Taxes that work versus those that don’t.
“We tried that, and it didn’t work,” Obama and his partisans sneer in response to arguments that tax cuts are the key to restoring economic growth. Instead they support an economic recovery plan based on increased welfare, government spending, and federal deficits and debt as the key to growth. Anyway, they have a “balanced package” with tax cuts too.
Even some conservatives do not understand well enough that not all tax cuts stimulate growth. Which tax cuts work to stimulate the economy and long-term growth and which do not?
Cuts in tax rates stimulate economic growth because the lower rates allow producers to keep a higher percentage of what they produce and earn. For example, at a 50% tax rate the producer only keeps 50% of what he earns. If the rate is reduced to 25%, the producer keeps 75% of what he earns. This means greatly increased incentives to save, invest, start businesses, expand businesses, create jobs, engage in entrepreneurship, and work.
Moreover, these incentives do not just expand the economy by the amount of the tax cut. For example, a tax cut of $100 billion involving reduced tax rates does not just affect the economy by $100 billion. The lower tax rate affects every dollar and every economic decision throughout the economy. That is because every economic decision is based on the new lower tax rates. Indeed, the new lower tax rates affect every dollar, or unit of currency, and every economic decision throughout the whole world regarding whether to invest in America, start or expand businesses there, create jobs there, even work there, because all these decisions will be based on the new lower tax rates.
Kennedy’s Tax Cuts
While President Obama and his hypnotized followers do not understand this, President John F. Kennedy did. Kennedy proposed legislation to reduce income tax rates across the board by 30%. Kennedy explained:
“It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates….[A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.”
Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other….It is between two kinds of deficits — a chronic deficit of inertia, as the unwanted result of result of inadequate revenues and a restricted economy — or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, produce revenues, and achieve a future budget surplus.
Kennedy explained further that the best way to promote economic growth “is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system — and this administration is pledged to an across-the-board reduction in personal and corporate income tax rates.”
Kennedy’s proposed tax rate cuts were adopted in 1964, cutting the top tax rate from 91% to 70%, as well as reducing the lower rates. Over the next year, economic growth soared by 50%, and income tax revenues increased by 41%! By 1966, unemployment had fallen to its lowest peacetime level in almost 40 years. U.S. News & World Report exclaimed, “The unusual budget spectacle of sharply rising revenues following the biggest tax cut in history is beginning to astonish even those who pushed hardest for tax cuts in the first place.” Arthur Okun, the administration’s chief economic advisor, estimated that the tax cuts expanded the economy in just two years by 10% above where it would have been.
Reagan’s Tax Cuts
In 1981, Reagan cut the top income tax rate of 70% to 50%, with a 25% across the board reduction in income tax rates for everyone else. Then, in the 1986 tax reform, he cut the top rate to 28%, with only one other rate of 15% for everyone else. Reagan also cut corporate income tax rates.
By 1982, just before the tax cuts were fully phased in, the economy took off on a 25 year economic boom, what Art Laffer and Steve Moore called “the greatest period of wealth creation in the history of the planet.” Steve Forbes called it “an economic golden age.” Forbes added:
Never before have so many people advanced so far economically in so short a period of time as they have during the [25 year boom]. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy.
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