Don't Blame Tax Cuts for Catastrophic Deficits

Posted: Mar 23, 2011 12:01 AM

Liberal commentators blame the Bush tax cuts, not runaway spending, for the budget crisis.

They insist that slashing rates on income taxes, which means smaller percentages of private income going to government, would guarantee red ink even if Congress finds many billions in spending cuts.

The problem with this argument is that it’s clearly contradicted by recent history. Actually, the second round of Bush tax cuts in 2003 brought increased revenues – both in actual dollar terms and as a percentage of the GDP (Gross Domestic Product) -- not falling levels of government support. In 2007, six years after Bush began slashing tax rates, revenues rose above 18% of GDP –more than the 60 year post-war average. Revenue didn’t fall until 2009, when economic collapse meant people earned less money and more families joined the 40% of the population who pay no federal income taxes—leaving top earners carrying more, not less, of the overall tax burden. The Bush tax cuts never increased the federal taxes on the poor, the middle class or anyone else and, in fact, served to exempt millions of Americans from paying income taxes at all. The Bush experience wasn’t unique in demonstrating that lower tax rates don’t cause reduced levels of federal revenue.

The official numbers show that in dollar terms (adjusted for inflation) the money the government collected in taxes went up every single year between 1950 and 2009, even with sharp tax cuts by Presidents John F. Kennedy, Ronald Reagan and George W. Bush. Even measured as a percentage of the GDP –or overall economy – falling tax rates didn’t produce plunging revenues—government generally got a bigger share, not a smaller share, when tax rates went down.

Reagan sharply cut tax rates twice, and reduced the top marginal rate from 70% when he took over all the way down to 28% when he left the White House. But revenue between the beginning and the end of his two terms went down only from 19% to 18% (of a dramatically expanded overall economy) and in dollar terms the tax collections dramatically soared.

Nor do sky-high tax rates on the rich guarantee substantial increases in government revenue. Under Eisenhower, the top tax rate reached 91%, but the government collected just 19%--almost identical to the 18% it collected after Reagan dropped that top rate all the way down to 28% in 2006.

Yes, government at all levels is broke, but the problem is based almost entirely on over-spending, crippling entitlements, too much borrowing and swelling debt, with stimulative tax cuts contributing little or nothing to catastrophic deficits.