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: