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The Tax and Spend Spectator
The Great Tax Divide
What could Wilson, Coolidge, Kennedy, Reagan, and W. Bush all agree on?
There was a time when Democrats and Republicans alike could talk sense about tax rates, in terms of what is best for the economy, without demagoguery about “tax cuts for the rich.”
Democratic presidents Woodrow Wilson and John F. Kennedy spoke plainly about the fact that higher tax rates on individuals and businesses did not automatically translate into higher tax revenues for the government. Beyond some point, high tax rates on those with high incomes simply led to those incomes being invested in tax-free bonds, with the revenue from those bonds being completely lost to the government — and the investments lost to the economy.
As President John F. Kennedy put it, “it is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” This was because investors’ “efforts to avoid tax liabilities” make “certain types of less productive activity more profitable than more valuable undertakings,” and this in turn “inhibits our growth and efficiency.”
Both Democratic president Woodrow Wilson and Republican presidents Calvin Coolidge, Ronald Reagan and George W. Bush said virtually the same thing.
This disconnect between higher tax rates and higher tax revenues is not peculiar to the United States. Iceland and India both collected more tax revenue after tax rates were cut. In Iceland the corporate tax rate was cut from 45 percent to 18 percent between 1991 and 2001 — and the revenue from corporate taxes tripled at the lower rate.
It doesn’t always have to be this way. Everything depends on how high the tax rate is initially and how other things are going in the economy. But at least we can do without the claims that tax cuts are just ways of helping “the rich” or that we have to raise the tax rate because we have a deficit. We need more tax revenue, not higher tax rates that can backfire.
This has not always been either a partisan issue or an ideological issue. John Maynard Keynes said in 1933 that “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”
New York Times economics writer David Leonhardt recently took the “no panacea” approach to rebut the argument for tax cuts. Presidents Bush 41 and Bill Clinton both raised tax rates, and the economy continued to grow, while the economy declined after President Bush 43’s tax rate cuts, Leonhardt argued.
The 800-pound gorilla that gets ignored by people who use these talking points is the dominant economic factor of those years — namely the huge and unsustainable housing boom that led to a catastrophic housing bust that took down the whole economy on Bush 43’s watch.
Tax cuts are not a panacea. In fact, nothing is a panacea or else, by definition, all the problems of the world would already be solved.
Ironically, it was Mr. Leonhardt’s own newspaper that reported in 2006, “An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”
Expectations are of course in the eye of the beholder. Rising tax revenues in the wake of a cut in high tax rates was a possibility expected by five different administrations, both Democratic and Republican, over a period of more than three-quarters of a century.
No one expected automatic and instant surges in economic growth. Both John F. Kennedy and John Maynard Keynes spoke in terms of the long-run effects of lower tax rates, not the kind of instant results suggested by Mr. Leonhardt’s graph of growth rates — least of all during a very volatile housing market in which American homeowners took trillions of dollars in equity out of their homes.
Back during the 1920s, when there was no such monumental economic factor as the housing boom and bust until 1929, there was a rapid increase in both tax revenues and jobs after the tax rates were cut. Today, the uncertainties generated by an activist and anti-business administration probably have more of a chilling effect on investments than the tax rate does.
COPYRIGHT 2012 CREATORS.COM
About the Author
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
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aware| 9.19.12 @ 6:41AM
Aside from being Plank #2 in the Communist Manifesto(a heavy or progressive income tax), income tax is THEFT of labor. Those who would argue over "rates" are still arguing over the "proper" amount of THEFT.
When 40 to 60% of your labor is pre-claimed by the State you are even worse off than Middle Age serfs. Is it "opposition" to petition the bandit with a gun to please let you keep a little more of your own wealth?
Does the "opposition" accept this organized theft as a given and resign themselves to staying within the boundaries set by the thieves of merely haggling over the amount? So it appears.
And when the Pavlov's dogs of the State contend that "taxes" are "voluntary" for "services" rendered are they not completely ignoring there is NO free exchange involved? And that prison is your lot if you don't "volunteer"?
I, for one, am not hoodwinked by these adjusters who claim to be "opposition". Nothing short of the repeal of the 16th amendment(passed under very suspicious circumstances) and the total abolition of all income taxes qualifies you as "opposition" in my book.
Alan Obama Fan Brooks | 9.19.12 @ 5:13PM
Sowell gets thousands a month he doesn't even need:
as a vet
as an octogenarian.
Good deal, Tom!
markenoff| 9.20.12 @ 1:23PM
Who decides what you "need"? Your spending money on a computer and internet connection, things that no generations before us ever had therefore you do not need them.
Frekki| 9.19.12 @ 7:34AM
Obama doesn't care about revenue, he cares about fairness.
Von Mises Jr| 9.19.12 @ 8:51AM
"Fairness" is the lie that the socialist party recites, but it is not what they mean. They believe that instead of being free to pursue your own life and property, the government of a select few will be in charge of deciding what everyone except them are allowed to have. This is not fairness. It is tyranny.
