The American Spectator : Kennedy-Reagan v. Bush-Obama

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Kennedy-Reagan v. Bush-Obama

By Peter Ferrara on 4.8.09 @ 6:08AM

Taxes that work versus those that don't.

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In 1984, the economy grew by 6.8% in real terms, the highest in 50 years. Nearly 20 million new jobs were created during the next 7 years, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989. Even with the Reagan tax cuts, total federal revenues doubled from 1980 to 1990, growing from $517.1 billion to $1,031 billion, or just over $1 trillion. In Reagan's last budget year, fiscal 1989, the widely overballyhooed federal deficit had declined to $152.5 billion, about the same as a percent of GDP as in 1980, 2.9% compared to 2.8%.

Bush's Tax Cuts

At first, Bush mostly followed in the steps of Kennedy and Reagan in his 2001 and 2003 tax cuts. Though his 2001 tax cut included some non-growth tax reductions, such as increasing the child tax credit, it also reduced the top marginal income tax rate from 39.5% to 35%, a reduction of only 11%, which he had to fight for tooth and nail. Bush's 2001 tax cuts also reduced the rate for the lowest income workers by 33%, from 15% down to 10%. In 2003, Bush cut the capital gains tax rate by 33%, and the income tax rate on corporate dividends by over half.

These tax rate cuts reversed the short, shallow 2001 recession and the negative economic effects of the 9/11 attacks, restoring growth. After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs and the unemployment rate fell from over 6% to 4.4%. Real economic growth over the next 3 years doubled from the average for the prior 3 years, to 3.5%.

Business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. Steve Forbes noted, "Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China's economy." In other words, the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding the entire economy of China to the U.S. economy.

By 2006, capital gains tax revenues had doubled, despite the 25% rate cut. In fact, over the past 40 years, every time the capital gains tax rate has been cut, revenues have increased, and every time the rate has been increased, capital gains revenues have declined.

Tax Cuts That Don't Work

But by the last year of his term, Bush had completely lost his way. When the economy began to falter at the end of 2007, Bush proposed not the tax rate cut policies that had been so successful since Kennedy, but a $150 billion tax rebate stimulus plan based on the disastrous, failed Keynesian policies of the 1970s and 1930s.

Such tax rebates or tax credits do not work to stimulate economic growth because they do not change the fundamental incentives that govern the economy. A $500 tax credit or tax rebate involves the government either explicitly or effectively sending you a check for $500. But after that you and everyone else still face the same tax rates and same economic incentives.

Tax cuts do not expand the economy by "putting more money in people's pockets," thereby leading to increased spending. Increased welfare benefits would put more money in people's pockets as well. But this is an outdated Keynesian rationale from the 1930s that increasing spending will increase growth to meet the demand. That does not work for two reasons. First, the government has to borrow or tax the money from someone else in the economy to give you the tax credit or increased welfare check. So, if it takes $500 out of the economy to give you $500 through the tax credit or increased welfare, it has not added anything to the economy on net. Secondly, again, there is no change in fundamental incentives.

Sure enough, the now long forgotten Bush stimulus of early 2008 did not stop the declining economy. A full discussion of the causes of the 2008-2009 economic crisis is provided in my forthcoming IPI study America's Financial Crisis: Causes and Cures.

Obama's Tax Cuts

Yet, the tax cuts Obama has adopted and proposed are virtually the same as the failed Bush tax rebate stimulus of 2008. The centerpiece is a $400 per worker tax credit that will not work to stimulate the economy for the same reasons just discussed above in regard to the failed Bush 2008 stimulus.

Note that Obama's own budget documents show that 35% of his supposed income tax cuts go to people who do not pay income taxes, and therefore are not tax cuts at all, but welfare checks. This is why Obama's own budget accounts for this portion of his supposed tax cuts as outlays rather than revenue reductions. You can't cut income taxes for people who do not pay income taxes.

Moreover, Obama has also proposed a cap-and-trade tax on energy to counter supposed global warming. That will raise the price of gas, electricity, home heating oil, and every product that is produced and distributed using energy. This will more than offset the $400 per worker tax credit.

As of this month, we are in the longest recession since World War II. The National Bureau of Economic Research scores this recession as having started in December, 2007. Yet, from the beginning we have followed old-fashioned, Keynesian tax cut stimulus policies, first under Bush, but then continued under Obama, rather than the amazingly successful tax rate cut policies of Kennedy and Reagan. That is why this is the longest recession since World War II, with still no end in sight, and unemployment persistent and relentlessly climbing.

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About the Author

Peter Ferrara is Senior Fellow at the Carleson Center for Public Policy, Director of Entitlement and Budget Policy for the Heartland Institute, and General Counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America’s Ticking Bankruptcy Bomb, now available from HarperCollins.

