Cutting Taxes For The Rich Worked In The 1920′s, The 1960′s, The 1980′s And The 2000′s
In the midst of the fierce national debate over whether or not to raise taxes, particularly through allowing the Bush tax cuts to expire, Thomas Sowell gives us a history lesson on the bi-partisan success of cutting tax rates to stimulate the economy and spur tax revenues.
Democrats have been having a field day with the cry of “tax cuts for the rich” — for which Republicans seem to have no reply. This is especially surprising, because Democrats made the same arguments back in the 1920s, and the Republicans then not only had a reply, but one that eventually carried the day, when the top tax rate was brought down from 73 percent to 24 percent (see chart above).
Those who argue that “the rich” should pay a higher tax rate, and that the revenue this would bring in could be used to reduce the deficit, assume that higher tax rates equal higher tax revenues. But they do not.
After Secretary of the Treasury Andrew Mellon finally succeeded in getting Congress to lower the top tax rate from 73 percent to 24 percent, the government actually received more tax revenues at the lower rate than it had at the higher rate. Moreover, it received a higher proportion of all income taxes from the top income earners than before.
Something similar happened in later years, after tax rates were cut under Presidents Kennedy, Reagan and G.W. Bush. The record is clear. Barack Obama admitted during the 2008 election campaign that he understood that raising tax rates does not necessarily mean raising tax revenues.
Why then is he pushing so hard for higher tax rates on “the rich” this election year? Because class warfare politics can increase votes for his reelection, even if it raises no more tax revenues for the government.
To be clear, cutting tax rates doesn’t always lead to higher tax revenues. And to be sure, the government shouldn’t be looking to maximize tax revenues anyway as though they were trying to maximize profits. Taxation should be based on government needs, not on how much can be squeezed out of the private sector.
That being said, raising taxes right now would hardly solve our nation’s deficit problems. They would only exacerbate them by further slowing investment and economic activity and depressing tax revenues.
Tags: Taxes
