People who say 'tax the rich, tax the rich, tax the rich, that's how the government should get more money' ... don't know dick about the effects taxation has on federally collected revenues. Lowering taxation on the upper income bracket earners always results in an increase in collected federal revenues. It always has. It is irrefutable.
The Falsehood That Tax Cuts Increase The Deficit
Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.
Let’s take a trip back in time, starting with the 1920s. From Burton Folsom’s book,
New Deal or Raw Deal?:
In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history. Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution 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 this 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 nor profit to the people” (
page 128).
Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.” And 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.”
And what happened?
“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent. These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios 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 taxes 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 $1 billion mark. Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (
page 129-130).
Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935). See Table 1 on page 125 of New Deal or Raw Deal for that information.
FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.
It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.
Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever. Few realize that he was also a supply-side tax cutter.
Kennedy said:
“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”
– John F. Kennedy, Nov. 20, 1962, president’s news conference
“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”
– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”
– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.
“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”
– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill
Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.
So let’s move on to Ronald Reagan. Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.
Did Reagan’s tax cuts decrease federal revenues?
Hardly:
We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts. And, following the Tax Reform Act of 1986, there was a
MASSIVE INCREASE of revenue.
So Reagan’s tax cuts increased revenue. But who paid the increased tax revenue? The poor? Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall. But that was exactly wrong.
In reality:
“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”
So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades. Pretty good achievement considering
that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good
considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation
by answering,
“It would be misleading for me to tell any of you that there is a solution to it.”
Reagan whipped inflation. Just as he whipped that malaise and that crisis of confidence.
This might explain why a Gallup poll showed that Ronald Reagan is regarded as our greatest president, while fellow tax-cutting great John F. Kennedy is tied for second with Abraham Lincoln. Because, in proving Democrat policies are completely wrongheaded, he helped people. Including poorer people who benefited from the strong economy he built with his tax policies.
Let’s move on to George Bush and the infamous (to Democrats) Bush tax cuts. And let me quote none other than the
New York Times:
WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.
A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.
Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.
Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.
The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”
The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well.
[Update, September 20: The above
NY Times link was scrubbed; the same article, edited differently,
appears here.]
Note the newspaper’s use of liberals favorite adjective:
“unexpected.” They never expect Republican and conservative polices to work, but they always do if they’re given the chance. They never expect Democrat and liberal policies to fail, but they always seem to fail every single time they’re tried.
For the record,
President George Bush’s 2003 tax cuts:
raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.
These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.
Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.
Budget deficits are not merely a matter of tax policy; it is a matter of tax policy
AND spending policy. Imagine you have a minimum wage job, but live within your means. Then you get a job that pays a million dollars a year. And you go a little nuts, buy a mansion, a yacht, a fancy car, and other assorted big ticket items such that you go into debt. Are you really so asinine as to argue that you made more money when you earned minimum wage? But that’s literally the Democrats’ argument when they criticize Reagan (who defeated the Soviet Union and won the Cold War in the aftermath of a recession he inherited from President Carter) and George Bush (who won the Iraq War after suffering the greatest attack on US soil in the midst of a recession he inherited from President Clinton).
As a result of the Clinton-era Dot-com bubble bursting, the
Nasdaq lost a whopping 78% of its value, and
$6 trillion dollars of wealth was simply vaporized. We don’t tend to remember how bad that economic disaster was, because the 9/11 attack was such a huge experience, and because instead of endlessly blaming his predecessor, George Bush simply took responsibility for the economy, cut taxes, and fixed the problem. The result, besides the above tax revenue gains, was
an incredible and unprecedented 52 consecutive months of job growth.
Update September 12: Did somebody say something about “jobs”? Another fact to recognize is the horrendous damage that will be done to small businesses and the jobs they create if the tax cuts for the “rich” aren’t continued. As found in the
Wall Street Journal, “According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.” Further, the
Tax Policy Center found that basically a third of taxpayers who are expected to be in the top tax bracket in 2011 generate more than half their income from a business ownership. And while Democrats love to point out that their tax hikes on the so-called rich only impact 3% of small businesses, the National Federation of Independent Business reports that that three percent employs about 25 percent of the nation’s total workforce. “
Small businesses that employ 20 to 250 workers are the most likely to be hit by an increase in the top two tax rates, according to NFIB research.
Businesses of this size employ more than 25 percent of the U.S. workforce.” So if you want jobs and an economic recovery, you simply don’t pile more punishing taxes on those “rich” people. Especially during a recession [End update].
We’re not arguing theories here; we’re talking about the actual, empirical numbers, literally dollars and cents, which confirms Andrew Mellon’s thesis, and Warren Harding’s and Calvin Coolidge’s, John F. Kennedy’s, Ronald Reagan’s, and George W. Bush’s, economic policies.
Harding and Coolidge, Reagan and Bush, with Democrat JFK right smack in the middle: great tax cutters all.
The notion that small- and limited-government conservatives who want
ALL Americans to pay less to a freedom-encroaching government are somehow “beholden to the rich” for doing so is just a lie. And a Marxist-based lie at that.
[Update, 12/15/10]:
Check out these numbers as to how the Reagan tax cuts INCREASED the taxes paid by the wealthy, and REDUCED the taxes paid by the middle class and the bottom 50% of tax payers:
Income tax burdens (from the Joint Economic Committee for the US Congress report, 1996):
1981: top 1% of earners paid 17.6% of all personal income taxes
1988: top 1% of earners paid 27.5% of all personal income taxes (+ 10%).
