrate the Long organization; at another level, Irey learned what he could from Long’s enemies. Among these were the Jahnke brothers, highway contractors, whose information on Long was useful to Irey. But since the Jahnke brothers were unable to get state contracts from Long, they were near bankruptcy. Irey, therefore, recommended and secured for them a loan from the federal Reconstruction Finance Corporation to keep them in business, thus giving them further incentives to help the IRS catch Long.
By 1935, the IRS began indicting lower-level and more vulnerable members of Long’s team. State Representative Joseph Fisher was successfully prosecuted for tax evasion in April 1935. Then Long was assassinated in September and his machine fell into disarray. In October, Abraham Shushan, a Long stalwart, was acquitted of tax evasion. Others eventually settled with the IRS in civil court. “It was at the time,” tax expert David Burnham concluded, “that the cases had been dropped in return for a pledge from Long’s heirs to support Roosevelt in his bid for a second term.” Most of the remnants of the Long machine, led by Huey’s brother Earl, did, in fact cooperate with Roosevelt and the president won almost 90 percent of Louisiana’s vote in 1936—a larger percentage than he got in either neighboring Texas or Arkansas. After the election, Irey was able to secure a couple more prosecutions for tax evasion, mail fraud, and misuse of WPA labor for personal use—but no more would Louisiana politicians thunder against Roosevelt and the New Deal.
Roosevelt marveled at the potential of the IRS for removing political opponents. Newspaper publisher William Randolph Hearst also found himself under investigation when he began opposing Roosevelt’s political programs. Such a situation was awkward for Elliott Roosevelt, the president’s son, whom Hearst had astutely hired as aviation editor for his newspaper, the Los Angeles Express. According to Elliott, “At about the same time that he [FDR] sent federal investigators into Louisiana to prove the financial shenanigans of Huey Long and company, father had the Internal Revenue Service conduct a similar scrutiny of every corner and crevice of Hearst’s empire. . . .” Hearst, however, did not depend on patronage and kickbacks to make his money and extend his influence. The nature of his business differed from that of Long, and Hearst’s books were in order.
So were those of Father Charles Coughlin, the popular radio priest from Detroit, who began meeting with Huey Long in 1935 and joined him in denouncing Roosevelt. The IRS sent reports on Coughlin’s finances to the president, who also put James Farley, the postmaster general, to work on Coughlin’s mail—how much was he getting and how successful was his financing? Roosevelt learned a lot about Coughlin’s financing, but could not find evidence to put him in jail. Thus, Coughlin joined Long and Hearst with his newspaper chain in regularly denouncing Roosevelt. Sometimes those three critics were able to join forces to defeat Roosevelt on key political issues. The president, for example, wanted the U. S. to draw closer to the League of Nations and join the World Court. He was furious when Hearst in his papers, Coughlin on the radio, and Long on the Senate floor generated enough opposition to the World Court to defeat Roosevelt’s plan.
As Elliott Roosevelt admitted, “other men’s tax returns continued to fascinate Father in the [nineteen] thirties.” Boake Carter, for example, was a radio commentator who criticized Roosevelt for “meddling” in the Far East and risking a war with Japan. Roosevelt—according to his son—had an IRS investigation of Carter and also asked Frances Perkins, the secretary of labor, if she would check Carter’s status as an alien and see if he could be deported.
Another target of the president was Hamilton Fish, the Republican congressman from Roosevelt’s home district in New York. When Fish began to oppose Roosevelt on program after program, Roosevelt at first tried to oust Fish at the ballot box. Hyde Park was Roosevelt’s territory and he hated the idea of Fish representing the president and his neighbors in Congress. When Fish kept winning re-election, sometimes by large margins, Roosevelt brought in the men at the IRS. They alleged that Fish owed $5,000 in back taxes and demanded payment. Fish challenged this ruling in court. “The case dragged on for several years,” Fish observed, “costing the government many thousands of dollars as it attempted to make me pay the money, which if I had agreed, would have besmirched my reputation.” Eventually, the IRS lost its case completely, and even had to concede a tax refund to Fish of $80. In 1942, the IRS launched a multi-year audit of Fish and that also failed. Finally, Roosevelt asked J. Edgar Hoover at the FBI to investigate Fish during World War II on a charge that he was engaging in “subversive activities.” That effort also fizzled, but Roosevelt finally got his way when his friends in New York gerrymandered Fish’s congressional district and he lost his seat in the 1944 elections.
