#8 The Not So Surprising History of Tax Cuts
A Reference Library
Capsule: #8 The Not So Surprising History of Tax Cuts finally puts to bed the economic implications of reducing or raising taxes on a national level. All of the tax cuts and hikes since WWII are examined and compared for their results, leading to obvious and unarguable conclusions.
Make Tax Cuts One of Your Best Counterarguments
Focus: Which offers more freedom? You keeping more of your hard-earned money, or the government taking more of it? Which supports more individual liberty, and which advances the voluntary slavery of collectivism?
Details: #8 The Not So Surprising History of Tax Cuts is as much an examination of history as it is of numbers. The historic record provides clear evidence of the consequences of national tax hikes and tax cuts in America. One need not be an economist to decipher these results. Twelve easy to understand graphs and tables assembled from publicly available data are presented illustrating such effects as GDP, employment, government revenues, deficits and debt. President Bill Clinton’s tax increases are carefully examined, along with President George W. Bush’s tax decreases. Each of the major tax cuts and hikes of the past sixty years are directly compared by subsequent government revenue growth rates, with shocking results (well, for liberals, anyway).
As a bonus, the debate over the end of the Great Depression is finally closed with a step by step examination of its final years. Again, the policies that finally ended the greatest economic calamity in American history will shock liberals (and perhaps some conservatives). No, it was not the spending on the war (it prolonged the G.D.), and it was not FDR’s supposed brilliance (without his timely death, the G.D. would have turned into the Depression that Swallowed the World).
Excerpts: ~There have been three major tax increases and six major tax cuts over the last sixty years. Tell me, American neighbor, do you think the tax increases produced higher annual average government revenues, or did the tax cuts? Here’s another question: Can you name a period in American history where raising taxes caused the national debt to go down? How about a period where cutting taxes correlated with a reduction in national debt? And then there is this question: Which do you think adds more liberty for Americans to direct their own lives, tax cuts or tax hikes?~
Preface: The Nuclear Counterarguments Essay Series is written for both contemporary American liberals and contemporary American conservatives – for the liberal (or progressive) as an exit counseling process with the purpose of removing the inherent paranoia that prevents them from seeing that in their core belief they are, in fact not a liberal, and for the conservative as a strategy for dealing with liberal acquaintances. (FYI, I am a Canadian – the implications of this are explained in the Introduction and #1 Deprogramming Liberalism with Nuclear Counterarguments.)
[All citations are active number/letter codes. Code links beginning with an * indicate that the linked page has additional information for the topic at hand. Links without an * are cited for evidence of existence and reference only, as in a quotation or number or case in point. Citations validate my points so that you can trust my claims, and will often provide you with invaluable supplemental information.]
Written in first-person narrative to liberals,
but also for conservatives.
• Mini critical thinking exercise
There have been three major tax increases and six major tax cuts over the last sixty years. Tell me, American neighbor, do you think the tax increases produced higher annual average government revenues, or did the tax cuts? Here’s another question: Can you name a period in American history where raising taxes caused the national debt to go down? How about a period where cutting taxes correlated with a reduction in national debt? And then there is this question: Which do you think adds more liberty for Americans to direct their own lives, tax cuts or tax hikes?
Four principles of liberalism are illustrated in this essay, the embracing of the noble lie, the enemies of liberal groupthink, self-interest and critical thinking, and the scoff reflex as a defense mechanism.ab
• Liberal presumption: tax cuts = deficit
As we saw in #3 Groupthink Truths Versus Self-evident Truths, our Mr. Spock demeanor of reason over preconceived ideology works wonderfully well with numbers, so let’s go back to numbers to reinforce your resistance to liberal groupthink. Relating to our previous topic of deficits let’s look at tax rate cuts, American neighbor. Specifically, let’s look at the major tax rate cuts of the past one hundred years. There were the Roaring Twenties tax rate cuts. There were – [dramatic pause for effect] – the tax rate cuts that ended the Great Depression. There were the infamous John F. Kennedy tax rate cuts that liberals would rather forget. There were – [another dramatic pause for effect] – the unknown Jimmy Carter tax cuts that everyone has forgotten about. There were the heralded tax rate cuts of Ronald Reagan that liberals love to demagogue. There were the relatively unknown tax rate cuts from the Contract With America. And, of course, we cannot forget the George W. Bush tax rate cuts.
Why liberals hate tax cuts I have never been able to get my mind around. It just defies any kind of reasoning. What have liberals got against citizens keeping more of their own money, with the added benefit of a stronger economy? But, don’t bother to attempt an answer, American neighbor. In a little while you will be just as perplexed as I am.
Liberals think of tax revenues like a static pie chart and so argue that broad based national tax cuts cause deficits by reducing government revenue:
~Tax cuts add to the deficit no less than spending increases do.~ – E.J. Dionne Jr., Washington Post columnist
On the face of it that seems to make sense. If you have incoming tax revenue of $10 and an expense budget of $10 you end up with a balanced budget at the end of the year, but if you spend $11 you end up with a deficit of $1. Or, if you implement a $1 tax cut simple reasoning suggests that you will have a shortfall in revenue of $1 at the end of the year. Or, as in our pie chart illustration, cut out a piece of pie and naturally there is less pie left. But I said “simple” reasoning, because that sort of reasoning is simple-minded. In reality there are many more factors at work than just “simple” pie charts. This will take some contextual investigation and critical thinking, American neighbor. Resist your scoff reflex and the pressure of programmed liberal groupthink and we will press on.ac
300-word pages of text = 35
Reference citation links = 29
Recommended-reading links = 18
Profound insights = 22
Cover photo: Cover photo: U.S. Department of Energy photograph XX-34 BADGER
Cover background: SQUIDFINGERS [4rol8]
Copyright 2012 Jim Autio License Note: Although free, this essay remains the copyrighted property of the author, and may not be reproduced, copied or distributed for commercial or non-commercial purposes. For fair use only.
