While Obama tours the country promoting his personal donation plan, the Republican Presidential hopefuls are in a pitched battle for the nomination and arguing which tax simplification plan is best. Threatened with the possibility of rate cuts, the Media and politicians trot out the usual suspects of lies about tax hikes and tax cuts. This is a battle Republicans must win and, to do so, they need to expose those lies.
Keep in mind that the battle between those who create wealth and those that want to redistribute it, mainly politicians, is as old as civilization itself. We read of tax battles and even reform in every age, like Urukagina’s tax reductions in Babylonia/Sumer in 2350 BC. Equally venerable are the constant set of demagogic lies by those against tax cuts and simplification. It is important to note that politicians like complicated tax codes and high tax rates because they control those rates and dispense the loopholes and regulations that complicate the tax code. Tax simplification means they lose power. As a result, resistance to tax reform is more often the rule than reform. As for the lies, they abound, so let’s consider just a few:
Lie # 1: Tax cuts cause deficits/Tax hikes balance the budget. The Media and the Left often say that the Reagan and Bush tax cuts led to deficits while Clinton’s tax hikes led to a balanced budget. In truth, according to the IRS, federal tax revenues rose dramatically after the overall Reagan tax cuts/reforms (98%) and the Bush tax cuts (a record $700+ billion). This is just as they did after the Harding/Coolidge cuts (61% revenue increase) and after the Kennedy/Johnson cuts (62% revenue increase). Those are the four major income tax reductions we have had since the inception of the income tax in 1913 and every time revenues rose after they were in place – every time.
So did the tax rate cut cause a deficit? The lie, of course, is to blame the revenue gathering mechanism (tax code/rate cut) instead of the revenue spending mechanism, i.e. Congress/Presidents. The spenders kept spending – often at an accelerated rate when they saw the new revenues. Thus, the fault for continuing deficits lies not with tax rate cuts, which produced higher revenues, but with politicians who spent too much.
Wasn’t there a surplus after the Clinton tax increase? Indeed there was – but only temporarily. First, it must be said that the economy had recovered from the short, Bush 41 tax-increase-induced recession by the end of his Presidency. It then resumed the Reagan recovery that was based on the dramatic reduction in tax rates a decade earlier.
Clinton then raised taxes on the recovering economy, and by the end of his 2nd term, we had the highest tax burden in American history considering federal, state and local taxes combined. To no surprise, we slipped back into a recession by the end of Clinton’s Presidency because of that record tax burden. As a result of the recession, federal expenditures went up (as welfare-related payments rose automatically) and tax revenues faltered along with the economy. The deficit reappeared, fulfilling John Maynard Keynes warning that “high tax rates defeat their own object” — to collect revenue. Thus, the Clinton tax hike temporarily gathered more revenue and, when combined with spending slowed by the Republican Congress, a surplus emerged. But over time, the Clinton tax hike weighed down the economy and reproduced deficits just like the Bush 41 tax increases that also weakened the economy and wound up doubling the deficit during his term. To give Clinton credit for the surplus, but not the later deficit, is to credit a pitcher with 6 good innings of pitching and fail to report when he lost the game in 7th inning.
Lie #2: Tax revenues would have risen even without a tax cut. This lie posits that tax rate cuts cost the government money because the revenues would have increased without the cuts as part of a natural business cycle uptick. Nothing can be further from the truth. First, as the current economy proves, recoveries are not automatic nor do they necessarily significantly increase employment and/or revenues.
Second, prior to the Reagan tax cuts, the 12 years of combined Nixon/Ford/Carter bad policies resulted in stagflation and tax revenues dropping at a rate of 2.8% per year. By the end of Carter’s term, the economy was dreadful and showed no appreciable signs of a turnaround. Reagan then dramatically cut tax rates and reduced regulations. The lie is to assert that the Reagan tax rate cuts had no influence on the economic turnaround that resulted in more employment, more business transactions and therefore more tax revenues. In truth, without the Reagan tax cuts, especially given the Federal Reserve’s inflation fighting tactics at the time, the economy would not have magically turned around and produced 92 straight months of growth, let alone led the revenue growth. Claiming otherwise is just silly.