Letter to the Editor View all comments (31) | Leave a comment

Robert Rosencrans| 4.8.09 @ 7:25AM

After President Kennedy cut taxes, the poverty rate declined from 22% to 14%. Then the great society was launched around 1967 and after 7 trillion was spent, the poverty rate is now at 12.7%. There should be a lesson there.

Liberty Lady| 4.8.09 @ 7:58AM

Mr. Mathews:
First of all, why are you so nasty? Liberal or conservative, I just don't get anyone being nasty. Thank God we all don't agree or we would be mindless puppets! I would like your opinion about increasing taxes and how it would work--I am quite concern of corporations going elsewhere, which means even more loss of jobs...I would like to hear your side just as I would like a liberal to hear my side and not stereotype me. Thank you.

Ryan| 4.8.09 @ 8:40AM

Hey David,

Why not pick out a couple of points on which Ferrara is wrong? Where is he wrong? Why is he wrong? What is your proof and counter-argument?

Why should I listen to you?

Deborah| 4.8.09 @ 8:52AM

Thanks, Mr. Ferrara, for a well-written, concise and easy-to-understand article. So easy to understand even a liberal could understand it -- if he could get past his redistributionist/everyone should be the same/ have the same/share with everyone what one makes-attitude.

Everything must be "fair" as The One says. It doesn't matter if redistributionist policies ruin the economy or are against the Constitution because "fairness" is what matters. Leftist/liberals want to "spread the wealth around" -- but only end up spreading poverty and misery around. How fair of them.

Deborah| 4.8.09 @ 8:58AM

"Reagan is dead."

Mussolini is dead too, but that hasn't stopped his comeback.

http://spectator.org/archives/2009/04/02/il-duce-redux

a spectator| 4.8.09 @ 9:02AM

Don't forget Reagan's tax cuts came at the expensive of record budget deficits.

Trickle down theory: Money may trickle down, but it gushes up, which is why the wealth have more of it.

For economy to be healthy it has to circulate, not trickle down.

dcc| 4.8.09 @ 9:17AM

Mostly interesting but a bit too dismissive of tax credits. Low income earners and consumption are important to the economy and produce numerous important economic decisions. Supply is only one side of the equation, without demand the system will collapse.

Hank Rearden| 4.8.09 @ 9:55AM

This is a very well executed article by Ferrara.

However, what the author does not mention is that this administration is not interested in stimulating the economy or helping to advance capitalism. In effect, they're trying to kill it because they don't believe in it. Without "victims" and the dispossesed the democratic party has no base!!!

stmichrick| 4.8.09 @ 10:04AM

*PLEASE DON'T FEED THE TROLL*

The latest myth being promoted by the leftists in power is that tax cuts for the investor class don't work. The idea that a 'fairer' economy is the way back to prosperity is being swallowed by many.

For fool the simple among us, their technique is to 'bundle' the facts that while revenues to the government and the economy grew, so did spending...well, right (Bob).

There has never been a better time to promote REAL cuts in spending (beyond baseline) alongside tax CUTS that encourage investment. Maybe it's a teaching moment for our side in terms of refining the message.

*PLEASE DON"T FEED THE TROLL*

"A Spectator's teacher"| 4.8.09 @ 10:06AM

Unfortunately, for every dollar of increased revenue (as a result of Reagan's tax-cut) to the government, a very Democrat Congress (under Tip O’Neill) broke its no-extra-spending promise and blew $1.86 for every new dollar collected - - so, yeah, there was an eventual deficit. Your witness...

JeffW| 4.8.09 @ 10:07AM

I smell a troll. Yep, DM eagerly jumped on this.

Lady Liberty, as much as I respect your well thought out reply to DM your wasting your time. He will not present points to his argument. Just nasty-name calling and insults. I too, would like to hear both sides of a argument and make up my own mind but with this troll we are barking up the wrong tree.

Liberty Lady| 4.8.09 @ 11:25AM

Hey all--What about the fair tax? No one seems to mention it. I would like some input about it--there's a small group where I live who are really pushing it. A consumption tax sounds good to me...the more you buy, the more tax you pay--therefore, people with more money pay more taxes! Sounds fair to me. However, I do not see the logic in heavily taxing people just because they are rich--I'm not rich and I don't expect a rich person to take care of me. I can take care of my little middle-class self, thank you very much.
Two of my favorite quotes I would like to share:
Gerald Ford: "A government big enough to supply you with everything you need is a government big enough to take away everything you have."
Winston Churchill: "You don't make the poor richer by making the rich poorer."
Needless to say, I'm concerned.

