from http://www.dontspreadmywealth.com
Why Tax Cuts Work and Stimulus Doesn’t
Donald A. Pleasants, Editor
Using tax revenue or funds borrowed from the private sector to fund a government stimulus package has been likened to taking water from the deep end of the pool and pouring it into the shallow end, and expecting the water to rise. And make no mistake, every dollar spent comes from the private sector, whether borrowed through the sale of treasury bills or other debt instruments, or taken directly by taxes. Unless of course it is borrowed from foreign debt-buyers.
But it’s worse than that, because money taken from the private sector is no longer
available to the rightful owners of the money to finance job-creating small business, or
purchase products and services. And the money poured back through the stimulus
package goes primarily to BIG business and BIG government, think banking and autos,
which are not the dynamic, entrepreneurial, incentive-driven job-producing small
businesses of the private sector.
What’s the result of the close-to-a-trillion dollar stimulus package? We are now
In the 21st month of the longest recession since World War II. Last month the economy
lost 216,000 jobs, and the economy declined 1% in the second quarter. Unemployment
has climbed to 9.7% as of last month. If part-time workers who can’t find full-time
jobs are included, the number of unemployed and underemployed total 26.3 million
for a total jobless rate of 16.8%.
Is there a better way to end the recession? Certainly: tax cuts. Putting money
back in the hands of small businesses and the individual taxpayers by a known and
certain reduction in tax rates enables them to plan for the future more aggressively and
expansively, and keep more of the profits furnishing a much-needed incentive for
business activity.
Have tax cuts worked in the past? Certainly. A quick review of the three major
tax cuts since the inception of the federal income tax in 1913 is very instructive. With
the adoption of the l6th Amendment a tax with the top marginal rate of 7% was
established. Then apparently, as now, the insatiable demand of government for funds
and a desire to tax “the rich”, resulted in a top marginal rate of 77% by 1918, and 91%
by 1920. When rates were cut in the Harding and Coolidge administrations the top
marginal rate was 25%, and economic output almost doubled in the next four years,
and unemployment fell dramatically.
Similarly, during the Depression and World War II top marginal rates rose to 94%
and continued at 90% until reduced during Kennedy’s administration to 70%, taking
effect in 1965, after his assassination. What followed was an increase in GDP of an
average of 5.1% over the previous years GDP. Unemployment also decreased after the
tax cuts.
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Most recently, and probably best remembered, are the Reagan tax cuts from a
top marginal rate of 70% to 50% in 1981, with additional cuts in the capital gains rates.
What resulted was an increase in GDP from a fraction of a percent prior to the cuts, to an
increase of an average of 4.8% per year from 1983 to 1986, culminating in an increase
of 5.3% in 1989.
In understanding the effect of the top marginal rate, bear in mind that this is the
rate that applies to much of the profit that a small businessman may hope to achieve if
he generates additional profit by undertaking the risk necessary to expand or improve his
business. In other words, it is in effect how much of the additional profit that the
government will allow you to keep.
Of course, any tax cut is an uphill battle to say the least with a Democrat
controlled Congress which successfully demonized President Bush’s modest tax cuts as
“for the rich”, and with a “spread the wealth” President. Nevertheless, public
awareness is growing, and there are some things an enlightened conservative movement
could do to advance such a plan. We would like to take the liberty of suggesting a
three-pronged tax cut strategy.
First it should be emphasized that this is not a Democrat vs. Republican issue.
After all, Kennedy cut taxes and ushered in a revival of the economy. After the recent
dose of Obamanomics, one must believe that conservative Democrats are at least more
open minded to conservative initiatives than they were a few months ago. If it can be
made a non-partisan effort chances are certainly enhanced.
Second, conservatives must seize the initiative in the battle of the labels.
Instead of allowing liberal Democrat spokesmen to characterize the cuts as “tax cuts for
the rich” the program should be promoted from the beginning under the banner of
“across the board” tax cuts.
Thirdly, while we’re on the subject of labels, it should be vigorously shown that
this is not “trickle down economics”, but rather a necessary step to
give small businesses the incentive to taking the risk of job-creating expansion, which is
the plain and simple truth.
Mr. Pleasants is an attorney who has practiced in the area of taxation, and holds a Master of Laws in Taxation degree from New York University Law School.