Less Taxes, More Revenue

Richard Bernstein
|
Posted: Sep 02, 2010 1:50 PM
Less Taxes, More Revenue

In recent American history three presidents, Republicans Ronald Reagan and George W. Bush—and Democrat icon John Fitzgerald Kennedy—all lowered taxes in response to economic recessions. In all three cases, more money flowed into federal coffers than expected, and all three recessions ended.

In 2003, President Bush lowered income, capital gains and dividend tax rates. As a result of the Bush tax cuts, the amount of revenue flowing into the federal Treasury over the next four years surged by over 40%, or $743 billion. To illustrate how the tax cuts boosted the economy, Gross Domestic Product grew at an annual rate of just 1.7% in the six quarters before the 2003 tax cuts. In the six quarters following the tax cuts, the growth rate was a robust 4.1%. While some of that growth was naturally occurring, the sudden and dramatic turnaround in the economy began at the exact moment those pro-growth policies were enacted.

Yet, despite compelling evidence, the Obama administration and Congressional Democrats intend to raise taxes beginning in 2011 by letting the Bush tax cuts expire. The top marginal tax rate will increase from 35% to 39.6%, capital gains rates will increase from 15% to 20%, and dividend rates will increase from 15% to as high as 39.6%.

As a result, money previously invested in the private sector will be confiscated by the government. Since there is indisputable evidence that tax cuts produce greater amounts of revenue—as proven by the above-referenced historical data—it is logical to assume that raising taxes will have the opposite effect. Martin Feldstein, Harvard professor and chairman of the Council of Economic Advisers under President Reagan agrees: “Historians and economists who’ve studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment.”

Tax revenues and GDP are highly correlated: as the economy grows, federal tax revenues also grow. This has been the case since the end of World War II. Simply put, the best way to increase federal revenues is not to increase taxes, but to expand the economy. Therefore pro-growth policies, such as lower marginal tax rates, restrained federal spending, minimal regulation, and free trade should be adopted.

Regarding tax cuts, Democrats would be wise to emulate the policies of former Democrat president, John F. Kennedy, who said the following:

“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… The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy (italics mine) which can bring a budget surplus.” Kennedy understood how an expanding economy benefits everyone, poor and rich, stating, “A rising tide lifts all boats.”

Bottom line: taxation is an extension of ideology. Unlike JFK, today’s “progressive” Democrats favor higher rates of taxation because they believe government is the best entity for allocating resources. Underlying this assertion is the Democrats’ assumption that most Americans are incapable of running their own lives and should defer to the “superior” wisdom of the political ruling class.

Republicans favor lower tax rates because they believe individual Americans have a far better idea of what to do with their hard-earned money than the bureaucrats in Washington, D.C. They believe Americans with additional amounts of disposable income will spend and invest it, which grows the economy.

Taxation is also an extension of power. Democrats want more of it centralized in Washington, D.C. Republicans want it spread among individuals across the country. Democrats want to be the nation’s arbiters of “fairness” and “social justice.” Republicans believe fairness and social justice can be distorted beyond all recognition by elitist political ideology, so it is far better if such concepts are determined by millions of Americans free to act in their own self-interest.

Democrats want higher taxes to pursue their goals. Republicans want lower taxes so Americans can pursue their own goals. The contrast between the parties couldn’t be sharper—which is something freedom-loving Americans should remember when they head to the polls in 2010.