• Roaring Twenties = successful experiment
Coming out of the First World War in late 1918, the American economy was in dire straights. Government debt was huge, inflation and unemployment were very high, and taxes were exorbitant, so first, President Warren G. Harding and following President, Calvin Coolidge, drastically reduced taxes. Along with reductions in both government size, spending and regulation, the economy responded with tremendous growth, and hence the name the Roaring Twenties. Were the twenties perfect? No, of course not. Income growth for the average American could have been better. High tariffs probably restricted growth, and the promise of more tariffs with the Smoot–Hawley Tariff Act was likely the main cause of the 1929 stock market crash, along with high leverage rates and no shorting restrictions. (A combination of the implementation of Smoot-Hawley and really bad Fed policy then led to the Great Depression.) Consuming on credit was a problem, and there was a housing bubble and bust. But in all regards, the twenties were far and above a better decade by every metric than the decades that preceded and followed it.) Tax revenue fluctuated as taxes were methodically reduced over the decade. Not only were the previous heavy annual deficits reduced, they were turned into real surpluses, and not with the accounting trickery of the so-called Clinton surpluses. Combined with judicial spending cuts the federal debt went from 26 billion dollars in 1920 down to 16.9 billion dollars by 1929 – a remarkable feat unparalleled in American history! [*6kd87g, *nu8n2, *yd8n7ap]
Here is the national debt for the 1920s [ypl9uk]:ad
• Graph – U.S. Total National Debt 1920s
So, did tax cuts cause deficits as liberals proclaim they should have? Well, obviously they did not, they coincided with real and substantial surpluses! This is our first tax cuts 800 pound gorilla.ae
• New Deal = failure
With the fear of a return to the malaise of the Great Depression’s Dirty Thirties at the end of WWII, Congress refused to revive FDRHoover’s New Deal policies which had been such a spectacular flop since 1933 (really since 1930 – more in #11 Austerity Versus Stimulus – What Is the History?), and had been mostly dismantled by 1942. [*y9e5693] (They were abandoned because the survival of the nation was literally at stake, and FDRHoover could not afford to play ideological games with the economy anymore. America had to produce for the war – period.) The economy was very fragile following the war with many war industries closing and millions of troops coming home looking for employment. As with the First World War, the Vietnam War, the Gulf War, and the Iraq and Afghanistan wars, government spending on WWII did not end the Great Depression any more than those other wars ended or prevented the depressions and recessions during and following them. For instance, why was there a depression following the First World War, if war spending stimulates the economy? And please name for me these supposed post war periods of huge economic stimulus, American neighbor. War spending does not stimulate the consumer economy – it only substitutes some industries for others, and ships the unemployed overseas to fight. The war had not ended the Great Depression, but simply put it on hold. What little consumer product demand there was, evaporated, replaced by temporary war manufacturing demands. Foreign competition was virtually nonexistent. The consumer market was eviscerated – this was no recovery. The GDP boost was representative of artificial war spending, not consumer demand, which is the real peacetime marketplace. The lowering of the unemployment rate was the result of the temporary war industries and moving millions of men into the military machine. Living standards under rationing and price controls had not even improved back to those of the 1920s, a full 15 years before. In fact, there was an officially recognized recession in 1945 that can arguably be viewed as an end-of-war/post-war continuation of the Great Depression. And a further fact, the GDP fell for each of the years 1945, 46 and 47 following the war, and inflation sky-rocketed in mid 1946. In the 1944 State of the Union address FDRHoover outlined his plan to rebuild the New Deal after the war with what was coined as the Second Bill of Rights, a frightening and draconian move toward an all out fascistic takeover of American society. FDRHoover’s death in early 1945 finally allowed America to get out from under FDRHoover’s tyrannical thumb and move to end his Great Depression for good. A Democratic majority Congress, instead of listening to new President Harry Truman who had no mandate, went against his desire of going back to the profligacy of New Deal policies (which they certainly would have done under the authoritarian control of FDRHoover), and instead modestly cut taxes in 1945 and more so in 1948. Combined with a reduction in the size of the government through the demobilizing of the military machine (similar to the effect of Harding’s cuts to government’s size), the consumer economy, now released from the war’s dominance, stutter-stepped for a few years as it struggled to gain its footing, but did not return to the extreme malaise of the prewar years. FDRHoover’s Great Depression, the most prolonged economic calamity in American history, was finally over (no thanks to him). By the early fifties the consumer economy was back on a solid footing it had not seen since the Roaring Twenties. Here were the government revenues for this period: [c6sqdf]af
• Graph – U.S. Federal Government Revenue – post WWII tax cuts
Government revenues never fell below the first postwar year level of 1946 and leaped in 1951 with special Korean War taxes on top of permanent rate increases. I debated as to whether to include this period, because this was a special era of transition from a truly national war economy during a depression, back to a private, peacetime consumer economy. The marginal income tax cuts were relatively mild (although 12 million Americans were removed from paying income taxes, and the marginal corporate tax rate was slashed by 58%). The removal of price controls and leftover New Deal regulations and tariffs also contributed to recovery (especially the disastrous Smoot–Hawley Tariff Act whose debate probably triggered the 1929 stock market crash, and whose passage probably greatly contributed to the Great Depression – unemployment in June of 1930 was a reasonable 6.3% when the act was passed, but then spiked to over 30%). The dismantling of many of the draconian labor laws of the 1935 Wagner Act through the passage of the Taft–Hartley Act of 1947 (again against the desire of Truman) also helped. Plus, government spending reductions were probably equally important to the recovery (all of the above mentioned moves were consistent with contemporary conservatism today, by the way). But the period earns a positive economic asterisk in American history simply because, with the threat of a return to the worst of the Great Depression, America made the proper decision to abandon the New Deal’s failed policies and the even more fascistic control proposed for after the end of the war by FDRHoover’s Second Bill of Rights. In effect, the Great Depression finally ended with FDRHoover’s death, releasing his iron grip on policy that had in fact prolonged the Great Depression and its threat of return from the early thirties well into the mid forties. (Because of its important relevance for today I will explain the Great Depression in greater detail in #11 Austerity Versus Stimulus – What Is the History?.) Of note, it was the 1946 election that re-established the Republican Party as the party of tax cuts (a reputation that had been lost since the 1920s). Due to the combination of spending cuts and tax reductions there were also real budget surpluses in 1947 and 1948 – the first time since the twenties.ag
• JFK – classical liberal tax cutter
Tax rates had again increased during the Great Depression and mostly stayed high until the Kennedy tax cuts of 1964 [*3bf6vq, *yeodhf3, *y89sr86, *ydau56h] (see the above section about the modest postwar tax cut period). Although cutting taxes to spur economic growth was a proposal of Republican presidential candidate Richard Nixon, once President, Kennedy became convinced of Nixon’s supply-side economics and cut personal income taxes, corporate taxes and capital-gains taxes. Offsetting some of these cuts, many corporate tax loopholes were closed as well, and although some liberals try to portray this as an overall tax increase, the hero of current liberal, Keynesian economics John Kenneth Galbraith did not agree, as he attempted to talk President Kennedy out of his tax cuts proposals, to no avail. Another rationalization by liberals is that Kennedy was attempting to stimulate the economy by increasing the deficit. The lameness of this argument is exposed by simply asking why, if that was his purpose, he didn’t just increase spending instead? Certainly, increased spending would have lined up with Galbraith’s Keynesian economics. No matter how you cut it, American neighbor, this explanation is an admission that tax cuts stimulate the economy – the very argument conservatives have always used in favor of tax cuts (just not the way liberals used it here).