Roy| 4.8.09 @ 11:52AM

Isn't the problem that the big, dramatic tax reductions have already been done?

If Kennedy cut the top tax rate from 91% to 70% then the top ratepayers went from keeping less than 10% of their income to keeping 30% of it. That is their incentive to work TRIPLED. Obviously that is huge, think how much more work you would do if your pay was multiplied by 3.

If Reagan cut the rate from 70% to 28% then the top ratepayers went from keeping 30% to keeping 72%. That is their take home pay was doubled. Again, a huge change in incentives.

Since then the rate has crept back up to what, 35%? OK fine. So how much can it realistically be cut? Hell, let's suppose we cut it to zero. OK, the top ratepayers go from keeping 65% of their income to keeping 100% - a 50% increase - not bad, but still much less than Reagan's increase never mind Kennedy's. And that's if we cut it to zero. Cutting it to 30% would be a tiny shift in incentives. Not to say it wouldn't help out at the margin but as compared with what Reagan's cuts produced it would be pretty minimal.

That's why I think that at least as regards personal income taxes the big battle has already been won. There are still ongoing skirmishes - I sure wouldn't mind a few thousand less going to the government every year - but other taxes and in my opinion, even more than taxes, regulation, are the issue now.

Dagny Taggert| 4.8.09 @ 12:59PM

The tax cuts have been proven to work, and will work. The problem is the government spending side of the equation. The federal government was a much smaller percentage of the overall economy in the past. As long as the looters (anyone notice there's a recession everywhere but in government?) continue to amass control through their bloated and inefficient (both in terms of services provided and wealth created) programs, that money goes down a black hole. Much like comments above regarding tax credits being one-time versus the longer-term positives of a tax rate cut.

Hey Hank, can I get that order of Rearden Metal by the end of the month?

Dagney's friend| 4.8.09 @ 1:06PM

Ayn Rand wrote these passages over fifty years ago: (page 690 of Atlas Shrugged) "I was ordered (by the courts) to hand out money earned by men, to a worthless rotter whose only claim consisted of his inability to earn it."
(848) "Those who had once simpered: “I don’t want to destroy the rich, I only want to seize a little of their surplus to help the poor, just a little, they’ll never miss it” - - then later had snapped: 'The tycoons can stand being squeezed, they’ve amassed enough to last them for…………'.”
.(850) “There... was the ultimate goal of all the loose academic prattle which businessmen had ignored for years, the goal of all the slipshod definitions, the sloppy generalities, the soupy abstractions, all claiming that obedience to objective reality is the same as obedience to the State, that there is no difference between a law of nature and a bureaucrat’s directive… There was the goal of all those con men… who sold their revelations as reason, their ‘instincts’ as science, their cravings as knowledge…"
And that about says it all...

JimP| 4.8.09 @ 2:25PM

Blind 'Spectator' couldn't be more disingenuous; or maybe he's just that ignorant. Reagan had to compromise with the Dem Congress on budgets. The Dems didn't HAVE to spend like drunken sailors just home from a 6 month deployment on an aircraft carrier, but they did. Remember, Spec, Congress controls the purse strings. It's called Checks and Balances. Blaming Reagan for fiscal deficits is only half the equation.

Tom| 4.8.09 @ 2:31PM

Liberty Lady, I believe that the Gerald Ford was quoting Thomas Jefferson.

Alan Brooks| 4.8.09 @ 4:14PM

Finally we are coming around to admitting Dubya was America's 21st century Eugene Debs.

You can never admit it in public, though-- you want the electorate to vote Republican no matter if it gets too devious for our own good.

Dagney's friend, again| 4.8.09 @ 5:04PM

"The American people will never knowingly adopt socialism, but under the name of liberalism they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened." Said Norman Thomas/American socialist & six time presidential candidate in 1944.

Alan Brooks| 4.8.09 @ 6:13PM

but it is not even as 'good' as socialism!

will leave it at Bush was the Anton Drexler of American Nationalized Socialism.

Todd| 4.8.09 @ 6:53PM

Where the heck is Bob? This article was made for him to spew his tax cuts don't work and look at my chart baloney. Also his priceless insult that Peter Ferrara is a right-wing hack that can't possibly know anything about taxes compared with himself. I guess he is too busy today trying his best to prove that Hitler was a committed Christian and Muslims are a peace loving people over on George Neumayr's article today. I will have to check back later and see if he has a chart for me to learn how tax cuts are always a terrible idea because they cause deficits.

Martin| 4.8.09 @ 9:30PM

It is quite pointless to lecture Barack Hussainovich what is an effective tax policy, as he, doubtless, already knows that. He is not trying to fix the economy, as happy and independent people do not vote for democrats.

