A few weeks back, someone made a comment that boggled my wife. For convenience’s sake, let’s just call this speaker Ann. Ann and my wife were driving around town when they passed a tax preparation business. A guy in front was holding up a sign that read, “Honk for Tax Cuts.” Quite a few people were. This prompted Ann to comment, “Oh, yeah, that’s really smart. How is our economy ever going to get back on its feet if you take your tax cuts?“
Ann is not alone in the idea that tax cuts are bad for the economy. While speaking to George Stephanopoulos on World News Tonight, Peter Jennings said of then Treasury Secretary-designate John Snow, “He is said to be in favor of further tax cuts but against deficits. Doesn’t one lead to the other?” No, Peter. Adjusting tax rates adjusts the income the government receives from taxes. Deficits are a result of spending. If I spend more than I earn, it doesn’t matter how much I earn; I am still spending too much. This is exactly what happened during the Reagan administration. About four months later, Matt Lauer said, “A lot of people say, ‘Why are you cutting taxes now when you’re increasing the deficit.’ Shouldn’t this be a time when you’re increasing taxes?” Matt, rasing taxes would only make sense if you honestly believed that it would increase the money the government brings in. But does it?
The Heritage Foundation has a clear write-up of just how the government and the rich are affected by tax rate cuts. Previous to our current administration, there have been three periods of large cuts in the federal tax rates. These happened during the 1920s, 1960s and 1980s.
In the 1920s, the top tax rate went from 70% to less than 25%. During this time, personal income tax revenues paid to the federal government rose 61%. Then-Treasury Secretary Andrew Mellon summed it up this way:
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.
During the Depression, President Hoover increased tax rates, and President Roosevelt raised the top tax rate to more than 90%! It’s no wonder that the Roosevelt administration had no beneficial effect on the national economy. If it hadn’t been for World War II and its increased productivity, this nation would have suffered even longer from the massive hike in taxes. President Kennedy asked for a reduction in these rates, and the top rate went from 90% down to 70%. During the next seven years, the economy grew and federal tax revenues grew 62%. President Kennedy said of this tax cut:
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… 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.
About 20 years later, President Reagan proposed dropping the top income tax rate from 70% down to near 20%. Contrary to what many revisionist historians say, taxes brought in by the government climbed an amazing 99% during the 1980s. The deficit grew during the 1980s not because the government failed to bring in taxes; rather it grew because the government proceeded to spend even more than it brought in. If you fail to live within your means, doubling your salary will not help if you continue to spend more than what you bring in. Then-U.S. Representative Jack Kemp spoke of the Reagan tax cuts:
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.
So here we are, over a decade after the Reagan administration, and the people still have not realized that tax rate cuts are beneficial to both the government in the form of more tax revenue, and to the people in the form of a stronger economy. After the devastating attacks of September 11th, 2001, and the resulting losses in the airline industry and economic confidence, the tax cuts proposed by President Bush have started to have a good result for the nation. In the last six months of 2003, real GDP grew at an annual rate of 6.1%, the fastest 6-month growth rate in nearly 20 years. Isn’t it interesting that if we subtract 20 years from 2003, we get 1983? To compare the growth brought by this tax cut, we have to go back to the last major tax cut.
So you see, Ann, tax cuts will get our nation back on its feet faster than any other government program. And it has worked every time it has been tried. On the other hand, at no point in history has any nation taxed itself into prosperity.