Amazing -- Lowering Tax Rates Actually Raises More Money
by Henry W. Burke
Fact: When Presidents Harding, Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush cut tax rates, the tax revenues amazingly increased between 32% and 100%.
Experience demonstrates that high tax rates discourage more work and investment; the result is less tax revenue flowing to the government.
The historical record has shown repeatedly that lowering tax rates will cause the rich to pay more taxes. More importantly, cutting the tax rates will actually increase the total tax revenues collected by the federal government!
Reducing the tax rates will lead to significant economic growth and more tax revenues. The economy expands; jobs are created; and unemployment drops. After tax cuts are instituted, the rich make more money, keep more money and send more tax revenue to the government.
Why is Obama pushing for tax rate increases if they raise little or no additional revenue? He wants to cause dissension among Republicans and incite a "civil war." Any Republican officeholder that votes for a tax increase runs the risk of losing in the next primary election.
Obama is harping about increasing taxes on the rich (the "wealthiest two percent"). Even though the election is over, he continues to campaign on this point. Obama's demands for more revenue are not an economic policy or a budget policy; rather, the demands express his vision of social justice and income redistribution.
Obama included these class warfare taxes in his failed budget attempts; Democrats and Republicans alike shunned the toxic issue. The 2012 Budget that Obama submitted to Congress last year was soundly defeated in the Senate by a 97 to 0 vote! His 2013 Budget, which included numerous recycled tax hikes, suffered a similar fate; Obama's 2013 Budget was defeated unanimously in the House 414 to 0!
It is estimated that Obama's tax hikes on the so-called "rich" (individuals with incomes more than $250,000) will generate about $80 billion per year (at best). The federal government spent $3.5 trillion in Fiscal Year 2012 (ending September 30, 2012). This equates to about $9.7 billion per day. At our current rate of spending, this tax increase on the rich will pay for only 8.5 days of federal government spending!
Obama completely ignored the recommendations of his own Deficit Commission; he has gone more than three years without an approved federal budget; and he has shown no leadership in cutting spending. Where are the spending cuts that he mentioned? They do not exist! Instead of real spending cuts, the White House has concocted "baseline" budgeting schemes to claim credit for the wars in Afghanistan and Iraq.
Brief History of the Income Tax
Stephen Moore recently released his excellent book Who's the Fairest of Them All? Moore is an editorial board member and senior economics writer at the Wall Street Journal; he is also a regular economic commentator on CNBC TV and the Fox News Channel. In the book, Stephen Moore describes true tax fairness, the taxes that people pay, and the effects of lower tax rates. Finally, Moore builds a strong case for the flat tax.
The book includes a fact-filled Chapter 6: "Soak the Rich with Lower Tax Rates." In that chapter, the author gives a great history of income taxes and explains how lower tax rates produced increased tax revenue. [Information in this section and the next two sections was taken from Moore's book.]
The United States briefly had an income tax during the Civil war but the Supreme Court struck this act down and thwarted other income tax attempts throughout the 19th Century. With the passage of the 16th Amendment in 1913, the income tax became a permanent fixture of government in America. [The year 2013 will mark 100 years of the federal income tax!]
The New York Times argued in 1894 that the income tax was a "vicious, inequitable, unpopular, impolitic, and socialist act." Even the Washington Post saw the negative effects of a graduated income tax. The Post editorial board said "It punishes everyone who rises above the rank of mediocrity." The tax was supposed to be capped at 7 % and would apply only to the very richest Americans: the Rockefellers and Vanderbilts.
When the income tax was debated, some of the opponents in Congress argued that there should be a constitutional cap on the income tax at 10 %. The income tax supporters assured voters that this was unnecessary because the income tax rate would never go that high. They could not have been more wrong!
Lessons from History on Tax Cuts
History can teach us some valuable lessons on tax cuts. In the last 100 years, there have been four episodes of significant tax rate reductions.
1. The Warren Harding and Calvin Coolidge Tax Cuts
After passing the 16th Amendment in 1913, it did not take long for the government to drastically increase the income tax rate. Within 8 years (by 1921) and during Woodrow Wilson's presidency, the top tax rate stood at 73 %! [This is slightly above the promised 10 % maximum rate.] Elected officials justified this high tax rate to fight the Germans in World War I.
In the 1920 presidential election, Warren Harding and the Republicans promised a "return to normalcy" and Harding won in a landslide. The country was suffering from a post-war recession and was experiencing very high unemployment.
President Warren Harding pushed for cutting the tax rates. After Harding died in office, his successor Calvin Coolidge promoted a steep reduction in tax rates to get the U.S. economy moving again. Coolidge argued for the tax rate reductions in his 1924 State of the Union address. He confidently predicted that his plan "would actually yield more revenues to the government if the basis of taxation were scientifically revised downward."