President John F. Kennedy was assassinated in November, 1963. He first proposed tax cuts in 1962 and they were in process when he died. They were implemented shortly thereafter in February, 1964 by his successor, Lyndon Johnson. But here’s even more irony, American neighbor. The tax cuts didn’t cause deficits. See for yourself. Here are the total government revenues for the years following the enactment of President Kennedy’s tax cuts: [c6sqdf]ah
• Graph – U.S. Federal Government Revenue – JFK tax cuts
Government revenues didn’t go down causing deficits as liberals proclaim should have happened. Revenues went up EVERY year, American neighbor. And there are those damn lines again getting longer each time as revenues multiplied. This is our second tax cuts 800 pound gorilla. Examine those lines closely, American neighbor. Alpha liberals insist that the lines are getting shorter. Will you conform to their aggressive groupthink pressure? At least, first consider JFK’s reasoning:
~ “Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that, no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget – just as it will never produce enough jobs or enough profits. […] 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 revenues in the long run is to cut rates now. […] The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”~ [h33hg]
~ “Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”~ [6tx5qxx]
Wow! Let me double check to see if these weren’t actually Ronald Reagan quotes. Nope. They were indeed JFK. Remember, we discovered in #4 Benevolent Utopia or Tyrannical Dystopia, that JFK did not believe in a tax and spend nanny “superstate”. No wonder liberals hate discussing his tax cuts. Even the NY Times in an unsigned editorial (that means this was not an opinion of a Times writer, but the position of the paper itself) proclaimed that Kennedy was a supply-sider (by the way – supply-side economics is considered Reaganomics):
~In a speech before the Economic Club of New York on Dec. 14, 1962, President Kennedy gave what could stand today as an eloquent statement of the supply-side case, particularly as it relates to budget deficits and tax rates.~ [yes7qud]
• Jimmy Carter – unknown tax cutter
Tell me, American neighbor, what is it about Jimmy Carter that keeps making Democrats look like fools? In 1978 Jimmy Carter signed across the board tax cuts – income, corporate and capital gains. While not aggressive enough to overcome other factors unaffected by the moderate tax reductions alone, like high oil prices, high inflation rates, high interest rates and a large trade deficit, government revenues continued to climb. By 1981 the malaise had turned into a recession and revenues dipped for a year until the Reagan tax cuts were piled on in 1983, then the economy finally turned around (more in a moment). It is interesting to note that if Carter had introduced more aggressive tax cuts in 1978 the economy may have turned around soon enough to earn him a second term. It is also of interest that it took many Democratic votes added to the Republicans in Congress to get these cuts passed due to the large Democratic majorities in both the House and the Senate at the time. But, I will give President Carter a thumbs-up and at least partial credit for Reagan’s economic turnaround. Without Carter’s tax cuts Reagan’s alone may not have been enough to reverse a particularly nasty decade of Stagflation and other economic calamities. [c6sqdf]aj
• Graph – U.S. Federal Government Revenue – Carter tax cuts
• Ronald Reagan – conservative tax cutter
Ronald Reagan took JFK’s and Jimmy Carter’s tax cuts a step further in the eighties. The first round of income tax cuts started in 1981, but were spread over three years, and then Reagan was convinced to raise some taxes in 1982. Like Kennedy, Reagan offset some of his earlier cuts by closing loopholes, and with selected tax increases in corporate rates, capital-gains, gas taxes, etc. The delay in fully implementing the tax cuts of 1981 also delayed the economic turnaround, and the tax hikes of 1982 made things worse. In 1983 the 1981 tax cuts were finally completed. [2ajqjny] A second round of rate cuts were implemented in 1986. [c6sqdf]al
• Graph – U.S. Federal Government Revenue – Reagan tax cuts
Coming out of the recession of 1983, we see that at no time did Reagan’s tax cuts cause a drop in government revenue causing a deficit. The lines keep getting longer, American neighbor. The two Reagan reductions are our fourth and fifth tax cuts 800 pound gorillas. In fact, if we go back to Jimmy Carter’s term as President the average annualized quarterly GDP growth from the first quarter of 1977 to the fourth quarter of 1982 was a measly 2.2% (which Carter inherited from Ford). [y85gk5w] (GDP is predominantly a measure of national economic growth.) After Reagan’s tax cuts and welfare reform kicked in, from the first quarter of 1983 to the last quarter of Reagan’s Presidency in 1988 the average annualized GDP growth was a robust 4.72% (imagine if Carter had been more bold with his tax cuts). So obviously, tax cuts did not cause the deficits during the Reagan years (the only fall in revenue followed the year after the tax increases of 1982). The only alternative explanation for the increase in deficits is government spending (more later). To achieve his tax cuts Reagan had to deal with a Democratic Congress on social program spending and, of course, he bolstered the military with the payoff being the eventual collapse of the Soviet Union and the end of the Cold War, because the Soviets could not match Reagan’s Cold War strategy of military expansion. The Soviet economy could not keep up, which led to their economic and political destruction and the disintegration of the Iron Curtain in 1989. Additionally, the U.S. unemployment rate peaked in 1983 and declined every year to the end of Reagan’s second term. [y995jjp] In fact, monthly employment totals went up for a staggering 81 of the next 82 months! [n8g5cl]am
• Contract With America – congressional tax cutters
When the Republicans swept the House and the Senate in 1994 they did it with promises in what they called the Contract With America. This led to a 1997 capital-gains tax cut as well as other tax cuts that encouraged the tremendous economic growth of the late nineties. We’ll examine this example a little more closely, American neighbor. A lot can learned from the Clinton years.