Fish was the exception to the rule that Roosevelt had less success using the IRS against media opponents than political opponents—especially those like Long who needed an influx of questionable financial contributions to operate.
Just as Long was vulnerable in Louisiana, so were all the city bosses in America, who, by the 1930s, needed federal patronage to win elections and generate operating funds. How these bosses fared with the law often depended on whether or not they had value to the president. In New Jersey, for example, Enoch “Nucky” Johnson was the political boss of Atlantic City during the 1920s and 1930s. He made his money from bootlegging, gambling, protection, and kickbacks. Johnson’s tax returns always included a large income under a vague category called “other contributions.” The gamblers and racketeers in wide-open Atlantic City liked Nucky, who provided security and stability, and they were willing to lie and even go to jail to protect him.
Unfortunately for Nucky Johnson, however, when he chose his political affiliation in the early 1900s, he happened to select the Republican party. The U. S. had no income tax then, and Johnson focused on local, not national, politics. Before 1933, local profits held much more potential for city bosses than federal. Atlantic County went Republican in 1932, but Democratic in 1936 by a small margin. Johnson seems to have been indifferent to Roosevelt—and when Johnson was ultimately convicted of tax fraud in 1941, Roosevelt seems to have cared little one way or another. Johnson neither hurt him nor helped him, so FDR simply watched from the sidelines as the IRS audited and then convicted Johnson.
The story of Frank Hague, the political boss in nearby Jersey City, had a very different plot development and ending. Hague, born of Irish parents, grew up in a rough neighborhood in Jersey City. He was expelled from school in the sixth grade, and as a teenager worked as a blacksmith and even a boxer. Politics was a way out of the slums for Hague, and he joined the Democratic political machine and worked his way up from constable to city commissioner to mayor. By 1932, the 56 year-old Hague was undisputed boss of Jersey City. He initially backed Al Smith for president in 1932, but quickly shifted to Roosevelt after the Democratic convention; Hague promised the swing state of New Jersey to Roosevelt and gave the future president a spectacular parade with 100,000 present in Sea Girt, New Jersey, the largest Roosevelt saw anywhere during the entire campaign.
On election day, Hague’s support proved to be indispensable in the state. Roosevelt carried New Jersey by less than 28,900 votes out of over 1.6 million cast. The major urban counties all went Republican, but not Hague’s Hudson County. Hague delivered that county to FDR by over 117,000 votes, nearly a 3-1 margin.
Once in office, Roosevelt funneled all federal patronage in the state through Hague and none through the governor or the two U. S. senators. When a man from Newark wrote to the governor of New Jersey asking for a job, the governor responded, “I do not have the power to appoint to these Federal positions. They are made upon the recommendation of the local organizations to Frank Hague. . . . I would suggest that you get in touch with the mayor.” Farley and Hopkins both went through Hague and helped the mayor strengthen his hold on the state. Hopkins began the federal flow by giving Hague $500,000 per month for relief in 1933 and ’34; and in the five years after that Hopkins directed the WPA to pour an incredible $50 million into Jersey City. Ickes and the PWA gave $17 million to Hague’s city—some of which helped Hague build the third largest hospital in the world. Those who could not, or would not, pay their medical bills could get them reduced or removed by seeing Hague’s district political leaders. Roosevelt came down to Jersey City in October 1936, right before the presidential election, to dedicate Hague’s hospital and receive the boss’s official blessing. On election day, Hague delivered an even larger county vote for Roosevelt—almost 4-1—and New Jersey’s 16 electoral votes again went to the president.
