Friday, September 21, 2012

DEBUNKING THE TAX CUT MYTH

TAX CUTS DON’T WORK?
Two Republican & Two Democrat Presidents Squash This Notion

HARDING- COOLIDGE TAX CUTS

President Warren Harding was one of the first Presidents to propose a supply-side economic agenda. In 1921 when he took office; he faced a severe economic recession from his predecessor President Woodrow Wilson. Harding, along with his Treasury Secretary Andrew Mellon, resolved the recession by slashing tax rates. Unfortunately, Harding died unexpectedly in 1923 before his tax policy had taken effect.  However, President Coolidge picked up where it left off and implemented the Harding tax cut plan.  The Harding & Coolidge tax plans took the Top Marginal Tax Rate from 73% in 1920 to 25% in 1925. The results were:
  • GDP grew from $90 Billion in 1925 to $104 billion in 1929.  
  • In 1925 Federal Tax receipts were $3.6 Billion and by 1930 Federal Tax receipts were $4 billion. That’s a 12% increase in federal revenues.  
  • The Harding/Coolidge Tax plan generated $5.1 Billion in Federal budget surpluses from 1925 to 1930.

JOHN F.KENNEDY TAX CUTS

John. F. Kennedy was one of the few Democratic Presidents that realized the economic prowess of supply-side economics and the crippling effects of Keynesian tax & spend economics. JFK said it best when at a speech before the New York Economic Club:
“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 revenues in the long run is to cut the rates now.”
In The White House, Economic Report of the President, January 1963, Kennedy states:
“Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle--workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit--why reducing taxes is the best way open to us to increase revenues.”
The Kennedy tax plan took the Top Marginal Tax Rate from 91% in 1963 to 70% in 1964. The results were:
·         GDP grew from $ 618 Billion in 1963 to $1.4 trillion in 1970.  
·         Unemployment went from 5.9% in 1963 to 3.4% in 1969
·         14 Million jobs were created from December 1963 to December 1969.
·         In 1963 Federal Individual Income Tax receipts were $48 Billion and by 1970 Federal Individual Income Tax receipts were $90 billion. That’s an 88% increase in federal income tax revenues!  

RONALD REAGAN  TAX CUTS

In 1981, President Ronald Reagan inherited a worse economy than President Obama insisted he inherited. In 1981 Reagan had inherited an economy which saw inflation rise from 4.8% in 1976 to 12% in 1980. Carter tried to force feed his “energy” policy and demand a conservation strategy on the world. However, his weak standing in the Middle East allowed OPEC to cut production. From there,  gas shortages took hold and prices skyrocketed. This led to an out-of-control downward spiral in the American economy. The result was 10.8% unemployment!  Ronald Reagan didn’t take long to correct the economic mess he inherited.  In 1981, he signed into law the Kemp-Roth Tax cut plan. This plan was an across the board tax cut plan that reduced the Top Marginal Tax Rate from 70% in 1981 to 50% in 1982 and eventually  to 38.7% in 1987. The results were:
·         GDP grew from $3.1 Trillion in 1981 to $5.4 trillion in 1989.  
·         Unemployment went from 10.8% in 1982 to 5.0% in 1989.
·         20 million jobs were created from December 1982 to December 1989.
·         In 1981 Federal Individual Income Tax receipts were $286 Billion and by 1989 Federal Individual Income Tax receipts were $446 billion. That’s a 56% increase in federal income tax revenues!  

BILL CLINTON CAPITAL GAINS  TAX CUTS

The historical data on changes in the capital gains tax rate have shown an incredibly consistent pattern. Just after a capital gains tax-rate cut, there is a surge in revenues. Republicans have always known this and in the 1990s they were finally able to convince Bill Clinton to cut capital gains taxes. In 1997, President Bill Clinton signed into a law passed by the Republican Congress that cut capital gains taxes. The Clinton tax cut lowered the capital gains tax rate from 29% to 21%. The tax cut more than favored wealthy Americans since they are the predominant stock holders and investors. The results were:
·         GDP grew from $7.8 Trillion in 1996 to $10 Trillion in 2000.
·         Capital Gains Tax Revenues went from $66 Billion in 1996 to $127 Billion in 2000. That’s a 93% increase in capital gains tax revenues!

CONCLUSION

 Arthur Laffer, the father of Supply-Side economics, once wrote:
“Lower tax rates change economic behavior and stimulate growth, which causes tax revenues to exceed static estimates. Under some circumstances, tax cuts can lead to more—not less—tax revenue. The exact opposite occurs following tax increases, and revenues fall short of static projections.”
There is irrefutable historical evidence that supply-side economic success is a “fact” and not a “theory”. Tax cuts have and will always work in the following ways:
  1. They stimulate the economy
  2. They create more investment & more consumer spending
  3. They create more jobs & thus more tax payers.
  4. They create more income tax revenues
Sources:

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