Want more proof? Consider the tax rate cuts that produced the Roaring 20’s. By 1917, just over three years after the income tax code was instituted with a top rate of 7%, Democrat Woodrow Wilson raised the top rate to 77%! Not surprisingly, we were in a deep recession by 1918. During the 1920’s, however, the economy turned around and after the tax rate reduction to a top rate of 25%, revenues jumped 61%. So, did the Roaring 20’s just happen to occur or did the tax cuts cause them? The tax rate cuts reversed a dynamic of capital being placed in tax-free government bonds and encouraged capitalists to put their money at risk. As a result, people were employed, more business transactions occurred and – of course – tax revenues rose. That changing dynamic would not have magically occurred without the tax reductions.
In sum, tax rate reductions produce more revenue over time because they provide incentives, which result in more business transactions, more income and more sales tax. It worked in 2350 BC and it will work again once Obama is defeated. On the other hand, tax hikes produce less revenue over time, because they reduce incentives and weigh down economies.
Lie #3: Tax cuts don’t lead to economic growth. The four major tax cuts (Harding/Coolidge, Kennedy/Johnson, Reagan, and Bush 43) all were followed by economic growth. The Harding/Coolidge cuts were followed by The Roaring 20’s, the Kennedy/Johnson cuts were followed by three years of growth averaging over 6%, and the Reagan cuts were followed by 92 straight months of economic growth. The Bush tax cuts were followed by 52 straight months of job growth. Was that all just a mere coincidence? Given that tax reductions were the only major policy changes shared by those times, the answer is no. Tax rate cuts do lead to economic growth. Not only that, according to IRS figures, after each of those major tax cuts, the top earners paid a greater percentage of income taxes not less.
Lie #4: The rich don’t pay their fair share. This is the rallying cry of those who want to raise tax rates. According to the IRS, however, the top 1% pays nearly 37% of all income taxes. The bottom 50% pays just over 2% of all income taxes. For those that claim that is not a fair share, I submit to you that no percentage would be fair. By using the “fair” card, they are seeking a rhetorical advantage and that will continue to be effective unless these lies are rebutted.
Lie #5: The Bush tax cuts led to a bad economy in 2008. It is true that there was a bad economy in 2008, something that occurred 5 years after the Bush tax cut. So does that mean that those tax cuts caused the bad economy? Certainly not. The main cause related to government distortion of the housing market combined with bad business practices and mistakes by the Federal Reserve. There is no plausible economic theory as to how lowering tax rates across the board by a few percentages points (and removing millions from the tax rolls) led to the Wall Street/housing problems 5 years later. In other words, it’s just a lie.
Lie #6: The current American tax burden is lower. That statement is partially wrong and used to demand higher taxes on the rich. It is true that the federal tax burden has dropped to an abnormally low 14%. It generally is closer to 18%. The biggest cause for that drop, however, is the prolonged and deep recession. When a nation has considerably less income for such a prolonged period, tax burdens tend to drop because they are paying fewer taxes then when they had higher income. Lower incomes leading to lower tax burdens is hardly something to crow about. Beyond that, the current 14% refers to federal taxes and that number fails to take into account the massive growth in non-federal income taxes such state and local taxes. Those non-federal taxes have replaced the federal burden. So, the next time you hear that the top federal income tax rate is lower than in 1950 (true) – tell that person we didn’t have gas taxes, cell phone taxes, cable taxes, cigarette taxes in 1950. When they say the tax burden is lower than before, tell them it came at the expense of a lower standard of living and that the way to raise tax revenues is to create a vibrant economy.
One last tidbit for your bushel of truths:
The last 8 Presidential winners were the perceived tax-cutting candidate.
1. Reagan over Carter,
2. Reagan over Mondale – who threatened to raise taxes,
3. Bush 41 (read my lips) over Dukakis,
4. Clinton (middle class tax cut) over Bush (who broke his pledge),
5. Clinton (promised to do it again even though he raised taxes) over Dole (who refused to take the No New Tax Pledge and made a career of brokering tax deals as the Republican Senate leader – and whose reputation overrode his tax plan which came too late in the game),
6. Bush 43 over Al Gore (who called tax cuts a risky scheme),
7. Bush 43 (who cut taxes) over Kerry,
8. Obama (promised to cut taxes for 95% of Americans) versus McCain who didn’t believe in the Bush tax cuts.
Knowing all of that, will the 2012 Republican nominee support tax cuts against the tax-raising Obama? It seems likely if this discussion of tax code simplification continues. To get it enacted, however, that nominee has to be able to make the case for tax cuts and expose the lies. Not just in passing, but with all the passion of a true reformer.
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