Hague used his patronage wisely and controlled his city with an iron hand. “I am the law,” Hague often boasted. Political opponents had no patronage jobs and sometimes found themselves in jail for their critical remarks. Hague openly disrespected civil liberties and his enemies labeled him the “Hudson County Hitler.” One outside reporter depicted Hague as “Dictator—American Style” and another called him “King Hanky Panky.” Even with the torrent of federal funds cascading into New Jersey, and charges of corruption rampant, the IRS never made a serious investigation of Hague. Nucky Johnson, with a smaller city and only local funds to swindle, went to prison, but Hague never did.
The IRS had overpowering reason to go after Hague on WPA corruption alone. Harry Hopkins had piles of evidence, including sworn affidavits, that Hague was manipulating elections, politicizing the dispensing of jobs, and forcing jobholders to pay 3 percent of their salaries to the Hague machine at election time. One WPA director regularly answered his phone, “Democratic headquarters.” He was not discreet but at least he was truthful. Many letters and statements describing this corruption are available in the National Archives in File 610, “WPA, New Jersey, Political Coercion.” Hopkins not only did nothing to stop Hague but actually seemed to encourage him.
Roosevelt was embarrassed by Hague, and never included him in his inner circle, but Hague was needed if New Jersey was to remain in the president’s column. Roosevelt was firm on that and proved it when James Farley discovered Hague had a crony at the post office who was opening and reading all mail to and from major political opponents. Tampering with the U. S. mail was a federal offense and some of Huey Long’s henchmen went to jail for misusing the post office. Farley, in fact, came to Roosevelt for instructions on how to prosecute Hague. The president, however, stopped Farley in his tracks: “Forget prosecution. You go tell Frank to knock it off. We can’t have this kind of thing going on. But keep this quiet. We need Hague’s support if we want New Jersey.”
Historian Lyle Dorsett, who has studied the evidence carefully, reported the following example of how Hague misused federal funds:
[A]fter a plea from Hague, Harry Hopkins decided to stretch the letter of the law and use WPA funds which were earmarked for labor to buy seats and plumbing for Jersey City’s new baseball stadium. Hague knew he was asking Hopkins to put his neck out, but assured him it was for a good cause inasmuch as the facility was to be named Roosevelt Stadium and the president was going to be present for the grand opening.
Hague was not the only politician who needed the president’s help to stay out of jail. Roosevelt would use his powers to help others who were useful to him. Lyndon Johnson, for example, was a young congressman from Texas in the 1930s. He always backed Roosevelt enthusiastically—especially in 1937 when others abandoned Roosevelt because of his efforts to pack the Supreme Court. Johnson, in running for a special election to Congress that year, argued that the New Deal was a seamless web and that to support Court packing was an essential test of loyalty to the president and his agenda.
Roosevelt came to like Johnson, especially when Johnson proved himself useful to Roosevelt in controlling Texas politics. Whenever Roosevelt needed help from Sam Rayburn, the House majority leader, Johnson was there as an intermediary. When Vice- President John Nance Garner of Texas mounted a presidential campaign in 1940, Johnson secretly undermined Garner in the state and swung much support to Roosevelt. In return Roosevelt channeled much federal patronage into Texas through Johnson.
Just as the president used a mayor in New Jersey as his key political connection, so he used a junior congressman in Texas to dispense patronage. Thomas Corcoran once observed that Lyndon Johnson “got more projects, and more money for his district, than anyone else. He was the best kind of Congressman for his district that ever was.” Those who received Johnson’s patronage in turn made Johnson a millionaire and also financed his political ambitions to the U. S. Senate. Brown and Root, Inc., a huge Texas contracting firm, built dams and other projects with federal dollars. In turn, they donated heavily to Johnson’s two Senate campaigns in the 1940s. Campaign contributions were not tax deductible, but Brown and Root did so anyway and with such carelessness that they triggered an IRS audit. The IRS investigated Brown and Root and determined that they owed over $1.5 million in back taxes and penalties. They were also vulnerable to a jail sentence.
Johnson himself became an IRS target for failing to properly report income from his campaigns. On January 13, 1944 just as six IRS agents were winding up their 18-month investigation of Johnson, President Roosevelt had an emergency meeting with Johnson. That day, the president contacted Elmer Irey and began the process of halting the investigation of Johnson. Brown and Root settled quietly—with no publicity—for a mere $372,000 in back taxes, and Johnson was not harmed at all. He had proven himself too valuable to the president to lose.