President Clinton came to the Presidency on the back of promising a huge middle class tax cut. He claimed that it was the “worst economy in the last fifty years” and it won him the Presidency (another example of liberal paranoia). Now what’s wrong with this picture, American neighbor? Bill Clinton was a liberal. Shouldn’t he have been warning that tax cuts would turn the “worst economy in the last fifty years” into the worst economy in the last one hundred years? Jus’ askin’.
Contrary to the Clinton campaign’s groupthink mantra that the economy in 1992 was the “worst economy in the last fifty years,” it was actually in the expansion phase of the business cycle coming out of a recession that had ended in the second quarter of 1991. The average annualized quarterly GDP growth for 1992 was 4.33%. [ybptjyy] Sorry, American neighbor, I realize that programmed liberal groupthink has proclaimed that Bill Clinton was an economic genius for breaking his campaign promise of tax cuts in favor of tax increases [ou4rl] to ostensibly stimulate a falling economy, but Bill Clinton inherited a rising economy from President George H. W. Bush. The NY Times reported just days after the Clinton inauguration, “U.S. SAYS ECONOMY GREW AT FAST PACE IN FOURTH QUARTER” – January 29, 1993. [ybcpuau] The business cycle was on the upside and Bill Clinton just caught the wave.an
• Graph – U.S. GDP Growth – Clinton tax hike fail
Here is the damming evidence against the mantra of the “worst economy in the last fifty years”: The quarterly annualized average GDP growth of 1992, the last year of the George H. W. Bush administration, was 4.33%, a full 47% higher growth rate than the 2.95% quarterly average for the first 3 years of the Clinton administration with his tax increase. So what we have is a year of very good growth before Clinton took office, then 3 years of relatively anemic growth under Clinton’s tax increase (remember our unintended consequences lesson about liberalism from #1 Deprogramming Liberalism with Nuclear Counterarguments), and then another 4 years of robust quarterly annualized average GDP growth of 4.75% under the Contract With America, an annualized increase of a commendable 61% per quarter. [*n9zgj9z, *yba4k72] In the first 3 1/2 Clinton years the NASDAQ stock exchange rose by 40%. In the next 3 1/2 years after welfare reform of 1996 and the tax cuts in 1997 it rose an incredible 360%! And, these increases happened during a period that included a war with Serbia, the uncertainty of a possible war with Iraq, and the instability of a President being impeached. If anything, Clinton’s tax increase seemed to create a growth gap in the economy from the beginning of his administration until the mid nineties, the end coinciding with the implementation of the Contract With America and President Clinton’s famous triangulated move to the right. Perhaps President Clinton should have stuck with his first idea of a tax cut. (No, not perhaps.)
Sorry again, American neighbor. No, Bill Clinton deserves little credit for welfare reform. Liberals vehemently objected to the Republican bill and Clinton vetoed it twice before finally signing it July 31, 1996. Clinton only acquiesced when polls for the upcoming congressional election showed huge public support for Republican welfare reform. Even in signing it Clinton vowed to undue many of the reforms in the near future (he never got the chance). By 1999 welfare recipients had been cut in half from 14 million to 7 million, and many of the jobs created in the late nineties under the Republican Contract With America went to these former welfare recipients. After the recession of 1991 unemployment peaked again in 1992, falling from 7.5% to 5.6% in 1995, but, with the Contract With America tax cuts and welfare reform the unemployment rate continued to fall to a modern record 4.0% in 2000. [y995jjp]
Unsurprisingly, once he gained power, Clinton being a liberal, immediately flip-flopped and raised taxes instead. So, let’s look at what the Clinton tax increases and the Contract With America tax cuts produced in government revenues: [c6sqdf]ao
• Graph – U.S. Federal Government Revenue – Contract tax cuts
What can we learn from these numbers, American neighbor? Well, Clinton raised taxes and government revenues continued to increase each year. The Contract With America cut taxes, and again government revenues continued to increase each year. But, programmed liberal groupthink insists that tax cuts cause deficits by reducing government revenues. This is our sixth tax cuts 800 pound gorilla. Hmm – it seems liberalism is having a hard time keeping up with our contextual investigation and critical thinking exercises, American neighbor.ap
• George W. Bush – Compassionate conservative tax cutter
Our last set of tax cuts are those of the George W. Bush administration. Just as liberal groupthinkers have pushed the rewritten history about Clinton inheriting the “worst economy in the last fifty years”, they have also pushed a liberalism that Clinton left this great economic situation for President George W. Bush which he subsequently squandered. Sorry once again, American neighbor. The end of the Clinton Presidency coincided with an economic mess. I myself don’t particularly blame President Clinton for the dire circumstances that followed him out of office. It was more the result of the business cycle than presidential politics, but liberals love to point back to the Clinton administration as this supposedly magical economic period managed by this supposed wizard of smart presidential economics. If they are willing to accord him all of this credit, then it logically follows that he shoulders the blame for the economic problems at the end of his administration as well.
