One thing we can see from our history is that when tax rates were high the economy slowed, but when taxes were cut, the economy prospered.
An article from the Cato Institute explains:
“Changes in marginal income tax rates cause individuals and businesses to change their behavior. As tax rates rise, taxpayers reduce taxable income by working less, retiring earlier, scaling back plans to start or expand businesses, moving activities to the underground economy, restructuring companies, and spending more time and money on accountants to minimize taxes. Tax rate cuts reduce such distortions and cause the tax base to expand as tax avoidance falls and the economy grows.”
There are four distinct examples of instances of U.S. tax-rate reductions that illustrate the point.
(1) In 1913 when the Federal Tax system was enacted the rate was 7% for the top wage earners, 1% for the lowest earners. President Wilson said that the rates would not go any higher, yet 3 years later the rate was 15% for the highest wage earners. By 1918 the rates were 6% for the lowest and 77% for the highest. And America's real Gross National Product (GNP) fell by 16 percent between 1919 and 1921.
Then in 1921 congress passed the Revenue Act and started lowering the tax rates. The top rate fell to 56% for the top wage earners. Treasure Secretary Andrew Mellon, who proposed the tax cuts, explained his rationale:
(1) In 1913 when the Federal Tax system was enacted the rate was 7% for the top wage earners, 1% for the lowest earners. President Wilson said that the rates would not go any higher, yet 3 years later the rate was 15% for the highest wage earners. By 1918 the rates were 6% for the lowest and 77% for the highest. And America's real Gross National Product (GNP) fell by 16 percent between 1919 and 1921.
Then in 1921 congress passed the Revenue Act and started lowering the tax rates. The top rate fell to 56% for the top wage earners. Treasure Secretary Andrew Mellon, who proposed the tax cuts, explained his rationale:
"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 result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people."
In 1921 federal revenues collected were $719 million (73% rate) and by 1928 revenues collected were $1.164 Billion with a top rate of 25%. Between 1922 and 1929, America's real GNP grew at an average annual rate of 4.7 percent, and the unemployment rate fell from 6.7 percent to 3.2 percent.
Notably, as tax rates were reduced, the share of the tax burden paid by the rich (those earning $50,000 or more in those days) rose from 44.2 percent in 1921 to 78.4 percent in 1928. Moreover, taxes paid by people earning in excess of $100,000 soared from roughly $300 million to $700 million per year.
Notably, as tax rates were reduced, the share of the tax burden paid by the rich (those earning $50,000 or more in those days) rose from 44.2 percent in 1921 to 78.4 percent in 1928. Moreover, taxes paid by people earning in excess of $100,000 soared from roughly $300 million to $700 million per year.
(2) Then in the 30’s Herbert Hoover dramatically increased tax rates and Franklin Roosevelt had pushed marginal tax rates to more than 90 percent. President John F. Kennedy recognized that high taxes were hindering the U.S. economy. Kennedy cut rates from 91 percent to 70 percent.
As a result of Kennedy's tax cuts, the federal government's tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent.
And like in the 1920s, the share of the income-tax burden borne by the rich increased following the Kennedy tax cuts. Tax collections from those earning more than $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose by just 11 percent. Consequently, high earners saw their portion of the income-tax burden climb from 11.6 percent to 15.1 percent.
(3) In the 80’s, Regan pushed an across the board 25% tax cut for everybody. And as a result, revenues rose by 99%. The average annual growth rate of America's real Gross Domestic Product (GDP) from 1983 to 1989 was 3.8 per cent per year, compared with 2.8 percent from 1974 to 1981.
And like in the 1920s, the share of the income-tax burden borne by the rich increased following the Kennedy tax cuts. Tax collections from those earning more than $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose by just 11 percent. Consequently, high earners saw their portion of the income-tax burden climb from 11.6 percent to 15.1 percent.
(3) In the 80’s, Regan pushed an across the board 25% tax cut for everybody. And as a result, revenues rose by 99%. The average annual growth rate of America's real Gross Domestic Product (GDP) from 1983 to 1989 was 3.8 per cent per year, compared with 2.8 percent from 1974 to 1981.
From 1981 through 1989, the U.S. economy produced 17 million new jobs or roughly 2 million new jobs each year.
Also, the share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent of earners saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.
(4) In 2001 the Bush administration passed income-tax cuts that lowered individual tax rates by about 7% on the low end of the income spectrum, and around 9% percent on the high end. Two years later, capital gains tax rates were lowered from 20 percent and 10 percent to 15 percent and 5 percent, respectively. Cumulatively, these cuts led to a period of economic prosperity that lasted until the housing crisis of 2008.
Also, the share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent of earners saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.
(4) In 2001 the Bush administration passed income-tax cuts that lowered individual tax rates by about 7% on the low end of the income spectrum, and around 9% percent on the high end. Two years later, capital gains tax rates were lowered from 20 percent and 10 percent to 15 percent and 5 percent, respectively. Cumulatively, these cuts led to a period of economic prosperity that lasted until the housing crisis of 2008.
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