Roosevelt, however, would not protect political allies from the IRS if they were insufficiently useful to him. An interesting example is “Big Tom” Pendergast, the Democratic boss in Kansas City. Pendergast was an early supporter of Roosevelt for president in 1932, and on election day he helped deliver Missouri to Roosevelt. Jackson County, Pendergast’s stronghold, went for FDR by more than a two to one margin—which must have taken some arm-twisting because that county had voted Republican in the previous three presidential races. In return, Roosevelt had Hopkins filter federal patronage in Missouri through “Big Tom.”
Pendergast used his new friend in a high place to consolidate further his power in Missouri. For example, he had his own construction company and, like Hague, he used his power to gain wealth, distribute jobs, and win elections. In 1934, Pendergast’s choice for U. S. Senate was a failed haberdasher named Harry Truman. After Truman won his election handily, a constituent wrote asking him for a WPA job. Truman responded, “If you will send us endorsements from the Kansas City Democratic organization, I shall be glad to do what I can for you.” That response spoke volumes about where the political influence in Missouri was located and which party held it. Pendergast’s choice for governor in 1936 was Lloyd Stark, and “Big Tom” coerced WPA workers all over the state to vote for Stark or lose their jobs. The same applied for Roosevelt’s re-election campaign, and the president carried Missouri easily, with Jackson County leading the way with a three-to-one margin for Roosevelt.
Pendergast’s exuberance to deliver a large vote for Roosevelt proved to be his undoing. After the election, some observers noticed that Pendergast’s first ward had cast more ballots than it had eligible voters. And some of the precincts in the ward had unanimous voting for Roosevelt—even though some voters there swore they had voted for Landon. A police captain accused of intimidating voters responded, “I wouldn’t hurt none of them women, but I consider it a patriotic duty to see that votes are cast the way the ward leader wants ‘em cast. After all, I’m employed by the city.” Maurice Milligan, the district attorney, prosecuted over 200 election judges, precinct captains, and partisan clerks—all of whom had legal defenses financed by Pendergast. Seventy-eight went to jail. Governor Stark, in the meantime, became nervous and took a calculated risk. He switched sides, joined forces with Milligan, and helped bring in the FBI and the IRS to investigate Pendergast. Would the president intervene?
Roosevelt no doubt appreciated the large Democratic vote mustered by Pendergast, but the bad publicity that followed gave ammunition to those critical of Roosevelt and the New Deal. He thus pondered the idea of switching his patronage to Governor Stark. When 78 of Pendergast’s men went to jail, and then when Stark’s candidate defeated Pendergast’s candidate for a key statewide election in 1938, Roosevelt dropped Pendergast and gave more of Missouri’s patronage to Governor Stark. Roosevelt sat back as the IRS fined and imprisoned Pendergast for tax evasion. Unlike Hague in New Jersey and Johnson in Texas, Pendergast was not indispensable to Roosevelt and did not receive his help in calling off the IRS.
By Roosevelt’s second term, he was accustomed to using—or contemplate using—the IRS for political help. Major crises like the Court-packing plan especially stimulated the Roosevelt administration into using the IRS to stymie political enemies. Burt Wheeler of Montana, who helped mobilize votes against Court packing, complained loudly to Secretary Morgenthau of rumors that the IRS had been investigating him. Morgenthau promised Wheeler freedom from a tax investigation. Morgenthau later received a memo from a colleague in the treasury department that Thomas Corcoran had come to the Department of Justice with “a request for information concerning the income tax returns of the Justices of the Supreme Court.” Morgenthau refused to allow Corcoran to have those returns, and Roosevelt apparently never insisted that that decision be overridden.