We need to stop buying into the socialist bullshit. It is not fair that Barry and Mochelle took hundreds of friends to the Festival of Lights with military jets and the Navy, rented out the top Hotels and partied like its 1999 on $2 BILLION of the tax payer’s money. It was not fair when Barry paid off his bundler George Kaiser and another guy at Solyndra with $527 MILLION of tax payer’s money.
They are despotic tyrants and want-a-be totalitarians. That is not fairness.
TLP| 9.19.12 @ 10:11AM
Flat Tax.
Not a Transdimensional Cold Fusion Reactor with the capability to propel Ships in and out of the Multiverse, regardless of the Dimension they reside in.
Just a Flat Tax. 15%? 17%?
No Deduction of any kind, and EVERYBODY PAYS.
aware is correct, as to the Origins of our Progressive Tax System. It resides right their in that Manifesto alongside an Inheritance Tax, and the need for Government Ownership of Property.
Flat Tax.
Conservative Bob| 9.19.12 @ 11:31AM
TLP I agree we need a flat tax or maybe the 'Fair Tax but I think your 15-17% is far too generous.
I think 10%.
I prefer the fair tax in that it eliminates the income tax (And the IRS completely via repeal of the 16th) I object not only to the amount of tax unequally paid but the annual requirement to disclose all of my personal information to the government. In addition the "Fair Tax" is only collected when you spend and individuals can manage what they spend and thereby their tax burden.
What we have is a dishonest dysfunctional intrusive unequal mess. (In short typical government)
TLP| 9.19.12 @ 7:29PM
You are correct, Conservative Bob.
Although, I am not a big Fan of the Fair Tax.
It seems too close to a VAT Tax.
Besides.
What could be FAIRER than a Flat Tax on everybody?
Contest on Friday.
Lots of Laughs, and Prizes.
Look for it.
CJW| 9.19.12 @ 1:34PM
Von
I agree. Fairness is whatever the Rulers say is fair.
The only fair tax is a flat rate where everyone pays the same rate. You can exempt the first $15,000, as some states do. For example, Pa has a 3.1% flat rate income tax, and there is low poverty exemption of the first $15,000 provided you have no other income, such as interest.
Politicians, especially Dems, hate this because it removes much of the power they have to hand out tax credits, tax deducitons, define income, and so forth to favored groups. They then will not get much money from the lobbyists because there is little for which to lobby.
Von Mises Jr| 9.19.12 @ 3:19PM
What they say is fair over time is that they shall be our gods and we shall be their servants.
It takes time to revert to serfdom, but they have patience.
Once they have you controlled, minor changes in rates of inflation, taxes, regulation mold you to be their servant boys.
Petronius| 9.19.12 @ 11:20AM
The economically illiterate boobs care about one thing; bringing their betters down to their level. They said it in 1640 and want Obama to do it for them today. They would rather ruin the lives of everyone else instead of lifting a finger to improve their own
theyjustcantstop| 9.19.12 @ 4:01PM
ever since mid 2008,wealthy people, large businesses,and some individuals such as myself, have pulled their money off the table,regular american citizens are outraged that the media did'nt give them a true vetting of o'bama,which is true,but the wealthy,and co's owners,and ceo's knew who he was and what he was going to do.
o'bama did'nt disappoint them,he turned america upside down,and went on a one man rampage to change health-care,and america as a whole,and not for the better,they seen he was pushing socialism(anti-capitalism),on a daily basis,everyday rules and regulations changed.
there are trillions of dollars out there ready for the return of capitalism,no matter how slowly or quickly it happens.
co's as well as individuals have to have set rules,and trust the ones setting the rules,you can't run a co.,or your personal life waking up to new rules,and regulations.
gulfcoastcommentary | 9.19.12 @ 11:46PM
I love your articles. Keep up the great work.
Don't forget the tax cuts after WWII. Both the tax cuts in the Coolidge administration and in 1945 were to reduce high tax rates raised during the WWI and WWII war efforts (back when the government used to actually try to pay for wars). So add Truman to Coolidge, Reagan, Bush, JFK.
gulfcoastcommentary | 9.20.12 @ 12:01AM
I'm concerned that tax cuts may not have the "bang for the buck" as they did for Reagan, JFK and GW Bush. Have a look: http://gulfcoastcommentary.blo.....oints.html
sniper| 9.30.12 @ 11:07AM
All of these are very informative, you put everything in a good order but you left out a mass of information. It would probably require a book, which you have already considered lol lol if not you should, because this is/will last way past this election. I, for one, consider this Presidency to be a complete fraud on the people of this great republic for which we will be talking for generations to come. I don`t feel this to be a legal Presidency in a lot more ways than his birth. I think and hope that new laws will be written to cover ALL the problems were ignored before this President was allowed to even seek the office. A candidate must be held to the highest standards, he should at least be able to pass a Top Secret clearance at least, after all if he should win, he will eligible to see all of our most secret information. His background check is a must to keep him safe from any type of blackmail and there should be no question of his eligibility by the constitutional standards. Just my thoughts!!!!