My View: Facts are in: Tax cuts raise revenue

Editor’s Note: We normally devote this page to local issues, but once in a while a national topic is so illuminating we are compelled to share it.

There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. History tells us that tax revenues grow and “rich” taxpayers pay more taxes when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden.

Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to “soak the rich,” the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.

1) Lower tax rates do not mean less tax revenue.

The tax cuts of the 1920s
Tax rates were slashed dramatically during the 1920s, dropping from over 70% to less than 25%. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61%.

According to then-Treasury Secretary Andrew Mellon:
“The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income.”

The Kennedy tax cuts
President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90%. 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% down to 70%. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62% (33% after adjusting for inflation).

According to President John F. Kennedy:
“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 Reagan tax cuts
Thanks to “bracket creep,” the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4% during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54% by 1989 (28% after adjusting for inflation).

According to then-U.S. Representative Jack Kemp (R-NY), one of the chief architects of the Reagan tax cuts:

“At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.”

2) The rich pay more when incentives to hide income are reduced.

The tax cuts of the 1920s
The share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2% in 1921 to 78.4% in 1928.

The Kennedy tax cuts
Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57% between 1963 and 1966, while tax collections from those earning below $50,000 rose 11%. As a result, the rich saw their portion of the income tax burden climb from 11.6% to 15.1%.

The Reagan tax cuts
The share of income taxes paid by the top 10% of earners jumped significantly, climbing from 48.0% in 1981 to 57.2% in 1988. The top 1% saw their share of the income tax bill climb even more dramatically, from 17.6% in 1981 to 27.5% in 1988.

Daniel J. Mitchell, Ph.D., is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.