Stop Believing the Flat Earthers of Tax Policy – Lower Tax Rates Result in Higher Revenues Not Less.
Why is the Left ignoring its Patron Saint John Maynard Keynes on taxes?
President Trump has many pressing priorities, domestic and foreign. Few are more important than ensuring America’s economic future by making his 2017 tax rate reductions permanent. Further, American needs a strong economy at home to fulfill its obligations abroad.
Opposing him are many flat-earthers of tax policy who claim tax rate reductions add to deficits. Recently, Speaker Johnson said that Republicans “don’t want to blow a hole in the deficit by extending the Trump-era cuts.” In truth, not extending the cuts would be far worse.
America has now had five major tax reform/rate reductions in its history since the institution of the income tax in 1913. All five times, the economy improved and, according to IRS collection records, tax revenues rose – notwithstanding the false claims of the flat-earthers of tax policy.
The American income tax came into being in 1913 and the top tax rate was 7%. By 1918, Democrat Woodrow Wilson raised that rate to 77%. Since then, tax rates have been the playgrounds of Congress and the Presidents – rising and falling in haphazard fashion.
Our five major reductions started in the 1920s, then in the 1960s, the 1980s, 2001, 2003 and then in 2017. They have always been beneficial to the economy and resulted in increased tax revenues because of increased economic activity.
Consider the effects of the 1964 cuts signed into law by Democrat President Lyndon Johnson, who lowered the top tax rate from 91% to 70%.
According to President Johnson,
“I signed the biggest tax cut in the Nation’s history. Then, the economy was dragging. Five and a half percent of the labor force was out of work. We were underachievers–falling almost $30 billion short of our productive capacity. We had to put our foot on the accelerator then. The income tax reduction and the later excise tax cuts brought new vigor and health to America’s economy. They helped us to roll up an unparalleled and impressive record: 88 months of sustained prosperity. This has meant higher paychecks to the worker and higher profits to the businessman.”
Not surprisingly, tax revenues jumped in response to the cuts. In 1963, income revenues were $106.6 billion. By 1969, that number had risen $186.9 billion.
The tax reductions of President Harding and Coolidge saw rates drop from that 77% under Wilson to 25%. With that, the Roaring 20s were unleashed and “Between 1922 and 1929, real gross national product grew at an annual average rate of 4.7 percent and the unemployment rate fell from 6.7 percent to 3.2 percent.” Not surprisingly, “individual income tax increased from $719 million in 1921 to $1.164 billion in 1928.”
Federal tax revenues in 1980 were $517.1 billion. After the two major Reagan tax reductions, tax revenue rose to $909.2 billion in 1988. From 2000 to 2003, federal tax revenue dropped from $2.03 trillion to $1.78 trillion. After the rather minor Bush 2001 and 2003 tax rate reductions, revenues rose to $2.57 trillion by 2007.
President Trump signed in tax rate reductions in December of 2017. The 2017 tax revenues were $3.32 trillion. By 2021, revenues under those rates had risen to $4.05 trillion – a 22% increase.
Five significant rate cuts and five increases in tax revenues – even after consideration of inflation. In other words, there is no evidence in American income tax history that significant rate reductions resulted in less tax revenues. None.
Every one of those tax reductions were preceded by claims that the tax rate reductions would result in less revenues. Beyond that, many on the Left claim:
1. that despite those higher revenues, that the tax rate reductions resulted in higher deficits; and
2. That collected revenue would have been higher without the tax rate reductions.
Of course, those critics ignore the fact that the deficits have been driven by the explosion in federal spending. Indeed, spending from 1980 to today has increased from $670 billion (on and off budget) to over $6.2 trillion dollars. After inflation, that is nearly a 300% increase. Of course, a significant source of that inflation is the now $36 trillion in national debt and printing of money to accommodate that national debt.
As for the claim that tax revenue would have been higher without the tax increases, the Left ignores it patron saint John Maynard Keynes.
It was Keynes, long before Reagan, that stated: “high tax rates defeat their own object,” i.e. to collect tax revenue. It was Keynes, long before Reagan economist Art Laffer, that said: “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”
Keynes so believed that that he also said that: “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more-and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
The next two years represent America’s best chance of getting its physical house in order. Spending must be reduced. Just as importantly, the American economy must grow at rate greater than 3%. The renewal of the Trump tax rate reductions, which applied to every American taxpayer, is essential to those goals.