Wealthy Americans were a natural target for Roosevelt and the IRS. For one thing, rich people had the money that Roosevelt wanted to use for the WPA and other programs. His 79 percent marginal tax rate on top incomes secured some of this cash, but people with wealth quickly sought tax loopholes. The complexity of earning money and then trying to shelter it legally made rich Americans an obvious target for generating federal revenue. Another related consideration is that rich people were a nucleus of energy blowing against the New Deal. No one likes to pay taxes, and many wealthy Americans resented paying about three-fourths of their annual earnings for federal programs that they loathed. Working from January to October 1 for Roosevelt and from October to December for themselves became a dreary prospect to face, and they complained loudly. But from Roosevelt’s point of view, hunting down rich Americans not only helped him fund his political agenda, but helped him undermine his political opponents as well.
Roosevelt’s first target among the rich was Andrew Mellon, the Pittsburgh industrialist and banker. Mellon helped found Alcoa and Gulf Oil, and he was on the board of directors of about sixty companies. By the 1920s, he was reputed to be the third wealthiest man in the country, trailing only Ford and Rockefeller. His wealth alone made him a tempting candidate for an IRS audit; but his political actions during the 1920s made him an irresistible target. Mellon, after all, was Morgenthau’s predecessor in the treasury department.
Mellon, as secretary of the treasury under Presidents Harding, Coolidge, and Hoover, was widely applauded as one of the greatest men ever to hold that office. Mellon’s legacy was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment. High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government not profit to the people.”
Mellon wrote a popular book, Taxation: The People’s Business, in which he developed his ideas. “It seems difficult for some to understand,” he wrote, “that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.” Mellon illustrated this principle with an example from his world of business. He compared the government setting tax rates on incomes to a businessman setting prices on products. “If a price is fixed too high, sales drop off and with them profits.” Mellon asked: “Does anyone question that Mr. Ford has made more money by reducing the price of his car [from $3,000 to $380] and increasing his sales than he would have made by maintaining a high price and a greater profit per car, but selling less [sic] cars?”
Mellon, of course, recognized that there was a limit to how far you could cut tax rates and still increase revenue. “The problem of governments,” he said, “is to fix rates which will bring in a maximum amount of revenue to the Treasury and at the same time bear not too heavily on the taxpayer or on business enterprises.” Mellon believed that 25 percent was about as much as rich people would pay in taxes before they rushed to the tax shelters, which included foreign investments, collectibles (e.g. art or stamps), and tax-exempt bonds.
Mellon had a chance to test his ideas as secretary of treasury. He persuaded Presidents Harding and Coolidge to promote a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to ½ of 1 percent. These tax cuts helped produce an outpouring of economic development—from air conditioning to refrigerators to zippers, scotch tape to helicopters and talking movies. Investors took more risks when they were allowed to keep more of their gains. President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation—the lowest misery index of any president in the twentieth century.
Furthermore, Mellon was also vindicated in his astonishing predictions that cutting tax rates across the board would generate more revenue. In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U. S. government was a little over $700 million. In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the one billion dollar mark. Mellon also whittled down the size of the IRS and spearheaded very few investigations. No wonder Mellon was nicknamed by his devotees as “the best secretary of treasury since Alexander Hamilton.”
Roosevelt’s philosophy of government contrasted sharply with that of Mellon’s. The president was mired in the Great Depression, and he believed in high taxation to generate the revenue for government planners to guide industry, cut back farm crops, and federalize relief. Roosevelt believed the Great Depression was partly caused by poor investments and stock manipulations by rich people. Mellon’s very presence as a popular former treasury secretary was an affront and a constant reminder to many Americans of “the good old days” when tax rates were low, jobs were plentiful, and government was unobtrusive. In Roosevelt’s first term, Mellon—almost as much as Huey Long—became the object of a massive and unrelenting IRS investigation.
“The Roosevelt administration made me go after Andy Mellon,” said Elmer Irey, head of Morgenthau’s Intelligence Unit at the IRS. Irey knew the situation and firmly believed Mellon’s tax returns were in order. Actually the Roosevelt administration had first tried an FBI investigation on Mellon; that failed, so the IRS was the next step. According to Irey, “Bob Jackson [future attorney general] was made chief counsel of the Internal Revenue Department and he said to me: ‘I need help on the Mellon thing. The F. B. I. Investigation was no good. You run one on him.’” When Irey hesitated to cooperate, he received a phone call from Henry Morgenthau. “Irey,” Morgenthau announced, “you can’t be 99 2/3 percent on that job. Investigate Mellon. I order it.” Irey pleaded with Morgenthau that Mellon was innocent, but Morgenthau ended the conversation by saying, “I’m directing you to go ahead, Irey.” Irey reluctantly began the audit, but over ten years later he was still upset that he had to launch a futile and wasteful IRS audit of an innocent man.