Incredibly, in early 2000 the Clinton administration declared that the business cycle was over, thinking the good times would just go on and on. However, in what has become an historic example of divergent coincidence, only a few weeks later the market maniacally laughed that declaration off on March 11 as the technology bubble in the stock market hit its high point and began to deflate. That day the NASDAQ stock exchange and the market in general began the long decline into a bear market that lasted for three years (the first year was the last year of the Clinton administration), and saw the NASDAQ experience a 75% drop (worse than the Dow Industrials in the 1929 crash), with the market shedding 8 trillion dollars in value! [yhsoth3] On top of this there was a recession that essentially began in the third quarter of 2000 as Clinton was about to leave office where the GDP crashed from the previous quarter of 8.0 to just 0.3 (the lowest rate since the first quarter of 1991). [bvwb46r, *c6pdmft] Also, let’s not forget the Enron, Tyco, Worldcom, Arthur Anderson, Global Crossing, Nortel, Rite Aid, Xerox, etc. accounting fiascos that had brewed in the late nineties and matured into full-fledged disasters shortly after Bush took office. Then, on top of all this there was 9/11, happening in part as a result of Clinton’s “Wall” to prevent investigation into his Chinese money laundering scam. The results of these problems were all compounded by a massive build-up of the non-petroleum trade deficit in the late nineties as a result of a Fed and Treasury strong dollar policy. A final element was the round of court challenges following the 2000 election delaying a new President Bush’s ability to place his people in the administration for months, which added to the apprehension in the marketplace. The most outstanding result of this economic calamity was the decline of household net worth from 2000 to 2002 – the first time that had happened since 1946! [66ur3sj] Additionally, the EMRATIO which measures the percentage of the potential labor force that is currently employed peaked in April of 2000 at 64.7% and then declined for the next three years until Bush’s major tax rate cuts in 2003, where it began climbing again until 2007. [*3kxgnuj]
Notice also the rises following the tax cuts of JFK, Reagan and the Contract – especially Reagan’s, a staggering rise of 60% of the total trough to peak rise from 1948 to 2000! All three measures in the following graph turned positive in either 2003 or 2004 after Bush’s tax cuts:aq
• Graph – Clinton Economic Legacy
So, was Bill Clinton the great steward of an American economy that Bush subsequently broke? Hardly, American neighbor. The economy was already breaking down when Bush got there. (Unlike Barack Obama, who constantly whines that his myriad of failures are his predecessor’s fault by name or title, George W. Bush didn’t go around blaming every problem on Bill Clinton – crass versus class.) In fact, later revisions by the Commerce Department showed that the Clinton administration cooked the books to look good for the 2000 presidential election, not unlike what Enron did:
~The Commerce Department’s painful report last week [August 2002] that the national economy is worse than anticipated obscured the document’s startling revelation. Hidden in the morass of statistics, there is proof that the Clinton administration grossly overestimated the strength of the economy leading up to the 2000 election.~ [ylhv476]
Think about this, American neighbor. If the economy was so great, how come Al Gore didn’t win the Presidency in a landslide? Because the economy was not so great. The declining economy was the major factor in Bush’s win. Now we come to President George W. Bush’s response to the struggling economy that he walked into. Bush responded with proposed tax cuts in 2001 which were largely implemented in 2003. So did Bush’s tax cuts cause a reduction in government revenues? See for yourself: [c6sqdf]ar
• Graph – U.S. Federal Government Revenue – W tax cuts
We can see that there were the three years of declining revenues as the economy struggled to regain its footing from the tech bubble bust that began in early 2000, the recession that effectively began in the third quarter of 2000, and the added shock of 9/11 only months later. By 2004 revenues were again on the increase right through to 2007. This is our seventh tax cuts 800 pound gorilla – the corner of the room is getting very crowded. The stock market also rebounded with the 2007 Dow Industrial Index returning to its high from the peak of the tech bubble in 2000. It was not the miniscule tax cuts in 2001 and 2002 that caused the reduction in revenues. It was the horrible economy left over from the Clinton administration. The poor and declining performance of the economy just could not produce the revenues it had before. In fact, it is obvious that it was the major tax cuts of 2003 that turned around the economy and the revenue problem in 2004. The unemployment rate also turned around with W’s tax cuts, going from another peak of 6.0% in 2003 to a low of 4.6% in 2007. [y995jjp] This included increasing monthly employment totals for the next 45 out of 46 months producing over eight million new jobs. [n8g5cl] The GDP recovered from an annualized quarterly average of 1.4% from the first quarter of 2001 to the second quarter of 2003, to an average of 3.0% from the third quarter of 2003 to the second quarter of 2007. [3zdo7wh]
The truth of it is that what was enacted in 2001 and 2002 were minimal tax rate cuts, along with some tax credits and tax rebates – entirely different animals that have never proved being more than temporarily helpful to an economy, if at all. Credits and rebates are more akin to stimulus spending than tax rate cuts. In 1975 the Ford tax credits failed, in 2007 the Bush tax rebates failed, and in 2009 Barack Obama implemented some minimal tax credits with his stimulus package that have also been erroneously called tax cuts, but were not tax rate cuts, and had no effect on the economy either – more later (Truman did the opposite, so to speak, by implementing temporary tax increases to pay for the Korean War in 1950). The majority of Bush 43’s real tax rate cuts did not begin to take effect until 2003, with a government revenue turnaround the following year.
