Election after election the same proposals are put up by the Conservatives: Lower Taxes. It is an easy sell to most. What is better than lower taxes?
But wait, there’s more. Many Conservatives claim is that not only will they lower your income taxes, but the government’s revenues will go up. Let me repeat. Lower taxes equals higher revenues.
Well heck, lower taxes to one percent! Will the revenues still go up? No matter if you are a Liberal a Conservative or a Centrist, if it is true that lowering taxes will increase revenues then by all means lower them!
Is this possible or is it just political talk and unsubstantiated theory?
In the eighties supply-side economist had a chance to use a theory they devised which says if you lower taxes it will create higher tax revenues. It had other names such as George H.W. Bush’s name for it; “Voodoo Economics”. Or maybe you have heard it called “Trickle-Down Economics”. It was also the major tenet of “Reaganomics”.
Ronald Reagan enacted the largest income tax cut in history which took the top rate down from 70% to 50% and then to 28% in addition to lowering middle class income taxes.
Let’s begin with the tax rate of 70%. This was clearly way too high and it did likely prevent investment and job growth which may have actually lead to lower government tax receipts. The same was true when Kennedy lowered the top tax rate from 90% to 70%. But where does it stop? 36%? 28%? 1%? Clearly there must be a mark where revenues do not continue to rise with a tax cut. Economic 101 teaches us this.
Let’s take a look at the Regan tax cuts a little more deeply to see there true overall impact.
The numbers are quite simple from the Conservative point of view. Tax revenues nearly doubled in Reagan’s two terms! Tax cuts equal higher revenues!
This is not lie. They did nearly double, but before you start adding up numbers, you must remove some factors from the equation starting with inflation. When Reagan came into office January 20, 1981 the government had collected 517.1 billion dollars in receipts in the previous fiscal year (1988). This number and all the numbers below are in today’s dollars, otherwise inflation is included. When he left office on January 20, 1989 the government had collected 909.2 billion dollars in tax receipts in the fiscal year 1988. Not quite doubling, but tax revenue increased 392.1 billion dollars or about 76%.
Let’s use an example to show how easily inflation effects tax revenue. Inflation from 1981-1989 was about 4.67%. For example if there was $100 in tax receipts in 1981 at an inflation rate of 4.67% would result in tax receipts of about $144 by year 1989. A 44% increase!
So when adjusted for inflation nearly one quarter of the argument is gone. More importantly is the point that tax receipts go up nearly every year and have nearly double every decade since the Great Depression. This is due to the fact that the population increases and thus there are more people working and thus more taxes collected every year.
Here are the numbers according to the White House OMB
Year Receipts (In Current Dollars – Billions)
The next issue that Conservatives do not mention in their arrangement is the fact that many other taxes were raised in the eighties by Ronald Reagan. The reference to the doubling of revenues under Ronald Reagan includes all tax revenues, of course including Social Security. In 1977, the 95th Congress and Democratic President Jimmy Carter passed a law increasing the taxable maximum faster than average wage levels in 1979, 1980, and 1981. In 1983 Social Security reform saw it raised even further. The FICA rate went from 6.13% in 1980to 7.51% in 1988. The fact that Ronald Regan actually raised taxes many times, including the gas tax and a large corporate tax increase.
Finally, everybody agrees that economies go in cycles and when the cycle began to grow jobs (not to say the tax cuts didn’t increase it more), naturally the tax receipts will go up. If you pick a low point in an economy to measure tax receipts versus a high point, naturally they will show their greatest increase.
To summarize, tax receipts did go up after the massive Reagan tax cuts. This alone gives some merit to the supply-side argument. But to understand their true value you cannot just look at the one simple cause and the one effect, you must look at all the causes. Subtract the Social Security increases, other tax increases, population increases, economic cycles and most of all subtract inflation and you have a number that is close to zero percent and possibly even negative growth. Nevertheless, it is likely dropping the rate from 90% (as Kennedy did) and dropping it from 70% (as Regan did) legitimately did raise tax revenues, but dropping them to 28% was clearly over the line and decreased tax revenues.
The current top tax rate is at 35% while under Clinton it was 39.6%. Look at the deficits under Bush and now Obama and look at the surpluses under Clinton. Clearly there is a point where lowering taxes does not increase revenues and that point seems to be around 40%.
Conservatives may not be lying when they say tax cuts increase tax revenues, but they are incredibly misinformed and incredibly naive to make such a blanket statement.