Since Morgenthau and Roosevelt were long time friends, and since the two of them met privately on a regular basis, we can assume Roosevelt directed Morgenthau to launch the tax audit of Mellon. At the very least Roosevelt tacitly approved. Certainly Morgenthau was a willing accomplice. “You can’t be too tough in this trial to suit me,” Morgenthau told Robert Jackson. Morgenthau added, “I consider that Mellon is not on trial but Democracy and the privileged rich and I want to see who will win.”
In fact, Mellon won. A Pittsburgh grand jury, heavily composed of working-class laborers, ignored the class rhetoric of the New Dealers and refused to indict Mellon. Then the Board of Tax Appeals voted unanimously that Mellon “did not file a false and fraudulent return with the purpose of evading taxes.” The Board did claim some technical errors in Mellon’s tax returns. Mellon decided to settle for $486,000—less than one-sixth of the original indictment—and get the “political prosecution,” as he called it, behind him. The Roosevelt administration may have lost a case it never had a chance to win, but it did send a message that lining up with the Republicans could be embarrassing, and might be costly.
Moses “Moe” Annenberg, who was almost as wealthy and almost as Republican as Mellon, also drew an IRS audit—with 35 agents working for two and one-half years to prosecute him. Unlike Mellon, who was born into Pittsburgh’s elite, Annenberg was a poor German immigrant who came to America at age eight. He showed skill selling newspapers for the Hearst chain and worked his way up to circulation manager of the whole Hearst newspaper empire. He wanted to create a business of his own and his more successful venture was in the horse-racing industry. He was an investor, not a gambler, and he sold racing forms (to describe the horses), wall sheets (to post the racing results), and the wire service, which was used to obtain immediate results of the races. He developed the largest horse-racing network in the country, and made many millions of dollars from that enterprise alone. He also invested effectively in real estate and the stock market.
But Annenberg continued to like the newspaper business, and in Roosevelt’s first term he bought the PhiladelphiaInquirer. Annenberg quickly became immersed in Republican politics, writing against the New Deal in general and competing against the Philadelphia Record in particular. David Stern was the editor of the Philadelphia Record and Stern enjoyed playing chess with Morgenthau and high stakes politics with Roosevelt—who appreciated Stern’s successful efforts to elect more Democrats in Pennsylvania. Annenberg’s conservative politics and his entrepreneurial spirit made him an effective Republican competitor in the newspaper and political wars.
On the newspaper end, Annenberg’s aggressive advertising and news reporting helped the Inquirer sharply increase its subscriptions and sales, and helped cause Stern’s Record to decline in sales and market share. On the political side, that meant more readers were absorbing Annenberg’s pungent editorials against the New Deal in general and Roosevelt in particular. “The War Against Business Goes On” and “No Room for Fascism in a Democracy” were just two of his headlines. The content was also hard hitting. “Never before has class hatred been elevated to the status of an unctuous virtue,” wrote Annenberg in one editorial. “Government, by swinging its mailed fist at business, has not brought lasting recovery,” Annenberg argued in another editorial: “Under its [government’s] stern restrictions and oppressive taxes, millions of employables have failed to obtain work.” Roosevelt’s state of the union message in 1938, Annenberg wrote, “indicates not the slightest retreat from a program and an economic philosophy which have signally failed, in five years of drastic and costly experiments, to establish the United States on a sound recovery footing.”
What made things so awful for Stern, Roosevelt, and the Pennsylvania Democrats was that Annenberg was selling his ideas effectively, making money for the Inquirer, and helping lead the Republicans to a stunning victory in the 1938 mid-term elections. His handpicked candidate for governor, Arthur James, was an obscure superior court judge, but he thrashed incumbent governor George Earle. The situation for the Democrats was desperate; much New Deal money had poured into Pennsylvania. Moreover, Earle left office under a cloud of suspicion for taking political kickbacks. Stern was losing money at the Record and he turned to the government for help; in desperation, for example, he was able to get the Federal Trade Commission to prosecute Annenberg for selling advertising at rates too low.
