A Brief Economic History of the Tax-Cut Stimulus in America
“Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.” —Thomas Sowell
Obama’s Idea of Fairness
In a presidential primary debate in 2008, Barack Obama was debating Hillary Clinton. The moderator pointed out that Bill Clinton dropped the capital gains tax from 28% down to 20%, and later Bush dropped it to 15%. As a result, “[i]n each instance, revenues from the tax increased. The government took in more money. . . . So, why raise it at all?”
Obama replied that he wanted a tax increase “for purposes of fairness.” He continued to explain that “[p]art of what has happened is that those who have been able to work the stock market, and amass huge fortunes on capital gains, are paying a lower tax rate than their secretaries. That’s not fair!”
President Obama’s idea of fairness is to increase taxes, even if it will have the effect of decreasing actual tax collections. What President Obama is saying is that causing the government to lose money is good, so long as his idea of fairness in wealth redistribution is achieved.
During WWI, the income tax in America was 73% for wealthy earners. When Calvin Coolidge succeeded to the presidency in 1923, upon the death of Harding, he cut taxes drastically. The top rate fell to 25%. Tax collections almost doubled as a result, and the amount of tax paid by earners of $100,000 or more (the equivalent of $1 million today) went up to a 51% share of all taxes paid, which indicates that the best way to get the rich to pay a greater share of the tax burden is to cut their taxes.
The 1930s, 1940s, & 1950s
In 1932, with Hoover as President, the top rates rose to 63%. In 1936, under Roosevelt, they went to 79%. During WWII, the top rate rose to 90%! It was due to this excessive taxation that the Great Depression was so prolonged and had to await the post-WWII boom to end. The boom was due to America’s still-intact factories causing the economy to accelerate to meet demands for American goods that came post-WWII.
The postwar heating-up of the economy ushered in a time of such prosperity that tax rates were not an issue. It was not until countries fighting in the war had been rebuilt that concerns of an economic cool-down arose.
The Kennedy Tax Cuts
JFK cut tax rates by 20% for every income group, arguing that the lower rates would increase economic outputs, revenue collections, and budget surpluses. He even called the lower rates an “investment” in the future. A student of history, President Kennedy was well-aware of the economic miracle that cutting taxes worked during the tenure of President Coolidge.
Kennedy died before the cuts took effect. But, in 1964, the rate for top earners dropped to 70%, down from 91%. The economy surged, experiencing rapid growth every year from 1965 to 1968. Tax collections during the same period grew at an 8.6% average, annually, and unemployment went down to 3.4%.
Americans in the selfsame group President Obama wants to raise taxes on (those earning $50,000 a year, which amounts to $250,000 today) ended up paying 40% more than before the tax cut, according to the Joint Economic Committee of Congress. Millionaires found themselves paying $603 billion in taxes in 1965, while they had paid $311 billion only three years previously.
The Reagan Reductions
Ronald Reagan reduced the top tax rate from 70% down to 50% in his first term, and then down to 28% (but also eliminating some deductions) during his second. The economy responded to this stimulus by booming, initiating a quarter century of enrichment for all Americans that saw the average American worker gain 33% in overall personal wealth.
Not only did the rich get richer; every economic group across the board benefited, proving that, as the wealthy get wealthier, so does everyone else. President Obama’s argument for raising taxes on the rich is that the income disparity has become so large. But so what? If everyone has improved his or her lot as a result of all this wealth creation, why should the government interfere? Is reducing the disparity between rich and poor really worth the cost of making everybody in the economy poorer, as a result?
It should be pointed out that, in 1980, federal revenues into the treasury were $517 billion, but 1990 saw collections hit $1,032 billion (that is over $1 trillion). And, in real terms, every year of the 1980s saw the percentage of taxes paid by the top 1% go up—from 18% to 25% of the tax burden from 1981 to 1990. The top 5% went from contributing 35% to 44% during the same time period.
The Clinton Years
When Clinton was President, the economy continued to boom. He raised income tax rates, but he also cut capital gains taxes down to 20%. This caused investors to invest more, and the amount of money collected on capital gains taxes almost doubled.
Republicans took over Congress in 1994, and they were able to force the president into balanced budgets during his last six years in office. Federal spending declined from 22% of the total US economy back down to only 18%, which is where it had stood prior to Clinton.
The Bush tax cuts took the Clinton rate for top earners from 39.6% down to 35% and cut capital gains down to 15%. Again, revenue collections increased. Federal tax collections surged to record levels between 2003 and 2007—by $780 billion in toto! Again, wealthy taxpayers paid more taxes into the treasury. The share of taxes paid by the top 1% now rose to 41%. Millionaires doubled their tax contribution, due to the fact that more millionaires had been created as a result of the wealth creation being caused by the American economic engine.
The reason the wealthy have paid almost $100 billion less from 2007 to 2010 is because the recession, coupled with the anemia of the recovery, has reduced the numbers of the wealthy. To increase tax collections, we again need policies that facilitate wealth creation for all Americans.
All Americans benefit from the increased opportunities that come about when the overall wealth of the nation increases. The outgrowth of a lower tax burden can only be more economic freedom and more individual liberty for all.
The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by EagleRising.com