Evidence, evidence and more evidence

Larry Kudlow
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Posted: Apr 07, 2005 12:00 AM

An opinion piece by reporter Anna Bernasek in last Sunday's New York Times actually argues that there's no real evidence that lower tax rates spur economic growth. Bernasek finds a couple of economists to back up her idea before concluding that tax "reform based on a notion that taxes are bad for the economy is just that: a notion not backed by strong evidence."
 
Let me beg to differ in a very strong way.

  Before making her strange assertions, Bernasek should have referenced the work of Harvard economists Martin Feldstein and Greg Mankiw, along with numerous articles published by the National Bureau of Economic Research. Then there's the work of Columbia economist Glenn Hubbard and Princeton economist Harvey Rosen. These are no small thinkers when it comes to tax theory. Each has found a high correlation between lower tax rates and higher economic growth.

  Then there's the Nobel Prize-winning Edward Prescott of Arizona State and Robert Mundell of Columbia. Add two more sound minds to the lower-tax, higher-growth list. Sure, the above economists have been Republican advisors at one time or another, but Bernasek could have found a trove of data contrary to her thesis had she looked to the "non-partisan" Organization for Economic Cooperation and Development, International Monetary Fund or Congressional Budget Office.

  Then there's the real-world evidence. Let's start overseas.

  Margaret Thatcher's tax cuts had made Britain the strongest European Union economy until Ireland passed it with even lower tax rates. Russia and almost all the former Soviet bloc countries in East Europe have moved to low flat-tax-rate systems. Western Europe, until recently, has not. Consequently, their economic growth rate has fallen 25 percent behind the pace set in the United States over the last decade.

 A recent BusinessWeek article notes that only last year "Germany was among the ringleaders of an effort to force low-tax countries like Estonia to raise their rates." Now, Germany is joining the race to cut taxes by slashing their corporate income tax. BusinessWeek continues, "Chances for just such economy-boosting tax cuts are looking better." (My italics.)

  Back at home, real-world evidence throughout the 20th century shows a stark contrast between high- and low-tax policies. In the 1920s, the Harding-Coolidge-Mellon tax cuts produced the Roaring Twenties. But repeated tax increases by Herbert Hoover and Franklin D. Roosevelt produced and prolonged the Great Depression.

 John F. Kennedy vowed to get the economy moving again after the sluggish growth of the high-tax Truman-Eisenhower years. JFK made good on his promise when he lowered the top income-tax rate from 91 percent to 70 percent. The result was the 1960s boom. Twenty years later, Ronald Reagan turned stagflation into the 1980s boom by slashing the top personal tax rate from 70 percent to 28 percent.

 President Clinton, you might recall, raised taxes in his first term, but lowered them in his second term, contributing to a burst of investment and growth. Note the difference. In his first four years, the economy increased at a 3.2 percent annual rate. But his next four years produced a 4.2 percent economic pace.

 Are we to throw out all this overwhelming historical evidence? Hardly. More likely, former Sen. Connie Mack, the head of President Bush's tax-reform commission, will recommend a new tax plan for the United States that will borrow heavily from the path-breaking flat-tax-reform work of Steve Forbes, Dick Armey and Art Laffer. No amount of academic-style econometric finagling can take away from the historical evidence that flatter and simpler taxes are the best way to maximize our economy's potential to grow.

 To think otherwise only defies the laws of common sense. Higher after-tax returns to work, investment and entrepreneurial risk-taking will promote more employment, more capital formation and more wealth. If it pays more to produce, then people will produce more. As Laffer put it three decades ago, when you tax something more, you get less of it. When you tax something less, you get more of it. Higher after-tax rewards always generate a greater supply of work effort and investment capital.

 In our capitalist free-market system, strengthening the link between effort and reward has proven to work time and again. I respectfully disagree with Anna Bernasek and The New York Times. More tax freedom will always fuel our free economy.