Let’s do another comparison between the Bill Clinton and George W. Bush years. The average annual capital gains tax rate (based on the average rate for each year) during the Clinton years was 22.35%, which in 2008 inflation adjusted dollars brought in government revenues at an average of $98.5B per year. The average rate under Bush was 17.77%, bringing in an average $91.5B per year. Now remember that Clinton came into office with a rising economy and left Bush a declining economy. Bush also left with a declining economy. Despite these tremendous advantages, the Clinton years only produced 7.65% more in average revenues per year than the Bush years. But here is the real kicker: The average capital gains rate was 41.7% higher under Clinton than under Bush! What happened to the 34.05% difference, American neighbor? Obviously, despite the disadvantages at the beginning and end of the Bush years, the lower rates under Bush were much more efficient in generating revenues than the higher rates under Clinton. Just more evidence that tax cuts increase revenues. [798vgdo]as
• “Deficits don’t matter”
As a bit of an aside, liberals love to pull out of context a quotation of Vice President Dick Cheney where he said, “Deficits don’t matter.” [yq8pnn] Apparently he said this in an argument with then Treasury Secretary Paul O’Neill who had expressed concern over proposed Bush tax cuts causing a deficit. Cheney was obviously saying that deficits do not matter in regard to tax cuts, because tax cuts lead to a rise in government revenue. Cheney used President Reagan’s tax cuts as an example, which, as we have already seen, did indeed correlate with increased revenues, and the Vice President was correct – Bush’s tax cuts did not cause a deficit, but instead correlated with an increase in government revenues. It was all the extra spending that caused the deficits (more later). Incidentally, Paul O’Neill was fired shortly thereafter – deservedly so. Shameful that a Republican Treasury Secretary could be so woefully ignorant of tax and revenue history. Didn’t anybody vet this guy?at
• Revenue growth rates
So let’s see how much revenues increased after the various fixed tax rate changes we have looked at over the last sixty years (I used the following three years from each rate change because of varying schedules in the implementation year, and in some cases, new rate changes or economic events preventing a fair tabulation after the three following years):au
• Graph – U.S. Federal Government Revenue Growth Rates
Are you surprised, American neighbor? I am not. Every contemporary American liberal should examine this chart. (How ironic is it that Jimmy Carter’s unknown tax rate cuts produced the highest revenue increases – LOL!) In the last sixty years government revenues grew faster after all six major fixed tax rate cuts than they did after any of the three major fixed tax rate hikes. Admittedly, the 1950s rate increase is not a great example because of the skewing of the temporary war taxes, but as they say, you play the hand dealt to you. Additionally, there was tax reform in 1969 under Richard Nixon that included both cuts and hikes. This mixed reform produced a paltry 3.6% annual average growth rate in government revenue over the following three years (Nixon should have just stuck was the cuts and nixed the hikes [not intended – I promise!]). The above graph includes Bill Clinton’s tax rate increase that liberals love to lionize as the mother of all tax strategies. Clearly cutting taxes generates more government revenue in the immediate, following years than does increasing taxes. [*c9sdjck] This is easy to understand if you just turn off your scoff reflex, American neighbor. Increase taxes and the marketplace responds negatively, produces less, protects more of its income by utilizing alternate untaxed compensation vehicles, and so generates less tax revenue, but decrease taxes, and the marketplace responds positively, produces more, protects less of its income, and so generates more tax revenue. That is why when President Harding cut taxes and spending in 1921 real surpluses were the result for the next eight years. So, when President Obama insists that the Bush tax rate reductions cost the government lost revenue you now know it is a noble lie, American neighbor. (If you are still having a difficult time understanding why tax cuts hurt the economy, maybe beer can explain it: [obek7wm]) Here is an interesting question: When government revenues fell from 2000 to 2003 were the marginal tax rates closer to Clinton’s 39% or Bush’s final 35% when revenues dramatically reversed? [2f3c277] See for yourself:av
• Graph – U.S. Federal Government Revenue – tax rate comparison
The above percentages represent the top marginal income tax rates that have been the focus of controversy over the last ten plus years. As can be seen, the top marginal rate for 2001 declined by only 11% of the total Bush rate cut. In 2002 it had declined by another 11%, but in 2003, the reduction was the remaining 78% of the total Bush rate cut. So, in effect, for the years 2001 and 2002 the top marginal rate was little changed from Clinton’s 39.6%, and yet we see a decline in government revenues for both years. Was this because of the rate reductions? Hardly – the revenue reductions were a result of the tech bubble bust, crashing financial markets, the recession and following malaise, the Enron, etc. collapses, the non-petroleum trade deficit, and 9/11. The economy was just not producing as well as it had been in prior years. If the revenue reductions were caused by the miniscule tax reductions of 2001 and 2002, then there should have been significantly more revenue reductions after the much larger 2003 tax rate reduction (2003 also included significant capital gains rate cuts). Instead, we see a massive reversal of government revenues in 2004, continuing through 2007. In fact, the Bush tax rate cuts reversed a shrinking of annual revenue into gains 36% higher per year than resulted from when Clinton had originally increased income taxes in 1993. So, when Obama says that America needs to return to the income tax rates of the Clinton years, how can he explain that in the following years from Clinton’s 1993 tax rate increase, revenue growth was much lower than the following years from Bush’s full fixed tax rate decrease of 2003? Again, the liberal claim that Bush’s tax rate cuts wiped out trillions in anticipated revenue is nothing more than a noble lie. Here is more evidence:
Average annualized quarterly GDP rate from 3rd quarter 1997 to 2nd quarter 2000 = 4.7%
Average annualized quarterly GDP rate from 3rd quarter 2000 to 2nd quarter 2003 = 1.4%
Now you explain to me, American neighbor, how President Obama and other liberals expected tax revenues to continue at the same rate with a fall of the GDP growth rate by 70% as a result of the tech bubble bust, along with the plunge of the financial markets for the next three years, the recession, the Enron, Tyco, Worldcom, Arthur Anderson, Global Crossing, Nortel, Rite Aid, Xerox, etc. fiascos, the non-petroleum trade deficit, and 9/11. Notice that this fall of the GDP rate began during the Clinton administration – Bush stepped into a soft economy. By the time Bush had full control of the executive branch at the end of the second quarter of 2001, the growth rate of the economy had already been declining for four straight quarters. Did you get that, American neighbor? For a complete year the economic growth rate had been declining before President Bush ever had the reigns of power. Is it any wonder government revenues went down, American neighbor? Did the reduction have anything to do with Bush’s income tax rate cuts? Obviously not – 78% of Bush’s cuts were not implemented until the end of this revenue and GDP reduction period. By the third quarter of 2003 both government revenues and the GDP began an upswing that developed into an up trend until the housing bubble bust. Those up trends were a result of the massive 2003 Bush tax rate cuts. [3htp3z6]
No, American neighbor, there was nothing magical about Bill Clinton’s higher income tax rates. The calamity of the tech bubble bust and other economic problems overcame any effects of the previous income tax rate increase by Clinton and the decreases of other taxes by the Contract. If in 2003 Bush had stayed with the status quo or had gone back to Clinton’s full marginal rate, as liberals claim would have been best, there is every reason to believe that government revenues would have continued to decline, but, when Bush implemented his full tax rate reductions in 2003, government revenues immediately expanded in 2004 and continued to expand until the housing bubble burst (expanded just as they had after every other major fixed tax rate reduction in the last sixty years, and more so than after Clinton’s tax rate increase). Obama’s proposition to increase taxes back to Bill Clinton’s rates is the least likely method for generating higher revenues or stimulating the economy (and don’t forget that Clinton’s tax rate increase was with an expanding economy of 4.3% annualized GDP growth for 1992, hardly the case today in mid 2011 with a 1st quarter annualized GDP equaling 0.4%, and a 2nd quarter annualized GDP of 1.3%). Every major fixed tax rate cut since the Great Depression has generated higher increases in government revenues than every major fixed tax rate increase. So, the obvious solution for increasing government revenues and reversing the current malaise is to further cut income tax rates and other tax rates.aw
• Whose tax rates would you prefer?