The Roosevelt administration had a better idea: an IRS investigation of Moe Annenberg. Unlike Mellon, who as secretary of treasury knew tax law inside out, Annenberg was careless and paid little attention to his taxes. His accountant filled out the forms and Annenberg signed them with no questions or probing. His corporate earnings—from news, horse racing, and dozens of other interests—were complicated. Also it may well be that Annenberg was trying to hide some of his revenue. Viewpoints differ on that issue. Whatever the case, after Morgenthau did a massive investigation it became clear that Annenberg would owe the government about $8 million. He offered to pay all back taxes and fines that he owed, whatever the amount, but the Roosevelt administration wanted back taxes and Moe Annenberg locked up in jail. As Elmer Irey told Morgenthau, “They are not going to have the opportunity to pay the tax [and avoid prison].” When Morgenthau and Roosevelt had lunch over the matter on April 11, 1939, Morgenthau asked Roosevelt if he could do something for the president. “Yes,” Roosevelt said, “I want Moe Annenberg for dinner.” Morgenthau responded, “You’re going to have him for breakfast—fried.”
That attitude, according to Annenberg biographer Christopher Ogden, is the key to understanding Annenberg’s ultimate $8 million fine and three year prison sentence. “The key to the Annenberg case for Morgenthau,” Ogden observed, “was not simply penalizing Moses with a fine which no matter how high, he was certain that the wealthy publisher could pay. The goal was removing Moses from the scene so that he could cause no further political trouble.” With Annenberg going to jail in 1940, the Philadelphia Inquirer became less strident; Roosevelt had an easier time carrying Pennsylvania to win re-election; and the treasury had $8 million more to spend on New Deal programs.
Sending Annenberg to prison fulfilled Roosevelt’s larger goal of scaring and threatening rich Americans into sending the government more of their money. If, for example, the law as of 1935 said that people with large incomes should pay a 79 percent marginal tax rate to the government, then Roosevelt wanted to see 79 cents out of each of their last dollars earned. Roosevelt was furious when he discovered that wealthy Americans were finding ways to take large deductions, and thereby were keeping most of what they earned instead of sending it to Washington.
Roosevelt tended to lump “tax evasion” and “tax avoidance” together. Tax evasion was breaking the law. But tax avoidance was using legal means—“loopholes” and various tax-deductible investments—to shelter income and thereby keep more of it. Alfred P. Sloan, the president of General Motors, expressed the issue this way: “No conscientious citizen desires to avoid payment of his just share of the country’s burden. I do not seek to avoid mine. . . . While no one should desire to avoid payment of his share . . . neither should anyone be expected to pay more than is lawfully required.” (46) In other words, if a taxpayer could find legitimate tax deductions, he should take them.
Alexander Forbes, a Harvard classmate and also a cousin of Roosevelt’s, went one step further. He argued that some of the chief tax deductions, especially charitable giving, did more good than if the money had been used for federal programs. “Look” he wrote in a letter to Roosevelt, “at the sorry spectacle presented by rows of beneficiaries of the ‘boondoggle,’ leaning on their shovels by the hour at futile projects, and contrast it with the great universities, museums, and research laboratories which have come from the wise and generous giving of such as Morgan, and then consider which is the major constructive force in building a stable civilization.”
Roosevelt was indignant with Forbes’s reasoning. “My dear cousin and old classmate,” he responded. “That being your belief, I do not hesitate to brand you as one of the worst anarchists in the United States.” With unbalanced budgets each year, Roosevelt wanted more tax revenue. Close the loopholes, publicly name the tax avoiders, and turn loose the IRS, the president urged.