1981: top 10% of earners paid 48% of all personal income taxes
1988: top 10% of earners paid 57.2% of all personal income taxes (+ 9%).
So rich clearly paid MORE of the tax burden when their tax rates were LOWERED.
For the middle class:
1981: middle class paid 57.5% of all personal income taxes
1988: middle class paid 48.7% of all personal income taxes (- 9%).
The middle class’ tax burden went DOWN by 9%. They paid almost 10% LESS than what they had been paying before the Reagan cuts.
For the bottom 50%:
1981: bottom 50% paid 7.5% of all personal income taxes
1988: bottom 50% paid 5.7% of all personal income taxes (- 2%).
So the Joint Economic Economic Committee concludes that if you lower the tax rates on the rich, the rich wind up paying MORE of the tax burden and the poor end up paying LESS. When you enact confiscatory taxation policies, the people who can afford it invariably end up protecting their money. They do everything they can to NOT pay taxes because they are getting screwed. When the rates drop to reasonable rates, they don’t shelter their money; rather, they take advantage of their ability to earn more – and improve the economy by doing so – by investing. If you take away their profit, you take away their incentive to improve the economy and create jobs.
___________________________________________________________________________
Looking at Case Histories
The effect of tax rates on economic activity should not be overstated. The economy, after all, can be affected significantly by trade policy, regulatory policy, monetary policy, and many other government actions. Even within the context of fiscal policy, tax rates are not the only critical issue. Both the level of government spending and where that money goes are very important. And even when looking only at tax policy, tax rates are just one piece of the puzzle. If certain types of income are subject to multiple layers of tax, as occurs in the current system, that problem cannot be solved by low rates. Similarly, a tax system with needless levels of complexity will impose heavy costs on the productive sector of the economy.
Keeping all these caveats in mind, there nonetheless is a distinct pattern throughout American history: Simply stated, when tax rates are reduced, the economy prospers, tax revenues grow, and lower-income citizens bear a lower share of the tax burden. Conversely, periods of higher tax rates are associated with subpar economic performance and stagnant tax revenues.
The 1920s
Under the leadership of Treasury Secretary Andrew Mellon during the Administrations of Presidents Warren Harding and Calvin Coolidge, tax rates were slashed from the confiscatory levels they had reached in World War I.
The Revenue Acts of 1921, 1924, and 1926 reduced the top rate from 73 percent to 25 percent.
Spurred in part by lower tax rates, the economy expanded dramatically. In real terms, the economy grew 59 percent between 1921 and 1929, and annual economic growth averaged more than 6 percent.
Notwithstanding (or perhaps because of) the dramatic reduction in tax rates, personal income tax revenues increased substantially during the 1920s, rising from $719 million in 1921 to $1,160 million in 1928, an increase of more than 61 percent (this was a period of no inflation).4
The share of the tax burden borne by the rich rose dramatically. As seen in Chart 5, taxes paid by the rich (those making $50,000 and up in those days) climbed from 44.2 percent of the total tax burden in 1921 to 78.4 percent in 1928.
This surge in revenue was no surprise to Mellon:
The History of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. 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 nor profit to the people.5
The 1960s
President Kennedy proposed a series of tax rate reductions in 1963 that resulted in legislation the following year dropping the top rate from 91 percent in 1963 to 70 percent by 1965.6
The Kennedy tax cuts helped trigger the longest economic expansion in America's history. Between 1961 and 1968, the inflation-adjusted economy expanded by more than 42 percent. On a yearly basis, economic growth averaged more than 5 percent.
Tax revenues grew strongly, rising by 62 percent between 1961 and 1968. Adjusted for inflation, they rose by one-third.
Just as in the 1920s, the share of the income tax burden borne by the rich increased. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.7
According to President Kennedy:
Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions and any new recession would break all deficit records. In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.8
The 1980s
President Reagan presided over two major pieces of tax legislation which together reduced the top tax rate from 70 percent in 1980 to 28 percent by 1988.
The economic effects of the Reagan tax cuts were dramatic. When Reagan took office in 1981, the economy was being choked by high inflation and was in the middle of a double-dip recession (1980 and 1982). The tax cuts helped pull the economy out of the doldrums and ushered in the longest period of peacetime economic growth in America's history. During the seven-year Reagan boom, economic growth averaged almost 4 percent.
Critics charge that the tax cuts caused higher deficits, but they misread the evidence. The Reagan tax cut, though approved in 1981, was phased in over several years. As a result, bracket creep (indexing was not implemented until 1985) and payroll tax increases completely swamped Reagan's 1.25 percent tax cut in 1981 and effectively canceled out the portion of the tax cut which went into effect in 1982. The economy received an unambiguous tax cut only as of January 1983. Thereafter, personal income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).
Contrary to conventional wisdom, it was the "rich" who paid the additional taxes. The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.9
One of the chief architects of the Reagan tax cuts was then-U.S. Representative
Jack Kemp (R-NY). According to Kemp:
At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.10
The Lessons
1) Lower tax rates do not mean less tax revenue.
The tax cuts of the 1920s
Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent (this was a period of virtually no inflation).
The Kennedy tax cuts
Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).
The Reagan tax cuts
Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).
2) The rich pay more when incentives to hide income are reduced.
The tax cuts of the 1920s
The share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.11
The Kennedy tax cuts
Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.12
The Reagan tax cuts
The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.13
