The government thinks there are 32 million illiterate people in America, about 10% of the population.
Apparently the folks with the highest level of illiteracy in this country must be the professional “economists” and “skeptics”, as The Wall Street Journal described them today, who uniformly think higher tax rates generate great economic growth and smaller annual deficits and lower tax rates cause deficits and poor economic growth.
This upside down distorted view of the economy passes as conventional wisdom.
But a simple review of the “facts” would immediately dispel the blank cloud of utter confusion hanging over the debate in this country on tax rates, economic growth and government spending.
Let us first lay out when tax rates changed. The tax rate changes in the Reagan, Bush and Obama administrations did not all take place in one year or even the first year each President took office. Reagan’s 25% tax rate reduction started in the 3rd quarter of calendar year 1982 and the full reduction to the 28% top rate from 50% happened in the 1986 tax reform legislation.
With Bush the initial top rate reduction was very small. It went from 39.6% to 39.1% in 2001 and then to 38.6% in 2002. This reduction had almost nothing to do with the relative level of deficits and revenue. Three other factors did: (1) the dot.com bubble burst in October 2000; (2) a mild recession that winter took hold in December 2000, (which the incoming President predicted and was promptly criticized for “talking down the economy”); and the attacks of 9-11.
As for the current administration, the initial budget or stimulus package of over $800 billion did have some tax rebates—but not permanent tax rate cuts. In fact the legislation even strangely characterized Medicaid and some unemployment compensation payments as “tax cuts”.
The 2010 post- election tax change compromise with Congress ended up preserving some of the expiring 2001 tax rate changes but also raised other tax rates considerably. The top rate income tax rate went back to 39.6%, and capital gain taxes were raised as well.
Later in the administration, Social Security taxes were lowered although a few years later they were raised to their earlier level. When all was said and done, the tax provisions, mainly credits, were considerably less than the $82 billion estimated over FY2009-19.
What happened to revenue during these three periods?
Apparently the “skeptics”, who think tax rate cuts can’t help the economy because of the deficits they create, are for some reason not familiar with the Treasury Department’s tax revenue tables. If you go to , you can find all the economic data you need to understand what has been going on for the past 35 years when President Reagan inaugurated the economic boom that has lasted over three decades.
The recession of 1981-2 was caused largely due to the 14% inflation and 21% prime rate of the Carter administration. Wringing that out of the economy required the Federal Reserve to tighten the money supply dramatically. This did cut back inflation and interest rates but also slowed the economy. But once the tax rates were fully implemented in 1983, growth accelerated dramatically, and revenue climbed from $601 billion to $999 billion in FY1989, a 66% increase averaging $66 billion a year over six years.
Following the Bush tax rate reductions in 2001, which primarily went into effect in FY2003, the top rate dropped from 38.6% to 35%. This is the famous “tax cuts for the rich” we often hear about.
But federal tax revenue soared as a result.
For example, revenue jumped from $1.782 trillion in FY2003 to $2.568 trillion in FY2007. This growth of $786 billion in annual tax revenue was a 44% jump, averaging $196 billion a year. The growth even reached $274 billion in 2004-5, a record at the time.
Now with the current administration, what happened?
Starting with the stimulus package, a tax rebate of sorts was adopted. The Bush era tax rates were not changed as they did not expire until 2010-11. So even then, revenue, which had tanked with the collapse of the housing and stock market in 2008-9 because of the recession, grew from $2.105 trillion in FY2009 to $3.335 trillion by FY2016, an increase of $1.238 trillion or 58%. But this was over 7 years and yielded an average annual revenue growth of $175 billion a year, less than the Bush growth years.
And the sharp increase in 2013 of over $300 billion in revenue was primarily due to the one-time increase in payroll taxes which will likely not be repeated. In FY16, the revenue appears to have only increased $86 billion despite relatively higher tax rates.
Thus with a -38% smaller GDP—average of $13 trillion over 8 years—the Bush growth–era generated $21 billion more revenue per year even with a lower tax rate. And tax payers and workers know the current $18 trillion economy despite higher tax rates has been growing at an average economic growth generally described—correctly—as the weakest economic recovery since the 1932 Great Depression.
So what can we conclude?
Lower tax rates lead to significant increases in economic growth, and with that growth can come a very significant increase as well in government revenue. The “skeptics” are wrong.
The low tax rates of 2003 generated up to that point the most growth in government revenue in US economic history. Reagan, with a GDP averaging $4.6 trillion, or 75% less than today, still generated revenue equal to 40% of what is generated today. Tax rate cuts obviously work.
As for growth, Reagan ignited an economic boom that over the next 35 years increased annual GDP by $14 trillion a year. That is 900% greater than the previous 30 year GDP growth of $1.5 trillion.
On top of which, 58 million new jobs were created, or 1.75 million/yr. in the 33 years from 1983-2016, compared to the 38 year post World War II economic boom from 1945-83 that generated 43 million new jobs, or 1.13 million/yr.)
In short, you want revenue, growth, jobs? Cut tax rates. Don’t believe it? You can look it up.
And if you also simultaneously smartly deregulated the economy and also restrained spending—well, think of what we could then accomplish!