We've all heard the talking points from the left and right about taxes, but what have the actual effects been when taxes were cut throughout the 20th century? In this article, I'm going to attempt to break down the myths about taxes, in an easy and comprehensive way. Before I do this, I want to give a hat tip to Dan Bongino of Conservative Review, for putting together an array of scholarly articles in his "Debunk This" section of his website.
One of the most common and infuriating things I hear when tax cuts are discussed is "How are we going to pay for them?" The first point of contention is that this assumes the government is entitled to a portion of our income. The second point that this assumes is that if the government takes less of that income, as a percentage, they'll need to take more from someone else, or more from you in another manner. Let's, for the sake of argument and brevity, agree that the goal of government should be to take in as much, or more, income than it already does. Again, this is not my position, but I'll attempt to take on the argument from this perspective.
One would think, from the articles and talking heads on tv, that whenever we cut taxes, tax revenue decreases. This is easy to believe because we tend to think of things from our own experiences. If I get a reduction in pay from one year to another, I'll likely make less money that year than the previous, but what are the historical facts? Tax rates have been cut five different times in the 20th century; Under Coolidge, JFK, Reagan, Clinton's Capital Gains tax cuts, and Bush (43). While reviewing them, let's focus on two key things: 1. Did tax cuts "cost" the government money, and 2. did the rich pay more or less of the tax load after the tax cuts?
- In 1918, under Woodrow Wilson, the top marginal tax rate was raised to 73 percent. This rate was cut three times, first under Harding/Coolidge in 1922 (58%), then again by Coolidge in 1924 (46%), and finally down to 25 percent in 1925 by Coolidge again. Using the left's logic, tax revenue should have dropped by nearly 2/3. According to the Secretary of the Treasury under Calvin Coolidge, Andrew Mellon, "The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden, and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people."
Below is listed the actual tax revenue, from 1920-1928, Hat-tip Cato!
As you can see, the tax cuts did lead to decreased revenue in the first couple of years, but as the rates continued to decrease, economic growth ensued, and tax revenues began to rise above the revenue generated before the cuts were enacted. Also, it's important to note the effect the tax cuts had on those who paid the burden of the tax load. In 1920, the bottom income earners paid 15 percent, and the top income earners paid nearly 30 percent. By 1928, the bottom income earners paid just 1.1 percent while the top income earners were paying nearly two-thirds of all income taxes! What happened to tax cuts only helping the rich? More on that later!
Between the time of Calvin Coolidge and JFK, the top marginal rate rose from 25 percent, all the way up to a staggering 91 percent. JFK then took a bold stance on taxes stating, ''Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that, no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget - just as it will never produce enough jobs or enough profits.'' In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low-- and the soundest way to raise revenues, in the long run, is to cut rates now. ''A year after his tragic death in 1963, LBJ signed into law the Tax Reduction Act. It was a bipartisan tax cut that reduced all rates by approximately 20 percent. In addition to individual income tax cuts, the act slightly reduced corporate tax rates and introduced a minimum standard deduction. Below is the tax revenue by year from 1960-1966. Tax Revenue continued to increase until the next tax cuts were enacted in 1982 by Ronald Reagan, reaching nearly $618 Billion!
- FY 1966 - $131 billion.
- FY 1965 - $117 billion.
- FY 1964 - $113 billion.
- FY 1963 - $107 billion.
- FY 1962 - $100 billion.
- FY 1961 - $94 billion.
- FY 1960 - $93 billion. It's important to note, between 1963 and 1966, tax revenue from those making over $50,000 rose by 57 percent while those making less than $50,000 only rose by 11 percent. This led to the burden of the total tax load, being paid by the wealthy, rising from 11.6 percent to 15.1 percent. Again, what happened to tax cuts benefiting the wealthy more than the middle class?
So far, we have established that under both Calvin Coolidge, and JFK, the tax cuts more than paid for themselves. We've also established that the rich ended up paying a higher portion of the overall tax load, even though their individual tax rates decreased, but is this all true for the Reagan tax cuts as well? Reagan once said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” President Reagan was a firm believer in cutting taxes and did so in 1982, cutting the top marginal rate from 70 percent to 50 percent, and again in 1987, cutting it down to 38.5 percent. Again, using the logic of the modern day left, this should've resulted in a loss of nearly 50 percent of all tax revenue by the time Reagan got out of office. Let's examine the actual tax revenue during the Reagan years and the years following Reagan:
- FY 1980 - $517 billion.
- FY 1981 - $599 billion.
- FY 1982 - $618 billion.
- FY 1983 - $601 billion.
- FY 1984 - $666 billion.
- FY 1985 - $734 billion.
- FY 1986 - $769 billion.
- FY 1987 - $854 billion.
- FY 1988 - $909 billion.
- FY 1989 - $991 billion.
- FY 1990 - $1.03 trillion.
- FY 1991 - $1.05 trillion.
- FY 1992 - $1.09 trillion.
As you can see, the tax cuts resulted in nearly doubling tax revenue while Reagan was in office-- $517 billion to $909 billion. According to Heritage, "The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988."
While we're on the Reagan tax cuts, let's examine the claim that Reagan "decimated the middle class." This is a phrase I hear repeated all the time, and one worth investigating. From 1982 to 1989, real per-capita disposable income increased by 18%. This increased the standard of living by nearly 20% in just seven years. The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak, and unemployment dropped by an estimated 45%. The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade. The economic boom that was generated during the Reagan years, spurred on by these tax cuts, continued for nearly 25 years.
Here are the actual changes of income level, according to the Census Bureau, in (real) dollar amounts, from 1980 to 1988.
As you can see, the lower two income levels decreased as a percentage of the population, while the upper three income levels increased as a percentage of the population. These are the many reasons Reagan won a resounding victory in his re-election bid.
Let me be absolutely clear, under Reagan, the US blew out the budget every year, increased the deficit, and nearly tripled the total US debt. He took over after deficits of $72.7 billion, $55 billion, and $82.2 billion his first year in office. The last year of his term, the deficit was $252 billion. An increase of around $180 billion in deficit, and $1.7 trillion in total debt added. None of this was due to tax cuts though, as tax revenue increased by nearly $400 billion. The problem was increased spending. It's important to note that Democrats held the purse strings, and pushed for a lot of that spending increase. Reagan still signed the budget though.
As you can see, the tax cuts of Coolidge, JFK, and Reagan, all led to increased tax revenue and shifted more of the tax burden onto wealthier individuals, from lower income earners. These are the facts, and they are unimpeachable. Please join me in part 2, when I take on the Clinton capital gains tax cuts and the George W. Bush tax cuts.