Liberty Lady| 4.9.09 @ 7:46AM

Thanks Tom. The reference I got it from was wrong, too. Good quote, though.

The Last Best Hope of Earth| 4.9.09 @ 7:55AM

Kennedy was the last real President America had, that's why he was murdered, he was not following orders. Kennedy was ready to lead, ready to take the control of money back to governmental control.

Lincoln, tried it during the civil war, and he too was later assassinated.
Lincoln spoke in Philadelphia of Independence, he said it's not the mere matter of the seperation of the colonies from the mother land, but something in that Declaration giving liberty, not alone to the people of this country, but hope to the world for all future time.

It was that which gave promise that in due time the weights should be lifted from the shoulders of all men, and that all should have an equal chance.

If this man was allowed to live, the world would be a better place today, and also if Kenedy was alowed to live we would have a better and more stable society world wide.

America would not need to Bankrupt it's self in far flung place, in wars that shoud never have been waged.

And the American people and their children would not have a life time of debt from borrowed money from the Federal Reserve Bank which is a private bank owned by Jews, and run by Jews, but by the American Government.

Pat Spooner| 4.9.09 @ 8:18PM

The first pos is by someone who has posted here before and his most recent earlier today is typical. He has proven once again that liberals are for the most part dopes.

stmichrick| 4.10.09 @ 9:47AM

What I see when I read something like 'Last Best Hope...' is someone so enamored with the physical persona of JFK; well, facts don't matter.

I enjoy jousting with modern liberals who lionize a President who was a Cold Warrior, tax cutter, war hero and objectifier of women. Not to mention dragged into the civil rights struggle.

zeroKnots| 4.13.09 @ 5:03AM

David Mathews| 4.8.09 @ 7:13AM
"Hey, Peter, your side lost ... Republicans are an unpopular extremist minority ... and Ronald Reagan is dead.
The tax cut ideology has run its course and failed. Now you conservatives can keep on blindly adhering to a failed ideology as long as you wish (fundamentalists always do) but if you do so you will continue losing."

What an idiot. You could bludgeon him with reality all day long but he'd only stick his thumb in his mouth and cling to the Obamanoid security blanket even harder.

Conservatives, theres no point in trying to appeal to these script-kiddies. It's entirely up to us to take this country back and restore the Constitution.
Hell, if you could limit eligibility to vote to those who have the slightest concept of Liberty, let alone free-market, they'd never win an election again and the golden age would last 'til the sun exploodes..

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CG Brady| 4.18.10 @ 4:13PM

The fact is the tax rate under Obama is the same as it was under Reagan. When will you righties stop lying and denying?

It is amazing to hear people equate Obama's tax plan with socialism. Such arguments reflect an ignorance of fact and history. The American tax system has been progressive for a long time. Also, Obama's tax plan is not nearly as progressive (or socialistic as some RWs would say) as Bill Clinton's or Ronald Reagans. Indeed, under Reagan, we had a 50% top marginal rate. So to address the charges and counter-charges regarding taxes with fact here's my effort to introduce some fact and immutable TRUTH into the tax debate:

The marginal tax rates for 2008 were as follows:

10%
15%
25%
28%
33%
35%

Obama's marginal tax rates:

10%
15%
25%
28%
36%
39.6%

McCain would have simply continued applying Bush's marginal tax rates:

10%
15%
25%
28%
33%
35%

However, does this make Obama's tax plan radical or socialistic? Hardly. In 1999, when the stock market was zooming through the roof, and real median household incomes were going through the roof under Bill Clinton, we had the following marginal tax rates:

15%
28%
31%
36%
39.6%

Thus, Obama's proposed taxes are still significantly less than the taxes under Bill Clinton, particularly for middle income Americans.

Okay, well how about Ronald Reagan? Well for much of Reagan's two terms, he had top marginal tax rates of 50%, though deductions may have resulted in a different tax burden. In other words, compared to Obama's proposed tax plans, Ronald Reagan is a pinko commie:

Married Filing Jointly
Marginal Tax Brackets
Tax Rate Over But Not Over
0.0% $0 $3,670
11.0% $3,670 $5,940
12.0% $5,940 $8,200
14.0% $8,200 $12,840
16.0% $12,840 $17,270
18.0% $17,270 $21,800
22.0% $21,800 $26,550
25.0% $26,550 $32,270
28.0% $32,270 $37,980
33.0% $37,980 $49,420
38.0% $49,420 $64,750
42.0% $64,750 $92,370
45.0% $92,370 $118,050
49.0% $118,050 $175,250
50.0% $175,250 -