Debunking Myths About Tax Cuts and the Economy

By Mike Griffith, Staff Writer 

MYTH: We can only cut taxes if we cut spending by the same amount; otherwise, tax cuts will reduce revenue and cause deficits.

FACT: Historically tax cuts have always paid for themselves.  Federal revenue increased after the JFK tax cuts, after the Reagan tax cuts, after the Clinton-Gingrich tax cuts, and after the Bush tax cuts.  The problem has not been taxes.  The problem has been runaway spending.  Total federal spending has not dropped once in over 40 years—not once:

• Under LBJ revenue grew by 25%, but spending grew by 24%. 
• Under Nixon revenue grew by 17%, but spending grew by 21%.
• Under Ford revenue grew by 11%, but spending grew by 22%.
• Under Carter revenue grew by 20%, but spending grew by 13%.
• Under Reagan revenue grew by 15%, but spending grew by 25%.
• Under Bush Sr. revenue grew by 17%, but spending grew by 18%.
• Under Clinton revenue grew by 35%, but spending grew by 9%.
• Under Bush Jr. revenue grew by 10%, but spending grew by 25%.

If we would just stop spending so much money, we would have a surplus, taxes could be even lower than they are now, and we could start paying off the national debt.  The problem isn’t that we aren’t being taxed enough.  The problem is that the government is spending too much money.

MYTH: Raising taxes in the 1990s caused the boom years of that decade.  This proves that raising taxes leads to economic growth.

FACT: Tax cuts, not tax hikes, caused the boom years of the 1990s.  The economy grew modestly after Clinton raised taxes in 1993, but the economy grew even more after Clinton signed the tax cuts that were passed by the Republican-controlled Congress under Newt Gingrich’s leadership in 1997.

Dr. J. D. Foster:

Following the [Clinton] tax hike, the economy performed reasonably well, but not as well as one would expect given the conditions at the time. The real economic boom came later in the decade, just when the economy should have slowed as it made the transition from a period of recovery to normal expansion. Further, this acceleration coincided to a remarkable degree with the 1997 tax cut. . . .

In 1997, the Republican-led Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. The 1997 bill:

* Lowered the top capital gains tax rate from 28 percent to 20 percent;

* Created a new $500 child tax credit;

* Established the new Hope and Lifetime Learning tax credits to reduce the after-tax costs of higher education;

* Extended the air transportation excise taxes;

* Phased in an increase in the estate tax exemption from $600,000 to $1 million;

* Established Roth IRAs and increased the income limits for deductible IRAs;

* Established education IRAs;

* Conformed AMT depreciation lives to regular tax lives; and

* Phased in a 15 cent-per-pack increase in the cigarette tax. . . .

In 1995, the first year for which these data are available, just over $8 billion in venture capital was invested. Venture capital is especially critical to a vibrant economy because high-risk/high-return investment permits promising new businesses to blossom, rapidly spreading new technologies and new ideas into the marketplace and across the economy. Such investments, when successful, generate returns to investors that are subject primarily to the tax on capital gains.  By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again. (http://www.heritage.org/Research/Taxes/wm1835.cfm)

The whole article is worth reading.  It refutes the argument that the Clinton tax hikes caused the boom years of the 1990s.

MYTH: JFK’s tax cuts were more responsible than Reagan’s or Bush’s.  They were aimed at the middle class and didn’t help the rich.

FACT: JFK cut taxes more than Reagan did.  JFK’s tax cut was almost as large as all three Bush tax cuts combined.  In addition, JFK gave a huge tax cut to the rich.

The Tax Foundation:

Contrasting the size of the tax cuts with national income shows that the Kennedy tax cut, representing 1.9 percent of income, was the single largest first-year tax-cut of the post-WW II era. The Reagan tax cuts represented 1.4 percent of income while none of the Bush tax cut even breaks 1 percent of income. The Kennedy tax cuts would only have been surpassed in size by combining all three Bush tax cuts into a single package.

Comparing the size of these tax cuts with the federal budget shows that the Kennedy’s tax cuts represented 8.8 percent of the budget. In 1981, Reagan’s tax cuts represented 5.3 percent of the budget. Each of Bush’s tax cuts are smaller than Reagan’s—EGTRRA (3.8 percent), JCWA (2.5 percent) and the 2003 Tax Cut (1.8 percent). When the Bush tax cuts are combined (8.1 percent), they would be larger than Reagan’s tax cut, yet smaller than Kennedy’s tax cut. ("Fiscal Facts," Tax Foundation, http://www.taxfoundation.org/news/show/323.html)

Jeff Jacoby:

By any rational yardstick, the Kennedy tax cut was enormous, and it was a boon to the rich. It cut the top marginal rate a whopping 21 percentage points, from 91 to 70. Bush’s plan lowers rates at the top by only 6.6 percentage points. For those in the lowest bracket, JFK cut the tax rate to 14 percent. . . . (http://www.jewishworldreview.com/jeff/jacoby031601.asp)

MYTH: Lower tax rates don’t cause economic growth.

FACT: Even JFK understood that lower tax rates produce economic growth and even higher tax revenue.

Dr. Daniel Mitchell:

There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and “rich” taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden – a consequence that should lead class-warfare politicians to support lower tax rates. . . .

Recognizing that high tax rates were hindering the economy, 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). (http://www.heritage.org/research/taxes/wm327.cfm)

According to President John F. Kennedy:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget — just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records.

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. The experience of a number of European countries and Japan have borne this out. This country’s own experience with tax reduction in 1954 has borne this out. And the reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus. (http://www.americanrhetoric.com/speeches/jfkeconomicclubaddress.html)

MYTH: Government borrowing and spending spurs economic growth. 

FACT: JFK rejected the idea that we can borrow and spend our way out of tough economic times.  Instead, he argued for tax cuts, including corporate tax cuts:

But the most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand — to cut the fetters which hold back private spending. In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion. It could also be done by increasing federal expenditures more rapidly than necessary, but such a course would soon demoralize both the government and our economy. . . .

The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system — and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes to be enacted and become effective in 1963. . . .

Corporate tax rates must also be cut to increase incentives and the availability of investment capital. The government has already taken major steps this year to reduce business tax liability and to stimulate the modernization, replacement, and expansion of our productive plant and equipment. (http://www.americanrhetoric.com/speeches/jfkeconomicclubaddress.html)

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