I have a question for you, American neighbor. If we could magically bring back either the JFK tax decrease or the Clinton tax increase, based on the revenue results of the following three years after each, which would you prefer. As we just saw, government revenues increased at a rate of 8.6% per year after the Clinton tax increase. After JFK’s tax cuts government revenues increased at a rate of 10.7% per year, a full 24% higher than during the Clinton years. The Clinton annual GDP rate averaged 3.4%, whereas the JFK GDP average was a robust 5.1% per year, a full 50% higher than Clinton’s. Which one would you prefer, American neighbor? Pretty obvious – huh? In fact, you could substitute any of the other tax cuts for JFK’s and get similar results. Why liberals think that Clinton’s tax rate increase was so great is beyond me. It resulted in less revenues and less GDP growth than any of the major tax cuts in the last sixty years (except for Bush 43’s GDP rate – but remember, Clinton inherited a rapidly rising economy from Bush 41, while leaving Bush 43 a crashing economy, and except Jimmy Carter’s, who also inherited a dismal economy). How about you, American neighbor? Can you get past your scoff reflex and accept the historical reality that tax cuts benefit revenue and economic growth much more so than do tax hikes?
(As an aside, Herbert Hoover’s and FDRHoover’s tax rate increases and subsequent revenue increases do not correlate with our other cuts and increases because of so many unique, mitigating circumstances that skew the results, making direct comparisons impossible. For instance, there were industrial quotas, multiple industry favoritism and protectionism, extremely high import tariffs, new social program taxes and direct government involvement in private sector industry, all policies that are more or less foreign to our other examples. There was also an average 29% non-farm unemployment rate during most of the Dirty Thirties, illustrating the utter failure of these policies – hardly a legitimate trade-off for increased government revenues. I’ll expand on the unique failures of the Dirty Thirties in #11 Austerity Versus Stimulus – What Is the History?.)
I have another question for you, American neighbor. Remember that liberals erroneously think that Bill Clinton produced budget surpluses in the years 1998 to 2000 (dealt with in #3 Groupthink Truths Versus Self-evident Truths). While there were no actual surpluses, the size of the budget deficit did go down each year. Since the Contract tax cuts came about in 1997, how could the budget deficit have gone down for the next three years, if tax cuts cause deficits? Oops…ax
• Spending causes deficits
If tax cuts didn’t cause the deficits, what did? There’s only one other alternative – excessive government expenditures. How can we determine this for a fact? By determining the natural growth factor comprised of inflation plus population growth necessary to maintain the status quo operation of the government from one year to the next, then comparing that to the percentage revenue growth and the percentage debt increase for each period. We’ll look at the following three years from each tax cut:ay
• Table – Surplus Range
Government revenues increased on average over twice as much as did population growth plus inflation following each tax cut. The deficits were small during the JFK and Contract years, corresponding with relatively low spending growth (government expansion). But, following the Carter, Reagan and Bush tax cuts we see giant leaps in the overall debt, indicating massive government expenditures (the latter including significantly ramped up military spending, and in the case of the Reagan tax cuts, a broken promise by congress to cut non-military spending beginning in 1982 – instead the Democrats increased it, and did it again in 1990 to President George H.W. Bush). To maintain the status quo government spending only needed to be increased by the rate of population growth plus inflation, but the status quo is never enough for politicians. They irrationally think that they must expand government every year. Even then, if their spending rate increases after any of these tax cuts had just been kept to between the population growth plus inflation rates and the revenue increase rates, surpluses would have resulted with no need to cut any programs – indeed government would have still expanded. Did you get that, American neighbor? I’ll say it again: Government could have still expanded while producing a surplus at the same time if the spending percentage increase had just been kept between the population growth plus the inflation increase and the revenue increase. This is what I call the surplus range (revenue increase minus the population growth plus inflation). Not only did government expenditures increase each time more than the population growth plus inflation percentages necessary to maintain the status quo, they also increased more than the revenue increase percentages that otherwise could have produced surpluses – within the surplus range. Again we see that tax cuts do not cause deficits – the over spending of excessive government expansion causes deficits. In case you are curious, here are the numbers since Barack Obama has been President (only two years – if you thought Reagan’s numbers were bad, look at these):
2009 & 2010 population growth plus inflation = 2.3% revenue increase = 12.5% debt increase = 35.3%
These two years of numbers are terrifying. Obama’s debt increase has exceeded the value of the surplus range by 350%! (12.5-2.3=10.2, 35.3/10.2=3.5, 3.5×100=350%) Reagan’s increase over three years was only 348% (still bad, but not Obama bad). But, is this really fair, American neighbor? Since Presidents are not dictators let’s make a comparison based on House, Senate and presidential party control. Let’s compare the Democrats two years of 2009 and 2010 to the Republicans of 2005 and 2006:
2005 & 2006 population growth plus inflation = 8.5% revenue increase = 15.9% debt increase = 15.3%
The Republican’s debt increase exceeded the surplus range by a mere 210% (still thoroughly disappointing). (15.9-8.5=7.4, 15.3/7.4=2.1, 2.1×100=210%) However, that makes the Democrat’s 350% excess a 67% increase over the Republican’s amount when each party had respective control of all three branches of government! When it comes to deficit spending Republicans are bad – Democrats are much worse. (This comparison of spending between the two parties based on who controlled each of the House, the Senate and the presidency will be examined in greater detail in #12 Can Governance Indicators Tell You Who Governs Best? Absolutely!) [yfmyqcs, 6n3v86v, 5rzdfor, 38nmoq, 2werbr]az
Now, we have examined the six major tax cuts of the last one hundred years (and one modest one with extenuating circumstances) and found that only once did government revenues temporarily decrease and coincide with an annual deficit for two years (Bush 2001-2002 – but again, these were mostly tax credits and rebates, with minimal tax rate cuts). The decreasing revenue was a result of an ailing economy inherited from the Clinton administration plus an almost 2 trillion-dollar hit on the financial markets from 9/11. [book citation – 9/11 cost – When the Market Moves, Will You Be Ready? – Peter Navarro – Ph.D. economics, Harvard]  The 2003 tax rate cuts overcame the downward momentum of the terrible economy left over from the Clinton administration and the economic shock of 9/11, reversing the GDP, employment numbers, the stock markets and government revenues. So, there are six 800 pound gorillas in the corner of the room, truisms illustrating that tax cuts do not cause deficits. Will you choose the self-interest of what you can see for yourself, or what group-interest demands that you accept, American neighbor?
