Just Look at the Numbers

The debate is underway; should the Bush tax cuts of 2001 and 2003 be extended to the “wealthy” that make more than $250,000? If one looks at historical data and trends regarding the relationship between cutting taxes and revenue received, it should be a no-brainer.

House Speaker Nancy Pelosi said this weekend that "I don't see any reason why we should renew a tax cut that only gives a tax cut to the wealthiest people in America, increases the deficit, and doesn't create jobs. That doesn't make any sense." Pelosi is wrong on two points. Cutting taxes to the “rich” will, based on historic data available through the IRS, increase revenue to the federal government. In addition, tax cuts should create jobs, real jobs; not ones that are “created or saved.”


Arthur Laffer of the Wall Street Journal outlines the historical data nicely:

Since 1978, the U.S. has cut the highest marginal earned-income tax rate to 35% from 50%, the highest capital gains tax rate to 15% from about 50%, and the highest dividend tax rate to 15% from 70%. President Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0% for almost all home owners. We've also cut just about every other income tax rate as well.

During this era of ubiquitous tax cuts, income tax receipts from the top 1% of income earners rose to 3.3% of GDP in 2007 (the latest year for which we have data) from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP from 5.4% of GDP over the same time period.

The revenue gained from the top wage earners actually increased when their tax rates were decreased. Pelosi’s characterization that tax decreases will add to the deficit is incorrect. Look at the numbers.

This should come as no surprise. When individuals get to keep more of their money, they have an incentive to work harder. When individuals have large percentages of their wages taxed, they have a less incentive to work. Why work when you don’t get to keep the benefits of your labor? Laffer also shows what happens when tax rates are increased during poor economic times:

And then there's the Hoover/Roosevelt Great Depression. The Great Depression was precipitated by President Hoover in early 1930, when he signed into law the largest ever U.S. tax increase on traded products—the Smoot-Hawley Tariff. President Hoover then thought it would be clever to try to tax America into prosperity. Using many of the same arguments that Barack Obama, Nancy Pelosi and Harry Reid are using today, President Hoover raised the highest personal income tax rate to 63% from 24% on Jan. 1, 1932. He raised many other taxes as well.

President Roosevelt then debauched the dollar with the 1933 Bank Holiday Act and his soak-the-rich tax increase on Jan. 1, 1936. He raised the highest personal income tax rate to 79% from 63% along with a whole host of other corporate and personal tax rates as well. The U.S. economy went into a double dip depression, with unemployment rates rising again to 20% in 1938. Over the course of the Great Depression, the government raised the top marginal personal income tax rate to 83% from 24%.

Is it any wonder that the Great Depression was as long and deep as it was? Whoever heard of a country taxing itself into prosperity? Not only did taxes as a share of GDP fall, but GDP fell as well. It was a double whammy. Tax receipts from the top 1% of income earners stayed flat as a share of GDP, going to 1% in 1940 from 1.1% in 1928, but at what cost?

Increasing taxes during economic constriction is not the way to climb out of a recession, as history shows us. The opposite is actually true.

In addition to tax revenue staying stagnant when taxes are increased, the GDP fell. This in turn, most certainly, led to higher unemployment. What Pelosi does not understand is that the best way to stimulate job creation is through the private sector. The federal government is quite possibly the most inefficient means to create private jobs. This might be why during this recession the only major sector which has grown is the public sector. This has increased the federal deficit for many years to come and depressed our economy.

One must ask themselves whether keeping more of one’s money is the best way to stimulate the sagging economy or whether giving up more of one’s money to the behemoth of the federal government would be more beneficial.

I think the numbers speak for themselves.