What happened when these tax cuts were instituted? The economy roared back to life in the mid-1920s and earned the label "The Roaring '20s." The rich got richer and middle-class Americans shared the affluence. Even the poor could afford radios and indoor plumbing.
Income tax revenue soared from $720 million in 1921 to $1,150 million by 1928. This is a 60 % increase in tax revenues. Also, the share of taxes paid by those earning over $50,000 (the rich back then) rose from 45 % in 1921 (when the tax rate was 73 %) to 62 % in 1925 (when the tax rate was 25 %). President Calvin Coolidge made eloquent speeches on how tax rate cuts would spur greater output and employment. Coolidge said this in 1924:
Experience does not show that the higher tax rate produces the larger revenue. Experience is all the other way.
One of the main architects behind this first American supply-side tax cut was Secretary of the Treasury Andrew Mellon. (The 1920s tax cut plan is sometimes called the "Mellon tax cuts.") Mellon was one of the few people in Washington who predicted that lowering the tax rates would produce more growth and even more tax revenue. Andrew Mellon said this about tax cuts:
It seems difficult for people to understand that high rates of taxation do not necessarily mean large revenues to the government and that more revenue may often be obtained by lower tax rates.
In the fall of 1929, the stock market crashed and the economy tanked. One contributor to the crash was the reversal of the Coolidge tax rate cuts. In President Herbert Hoover's last year in office, the economy was sagging and the government faced a $2 billion budget deficit. Hoover and the Republicans called for a tax increase that doubled the tax rates. The economy sunk.
When Franklin Delano Roosevelt entered office, all the rates were raised. FDR and the Democrats increased the tax rates from 25 % to 63 %; then in 1935, FDR raised the top tax rate to more than 83 %. During the war, rates were increased even more to an astounding 92 %! Workers and investors kept 8 cents on the dollar!
2. The Kennedy Tax Cuts
America's high tax rates took a toll. The economy grew in the 1950s but not steadily. By the end of the Eisenhower presidency, the economy was stalled again. A young charismatic Senator from Massachusetts, John F. Kennedy, ran for president in 1960, promising to get the economy growing faster. The Democratic party platform called for 5 % real economic growth rates. [We would certainly like to see those growth rates today.]
When JFK took office in 1961, the highest marginal tax rate was 91 %; the lowest was 20 %. Many of Kennedy's advisers, including John Kenneth Galbraith, argued for a massive government spending program. [Does this sound familiar?] John Kennedy was ultimately his own economic counselor and understood human nature and the lessons of history. He decided the best way to get the economy moving was through across-the-board tax reductions.
John F. Kennedy was the first modern-day supply side president. He wisely declared this in 1963:
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.
Tragically, President Kennedy was assassinated but his tax package was enacted into law in 1964. The law reduced the top personal income tax rate from 91 % to 70 % by 1965 and cut the lower rates as well. Some of his opponents suggested that this tax cut would benefit the rich. Kennedy argued that economic growth would benefit all income levels and uttered the famous quote: "A rising tide lifts all boats."
Guess who opposed the tax cuts in Congress? Politics was flipped on its head with Democrats pushing for tax cuts and Republicans opposing tax reductions. House Ways and Means Committee Chairman Wilbur Mills wisely prophesied:
The larger revenues derived from this additional income will result in the federal budget being balanced sooner than would be the case in the absence of the tax cut.
What were the results from the Kennedy tax cuts? The economy grew rapidly in 1964, 1965 and 1966. The unemployment rate fell to its lowest peacetime level in more than 30 years. The Gross National Product (GNP) grew by 10 % in 1966.
How about the tax revenues? The tax revenues grew from $113 billion in 1964 to $149 billion in 1967 ($36 billion improvement). This is a 32 % increase in tax revenues.
This is the interesting part. Lower tax rates on the rich led these income classes to pay a much larger share of the total tax burden. Americans earning over $50,000 per year (equivalent to $200,000 today) increased their taxes by nearly 40 %. Their tax share rose from 12 % in 1963 to almost 15 % in 1966. Americans over $1 million doubled their tax payments from 1962 (when the tax rate was 91 %) to 1965 (when the tax rate was 70 %). The rich pay more when the tax rates are reduced!
3. The Reagan Tax Cuts
President Ronald Reagan and Congressman Jack Kemp modeled their tax cuts after the successful Kennedy plan. Tax rates were cut across the board by 25 %. The highest tax rate was slashed from 70 % to 50 %, and then later to 28 %. This time, the Republicans were pushing for lower tax rates and the Democrats were arguing that lower tax rates could not be afforded.
