Monday, December 6, 2010


By Bob Ward

(updated 12/07/2010)

Even though President Obama has agreed to extending the Bush tax cuts for all income levels of taxpayers in return for GOP concessions on unemployment benefits, some Congressional Democrats are still opposed claiming the tax cuts will add to the deficit by reducing Federal revenues. It’s anybody’s guess whether they are lying or just ignorant of the historical record which shows that just the opposite is true: lower taxes produce greater revenue for the Federal government, not less.

The Bush tax cuts did not diverge from this record. In July, 2006, Michael Franc of The Heritage Foundation reported that Federal revenues rose by $206 billion (13 per cent) during the first nine months of the fiscal year when he was writing. That increase followed that previous year's “record surge in revenues,” when Federal revenue grew by $274 billion (15 per cent). These increases following the Bush tax cuts allowed the White House to lower its projected budget deficit by more than $100 billion.

Franc noted that in the two years before the Bush tax cuts U.S. economic growth averaged about one per cent and unemployment was at six per cent. After the tax cuts, he said, economic growth averaged four per cent for three years and the unemployment rate dropped to an “historic low” of 4.6 per cent.

Economist Daniel Mitchell was not surprised by these results. “Lower taxes,” he said, “leads to more work, saving and investment. It's not exactly rocket science."

The experience with the Bush tax cuts was not unique. A similar result occurred when Ronald Reagan cut taxes. The Heritage Foundation notes that annual revenues over the next decade averaged $102 billion above their 1980 level. Total tax revenues for the decade rose by 99.4 per cent, just short of double. Heritage also noted that Federal revenues had been dropping in the years just prior to Reagan’s tax cut.

Once upon a time even Democrats understood economics. President Jack Kennedy observed: “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 . . . 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.”

Kennedy’s solution to low tax revenues was to reduce the top tax rate (the one paid by Barack Obama’s hated millionaires) from more than 90 per cent down to 70 per cent. As a result, tax revenues went from $94 billion in 1961 to $153 billion in 1968, an increase of 62 per cent.

Kennedy, Reagan and Bush just retold an old story. Way back in the 1920s tax rates were slashed from over 70 per cent to less than 25 per cent. And revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.

Andrew Mellon, Treasury Secretary during the 1920s, had figured out that when taxes are too high, people just don’t pay them. Wealthy taxpayers, the target of the high marginal rates, simply withdraw their money from productive business and invest instead in tax-exempt securities or other lawful methods of avoiding having their income taxed. The result, Mellon observed, is that capital is diverted into channels “which yield neither revenue to the Government nor profit to the people.”

Democrats have to choose. Do they want a tax policy that increases revenue and creates jobs, or do they want to indulge in class-warfare by opposing any tax cuts that might benefit a wealthy person.

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