Friday, November 5, 2010

Tax cuts equal more money to the government

You know what gets old in the media is the chant that tax cuts always result in less money to the government to pay for government programs. I think anyone who looks at the history of tax cuts should know by now that tax cuts don't always result in less governmental income.

The latest example comes from Peter Luke's article in the Sunday, October 31, 2010 issue of the Grand Rapids Press, "Hold them to their promises." In the post he describes what he thinks the next Michigan governor needs to do right away.

One of his ideas he describes this way:

"There is widespread agreement that a tax overhaul to cut the cost of doing business in Michigan would help. Republican Rick Snyder's proposal to eliminate the business tax would help...

"According to the Citizens Research Council of Michigan, the next governor and Legislature will be faced with a $1 billion deficit in 2012 general fund.

"Even if revenues grow by 5 percent, or $400 million, that will be more than offset by planned reductions in income and business taxes, and one time revenue shifts that aim to keep 2011 in the black."

"There are two ways to get the money, and you can't do one without the other.

"First, tackle the state’s long list of business and consumer tax breaks. The one break that benefits all — and the most lucrative — is the sales tax exemption for most consumer services.

The political incentive for applying sales tax to services would distribute the proceeds both to business tax reduction and education. Companies would have to agree that paying no business tax (under Snyder’s plan) is an acceptable trade off for tacking on 6 percent to the services they sell.

"The public, asked to pay that 6 percent, would have to be persuaded it’s a worthwhile investment."

I added the bold for emphasis. It is true that there might be an immediate reduction in income to the government after tax cuts, but we must not forget the purpose of giving cuts: to give people and businesses alike more money to spend.

With more money to spend, consumers will buy more goods and services. With more goods and services being purchased, businesses will make more money. With more money, businesses in turn invest that money by hiring new workers and expanding their businesses.

Thus, with more people working, there will be more tax revenue to the government. On the contary, according to the Laffer Curve, if taxes are raised above a certain point, tax revenue will decrease, mainly because people will find ways of hiding money, many of these methods will result in not expanding businesses, no investing in new goods and services, not hiring, and laying off workers.

Now progressives like Peter Luke might disagree with me, yet you cannot disagree with history. If you look at historical data, you will see that revenue to the government nearly doubled over the the 10 year spans after Calvin Coolidge cut taxes, after JFK cut taxes, after Ronald Reagan cut taxes, and after George W. Bush cut taxes.

In 1921 Calvin Coolidge reduced the top federal tax rate from 73% to 25$, and revenue to the government increased by 2%. At the same time the tax revenue from the top 2% nearly doubled.

Likewise, according to the Heritage Foundation, "The share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928."

Hoover raised taxes when he was elected, and FDR "compounded the problem. In 1932, the federal income tax rate went from 25% to 63%. Government tax revenue dropped from $834 million in 1931 to $427 million in 1932. The tax burden on people making less than $25,000 went from 21% in 1931 to 36.5% in 1932, while the burden on the top wage earners (or rich) decreased.

According to the Heritage Foundation, revenueRevenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.

The Kennedy tax cut that took effect in 1964 lowered the top marginal tax rate from 91% to 70%. According to the Heritage Foundation, "President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation)."

Likewise, according to the Heritage Foundation, "Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent."

Ronald Reagan (in 1983) lowered taxers from 70% on top wage earners to 50%.

According to the Heritage Foundation:

Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

According to the, the George W. Bush tax cuts took effect in 2004. From 2004 to 2007, federal tax revenues increased by $785 billion, the largest four-year increase in American history.

Likewise according to the Washingtontimes, Bush cut the capiatl gains tax and the divident tax to 15%, and within 2 years stocks rose 20% and in three years $15 trillion in new wealth was created. "The U.S. economy added 8 million new jobs from mid-2003 to early 2007, and the median household increased its wealth by $20,000 in real terms."

And, "According to the Treasury Department, individual and corporate income tax receipts were up 40 percent in the three years following the Bush tax cuts. And (bonus) the rich paid an even higher percentage of the total tax burden than they had at any time in at least the previous 40 years."

The theory, as proposed in this post at, postulates the following:

Likewise, according to the Heritage Foundation: "The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988."

Underlying the debate is an economic concept called the Laffer Curve, which shows that revenue can either increase or decrease when taxes are raised, depending on where the tax rate falls on the curve.

It's not as complicated as it first sounds: The basic idea is that when taxes are raised to a high level - say, for the purposes of this example, 99 percent - revenue will suffer because people will have no incentive to work (and there will thus be nothing to tax). When the tax rate is relatively low, however, raising taxes does indeed generate revenue since incentives to work are still significant.

This is a perfect example of how conservatives like me look at the facts to see the truth, and how liberals look at their feelings and determine that if you cut taxes you'll have less money to the government. Yet progressives are assuming economics is a zero sum game, and it's not.

So the next time you read an article, or watch someone on TV, claim that tax cuts need to be offset by tax increases elsewhere, now you know the truth: tax cuts result in more jobs and more government revenue, not less.

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