By 1937, Roosevelt insisted that Morgenthau go more on the attack. “Henry,” Roosevelt announced, “it has come time to attack, and you have got more material than anyone else in Washington to lead the attack.” Roosevelt also suggested that Democratic leaders in Congress create a “subcommittee to investigate tax avoidance.” Exposing tax avoiders, Roosevelt told Senator Pat Harrison of Mississippi and Congressman Robert Doughton of North Carolina, would also bring the Democrats “ten million votes.” “Mr. President,” Morgenthau inquired, “how did you arrive at the ten million figure?” “I don’t know” Roosevelt said with a smile, “but it sounded good. . . . Everything’s settled.” Thus, Congress established the Joint Committee on Tax Evasion and Avoidance and gave it power to hold hearings, call witnesses, and secure tax returns from the treasury.
Oddly enough, one witness the committee could have called was Roosevelt himself. Roosevelt may have been the first president to use a major tax loophole to shelter personal income. Unlike other presidents, he wanted to build a large presidential library on Hyde Park to house his presidential papers and his vast memorabilia. For donating his books, naval prints, and other material to his own library, Roosevelt took a $9,900 (about $100,000 in today’s currency) tax deduction. Roosevelt’s decision to employ tax avoidance was, of course, completely legal—just as the IRS concluded it was legal for Andrew Mellon to deduct from his tax burden the value of the paintings he donated to start the National Gallery of Art in Washington, D. C.
By taking such a deduction, however, Roosevelt ultimately agreed with his cousin and classmate Alex Forbes. Forbes had said that tax-deductible gifts to “universities, museums [e.g. presidential libraries], and research libraries” were more valuable to society than “long rows of beneficiaries of the boondoggle, leaning on their shovels by the hour, at futile projects. . . .” Roosevelt, however, accused Forbes of saying, in effect, “I have a perfect right to evade or avoid any of the taxes just so long as I can get away with it. My dear cousin and old classmate—that being your belief, I do not hesitate to brand you as one of the worst anarchists in the United States.”
Roosevelt was constructing the following logical sequence. First, Roosevelt, like Forbes, does not agree with all laws Congress passed. Second, our representative form of government, however, authorizes and empowers Congress to make laws. Third, even though I may disagree with the tax laws passed by Congress, I have no right to “avoid or evade” the payment of any taxes. Fourth, because Forbes thinks he can “avoid or evade” tax laws, he is an anarchist. Roosevelt’s letter to Forbes was no emotional outburst. Forbes, in addition to being the president’s cousin, was a professor of physiology at Harvard Medical School. Roosevelt told him what he believed to be true. When J. P. Morgan publicly defended avoiding taxes by strictly legal means, Roosevelt was similarly angry with him. “Ask yourself,” the president wrote a New York lawyer, “what Christ would say about the American Bench and Bar were he to return today?”
In light of Roosevelt’s beliefs, then, it is odd that he would do the following. First, that he would take any tax deduction, however reasonable, for donating his presidential papers to his own presidential library. That meant less money for the WPA and other programs authorized by Congress. Second, that Roosevelt would refuse to investigate Frank Hague for tampering with the U. S. mail—a law passed by Congress—and that the president would also call off the tax investigation of Congressman Lyndon Johnson. The IRS was authorized by Congress and had found clear evidence that Johnson had evaded—not avoided but evaded—paying enough income tax. Third, that Roosevelt would willfully disobey Congress’s orders on many other occasions. For example, Elliott Roosevelt described “another of Father’s magicians’ tricks for shuffling money.” Elliott described how “Millions of Works Progress Administration dollars were surreptitiously diverted to make machine tools for producing small arms ammunition, some of which, with equal secrecy, he allowed France and Britain to buy.”
Whatever the case, one thing we can say is that Roosevelt used the powers he possessed to reward those who helped him prosecute those who he wanted the IRS to investigate. Robert Jackson, though he failed to convict Mellon, found favor with the president for trying. Jackson, after the Mellon case, was appointed to the president’s cabinet as attorney general; in 1941, Roosevelt appointed him to the U. S. Supreme Court. Frank Murphy, who helped lead the charge against Annenberg, Roosevelt also appointed to join Jackson on the Supreme Court. William Campbell, who helped prosecute Annenberg, won from the president an appointment as a federal judge two months after Annenberg went to prison.