Every good liberal will tell you that low tax rates cause tax revenues to drop, hurt the economy, benefit only the wealthy and cause skyrocketing budget deficits. A Wall Street Journal article last week blew a hole in those liberal lies. The Journal reported that federal tax revenues for the first five months of fiscal year 2006 are up 10.3 percent from the same period a year ago. The 2006 revenue growth adds to a 15 percent tax revenue increase from 2004 to 2005. This good fortune for U.S. Treasury coffers is attributed to the steady and growing economy, which is largely a product of the 2003 cuts in income, dividend and capital gains tax rates.
The parallel growth in the economy and tax revenues is not a fluke and did not occur by chance. History has shown us that every time tax rates are cut, federal tax revenues rise, the economy responds positively and the wealthy pay a larger share of the tax bill.
Presidents Warren Harding and Calvin Coolidge significantly cut tax rates in the 1920s, which caused both the national economy and federal revenues to grow. Harding repealed the World War I excess profits tax, dropped the top tax rate on individuals from 73 to 58 percent and set the capital gains tax rate at 12.5 percent. Coolidge further reduced individual tax rates and inheritance taxes. The Harding and Coolidge tax rate cuts caused income tax revenues to rise 61 percent from 1921 to 1929. At the same time, the economy grew by 59 percent. Additionally, the share of taxes paid by the wealthiest Americans grew from just over 44 percent in 1921 to over 78 percent by 1928.
President John F. Kennedy introduced a plan in 1963 to lower the highest individual tax rate of 91 to 70 percent, and the top corporate rate from 52 to 48 percent. The Revenue Act of 1964, passed after Kennedy’s death, containted his proposed rate cuts and sparked considerable economic growth. Federal tax revenues rose 68 percent through 1968, and the economy grew 42 percent. The share of tax revenues paid by the wealthiest in the 1960s dwarfed the amounts paid by the middle class and poor. Tax revenues from those individuals making over $50,000 rose by 57 percent following the Kennedy rate cuts, while revenues from those making under $50,000 rose by just 11 percent.
When President Ronald Reagan came to office in 1981, the economy was mired in high interest rates, high unemployment and stagflation produced by policies of the 1970s. Reagan cut the highest individual tax rate in 1981 from 70 to 50 percent, and cut the lowest rate from 14 to 11 percent. In 1986 he further cut the top rate from 50 to 28 percent.
Reagan’s tax rate cuts helped produce the longest period of peacetime economic expansion in U.S. history. Total tax revenues grew by over 99 percent during the 1980s, and the economy grew by an average of 4 percent each year. As we saw in the 1960s, the wealthiest Americans paid the most taxes following Reagan’s rate cuts. The top 10 percent of income earners went from paying 48 percent of all taxes in 1981, to over 57 percent by 1988.
The other lie liberals perpetually tell is that low tax rates cause budget deficits. History proves just the opposite – that cuts in income, capital gains and dividends tax rates increase the amount of federal revenues available for Congress to spend. The only thing that can cause a budget deficit is when Congress spends in excess of available revenues, and the president at the time signs off on that spending. Members of Congress who blame tax cuts for causing deficits might as well argue that gun manufacturers cause homicides, fast food restaurants cause obesity and cigarette makers cause lung cancer. Surely no one would agree with that flawed logic.
Fiscal conservatives who advocate low tax rates, and even complete replacement of the income tax code with a consumption tax, can be assured that they are on the right side of history, and the right side of economic common sense. Liberals of both political parties who decry low tax rates would harm our nation’s economic infrastructure, and the poor and wealthy alike.
Nearly everyone has a chance to succeed in our dynamic economy, provided that government does not confiscate their wealth through the tax code. As former President Abraham Lincoln once stated, “That some should be rich shows that others may become rich and hence is just encouragement to industry and enterprise . . . I don't believe in a law to prevent a man from getting rich; it would do more harm than good.”