Reducing income and capital gains tax rates in 1981 helped to launch what we now appreciate as the greatest and longest period of wealth creation in world history. In 1981, the stock market bottomed out at about 1,000 (Dow Jones Industrial Average), compared to nearly 13,000 today.
After the tax cuts, the economy soared in the 1980s. Federal revenues doubled from $517 billion in 1980 to $1,032 billion in 1990.
Also, the rich paid a larger share after the tax cuts. The richest 10 % of Americans paid $177 billion in federal income taxes in 1980 but they paid $237 billion in 1988. The remaining 90 % of households paid $5 billion less in income taxes over this period. The share of total income taxes paid by the wealthiest 1 % of Americans rose from 18 % in 1981 to 25 % in 1990. The wealthiest 5 % saw their tax share rise from 35 % to 44 %. This means that the rise in deficits during this period was not a result of "tax cuts for the rich" but rather a rise in federal spending.
Federal Reserve Board member Lawrence Lindsey wrote a report in the peer-reviewed Journal of Public Economics. Lindsey painstakingly compared the actual revenues generated and determined that all of Reagan's income tax cuts were "recouped by changes in taxpayer behavior." Lindsey concluded his analysis by stating:
But the core supply side tenet -- that tax rates powerfully affect the willingness of taxpayers to work, save and invest, and thereby also affect the health of the economy -- won as stunning a vindication as have been seen in at least a half-century of economics.
4. The George W. Bush Tax Cuts
The tax rate cutting history would not be complete without a quick review of the Bush tax cuts of 2003. That plan reduced income tax rates, dividend tax rates and capital gains rates to spur a stock market recovery and create jobs. President Bush was accused of employing "trickle-down" economics and giving tax cuts to the rich.
Here are the results. Tax receipts exploded by a record $786 billion in four years, going from $1,782 billion in 2003 to $2,568 billion in 2007. This is a 44 % increase in tax revenues. The economy produced 8 million new jobs. And once again, the rich paid more tax, not less. In 2005, the top 1 % of earners paid 39 % of the federal income taxes (the highest ever); the top 5 % paid 57 % of the income taxes; and the top 10 % paid 66 % of the taxes. The bottom 50 % paid a whopping 3 % of the taxes.
Summary of the tax revenue increases from the four tax cuts:
1. Harding-Coolidge Tax Cuts -- As a direct result of the tax cuts, tax revenues rose from $720 million in 1921 to $1,150 million in 1928. This is a 60 % increase in tax revenues.
2. Kennedy Tax Cuts -- After the tax cuts were passed in 1964, tax revenues grew by $36 billion in three years. This is a 32 % increase in tax revenues.
3. Reagan Tax Cuts -- The Reagan-Kemp tax cuts caused a $515 billion growth in tax revenues, going from $517 billion in 1980 to $1,032 billion in 1990. This is a 100 % increase in tax revenues.
4. Bush tax Cuts -- The Bush tax cuts caused a large increase in tax receipts; tax revenues grew by $786 billion between 2003 and 2007. This is a 44 % increase in tax revenues.
Percent of total tax revenues paid by the top income earners:
1. Harding-Coolidge Tax Cuts -- For those earning over $50,000 per year, their share of the total taxes paid rose from 45 % in 1921 to 62 % in 1925. For those who made more than $100,000, their share of the taxes rose from 28 % in 1921 to 51 % in 1925.
2. Kennedy Tax Cuts -- Americans earning over $50,000 per year saw their share of the total taxes increase from 12 % in 1963 to 15 % in 1966; this is a 40 % increase in their share. For those who earned over $100,000, their share of the total taxes rose by 68 %. For people who earned over $1 million, their share of the taxes increased by 80 %.
3. Reagan Tax Cuts -- The richest 10 % of Americans paid 34 % more in taxes between 1980 and 1988.
4. Bush Tax Cuts -- After the Bush tax cuts, the richest Americans shouldered the highest percentages ever. In 2005, the top 1 % of income earners paid 39 % of the total taxes; and the top 10 % of earners paid 66 % of the taxes.
The Laffer Curve
Obama's tax hikes on the rich are doomed to fail! History teaches us that high tax rates do not produce more tax revenue for the government. Also, high tax rates are the worst way to redistribute income to the poor and middle class. This is because of the "Laffer Curve" effect. [Someone needs to tell Obama about the Laffer Curve.]
The Laffer Curve is a graph that plots Tax Rate vs. Tax Revenue. Experience demonstrates that high tax rates discourage more work and investment; the result is less tax revenue flowing to the government. For example, a tax rate of 80 % means that the worker or investor keeps only 20 cents out of every dollar.
Stephen Moore offers this simple illustration:
If there were a 20 percent tax rate for working on Monday, a 40 percent tax rate for working on Tuesday, a 60 percent tax rate for working on Wednesday, an 80 percent rate for working on Thursday, and a 90 percent rate for working on Friday, how many people would work on Friday? Not many.
Rich people put more of their money in tax shelters when the tax rates are high. This results in less taxable income and lower tax payments. Every time taxes have been raised, revenues have fallen. Of course, the opposite also holds -- lower tax rates produce greater tax revenues. This was demonstrated by the four major tax cuts (Harding-Coolidge, Kennedy, Reagan, and Bush).
The rich pay more when incentives to hide income are reduced.
Who Pays the Taxes?
The highest-earning families and businesses already pay the lion’s share of the federal income tax burden. A recent IRS publication provides some basic facts on income tax rates and tax shares.
Source: U.S. Department of Treasury, Internal Revenue Service, Individual Income Tax Rates and Shares, 2008, (September 20, 2011).
The report reveals that the top 1 % of income earners paid 38 % of all federal income taxes in 2008; and the top 10 % of earners paid 70 % of the total taxes.
The bottom 50 % of income earners paid 3 % of the total income taxes.
Taxpayers who had incomes over $200,000 earned 32 % of the total income and paid 52 % of the total income taxes.
The following statements can be made about Higher-Income Earners:
1. Taxpayers with an Adjusted Gross Income (AGI) from $200,000 to $500,000 earned 13 % of the total income and paid 19 % of the total income taxes.
2. Taxpayers with an AGI from $500,000 to $1 million earned 5 % of the total income and paid 9 % of the total income taxes.
3. Taxpayers with an AGI over $1 million earned 14 % of the total income and paid 24 % of the total income taxes.
4. The higher income group (taxpayers who earned over $200,000) earned 32 % of the total income and paid 52 % of the total income taxes.
5. The Average Tax Rate for this group was 21.9 %.
It is easy to see that higher-income taxpayers are already paying a very high percentage of the total taxes.
Obama’s plan is straightforward – soak the top-earning households in America – those earning more than $200,000 as single filers or $250,000 as married couples. According to the IRS data, that “tiny, wealthy minority” encompasses more than 4.3 million households! When we count spouses, children, and other dependents, we are talking about 12.5 million Americans!
Also many of the small businesses fall into this $200,000 - $250,000 category. Roughly two thirds of small businesses are taxed at this rate. Why would we want to raise taxes on the job creators? [People who make $50,000 do not create many jobs.]
Obama wants to dramatically increase taxes on the "rich." What if the feds confiscated 100 % of the gross income from the taxpayers who made over $1 million? That would amount to $1.068 trillion (2008 study). This amount is less than the federal deficit for one year! (Deficits have been running over $1.3 trillion per year under Obama.)
Obviously, this is ridiculous and far-fetched, but it makes a point. People would not stand for it; they would have no incentive to earn money; and they would leave the country in droves! However, it helps to put the government's spending and deficits into perspective.
I might also point out that the Total AGI for all taxpayers ($7.58 trillion) is less than half of our $16.4 trillion National Debt.
Obama has successfully focused the attention on people at the upper end of the income scale, the so-called "rich." What about people at the lower end of the income scale? The bottom 50 % of income earners paid 3 % of the total income taxes; and the bottom 40 % paid no federal income tax! Instead, the bottom 40 % of tax filers receive net payments from the income tax system equal to 3.8 % of all taxes paid (about $39 billion per year).
Under Obama, new "refundable tax credits" have been inserted into the tax code. Today, refundable tax credits cost the federal treasury $82 billion a year. These are welfare payments that are disguised as tax cuts. The amount of the refundable tax credits ($82 billion) is essentially identical to the $80 billion tax increase that Obama expects to get from the rich. [Does this make sense?]
Obama wants to increase tax rates on the "rich." (Apparently, he defines rich as anyone making over $250,000 per year.) Obama is driven in this direction by his income redistribution ideology.
Obama's plan will not reduce the deficit, mainly because he offers no real spending cuts. His "baseline" budgeting schemes are bogus tactics that do nothing to trim the recurring deficits and burgeoning national debt.
History has repeatedly demonstrated that reducing the tax rates will lead to significant economic growth and more tax revenues. The economy expands; jobs are created; and unemployment drops. After tax cuts are instituted, the rich make more money, keep more money and send more tax revenue to the government.
I would call this a "Win-Win" Tax Plan!
Henry W. Burke