One last thing. Another way to gauge federal spending is by percentage of GDP. Go back to #3 Groupthink Truths Versus Self-evident Truths, and look again at the various definitions of debt, deficit and surplus and their relationship to government revenue. Not one uses percentage of GDP. The definitions all use total dollar amounts, the same as we have used in this essay. It is only where a percentage of GDP level for total national, state and local government taxation is limited that a percentage of GDP becomes relevant. It has been determined that including all three levels of government, 25% of GDP is the maximum percentage that still allows for maximum economic growth. [*27pxz94] Any more taxation reduces GDP growth. Currently America taxes at about 34% of GDP – leaving a lot of room for tax cuts and improved GDP growth. This also explains why cutting taxes correlates with increased government revenues. Obviously, until one reduces total taxation down to 25% of GDP any tax rate cuts would allow for an increase in GDP, which of course would result with increases of total tax revenue to the government. This is the reason the tax cuts examined above did not cost the government revenue, but actually resulted in increased revenue. At the current rate of 34% of GDP, total taxes could be reduced a whopping 26% from that number without costing government revenues and with the added benefit of an improved economy! This is what you call a win/win scenario, American neighbor.ba
• Deprogramming lessons
The moral of our lesson is that broad-based tax cuts on a national scale do not cause deficits as groupthink liberal paranoia proclaims. As I asserted above, the static pie model view of tax revenues is simple-minded. In fact, tax revenues are dynamic and change with the rate of economic growth. Tax cuts spur growth and revenues as well. Deficits are obviously caused by the only alternative, an increase in government spending that amounts to more than the increased government revenues brought in. See again for yourself here that deficits are a result of out of control spending: [*66vt9hw] At almost any time, following any of the tax cuts discussed, if the increase in government spending had only been held to within the surplus range, real surpluses could have been realized. Unfortunately governments have a nasty habit of increasing spending significantly each year so the debt climbs and climbs and climbs. In fact, it has been found that since World War Two for every dollar of inbound tax there has been $1.17 of outgoing spending. There is your problem, American neighbor. It is not that there is not enough coming in – it is that there is too much going out. Always remember this:
~ “Politicians will always spend every penny of tax raised and whatever else they can get away with.”~ Milton Friedman [22tjyw8]
Alpha liberals put out the noble lie that tax cuts caused deficits during the tremendous economic success of the Reagan administration (you didn’t think it was in reaction to JFK’s tax cuts, did you?). This was a mother robin strategy to divert from the fact that massive increases in congressional spending were the real cause of those deficits, and to blunt the credit Reagan was legitimately receiving for the recovering economy. Beta liberals adopted this groupthink mantra and from then on liberals in general simply presume that tax cuts cause a reduction in government revenue. This is a prime example of the liberal principle: Contemporary liberals embrace the strategy of the noble lie. Our little study also proves the accuracy of this liberal principle as well: Self-interest and critical thinking are enemies of contemporary liberal groupthink. And have you noticed your scoff reflex having been tested over and over? Contemporary liberalism relies on a programmed, instinct-like scoff reflex to preserve itself from the consequences of critical thinking.
So what are your answers to our MCTE questions now, American neighbor? I asked if tax cuts or hikes led to higher government revenues. Now we know that the correct answer is tax cuts. I also asked for periods of tax cuts and tax hikes that led to a lower national debt. Since the year 1900 the only time that the national debt has gone down consistently year after year is after the tax cuts of the Roaring Twenties (more in #11 Austerity Versus Stimulus – What Is the History?). So which do you think adds more liberty for Americans to direct their own lives, tax cuts or tax hikes? Well, obviously, if more money is left in each American’s bank account, and the government benefits with more revenues, tax cuts most certainly produce more liberty for each American to direct his own life.
I know this is a tough one for you, American neighbor. Tax cuts causing deficits is one those foundational liberal doctrines, like the mythical Clinton surpluses. I realize it is a real double kick in the chest for you, but if you can get over these, you will be able to handle almost everything to come. Take some time, then gather yourself up, and in #9 Liberals Are the Compassionate Ones – Really?, we’ll explore so-called liberal compassion.bb
• Deprogramming exercise
Federal deficits and debt are crushing the American economy, American neighbor. As we saw, raising tax rates under Bush 41 and Clinton generated less revenue growth in the following years than did cutting tax rates under JFK, Carter, Reagan, the Contract and Bush 43. We also saw that before the Reagan and Bush 43 tax rate cuts government revenues were falling, so leaving the rates unchanged would have led to less revenues than those generated by the cuts. Indeed, it is apparent that the tax rate cuts reversed the problem of falling revenues. It is time for you to speak out against adding more to the debt. Tell the politicians in Washington to emulate the most economically successful presidents in history, Warren Harding and Calvin Coolidge. Tell them to stop playing stupid, pretending that FDRHoover was some sort economic genius for prolonging the Great Depression for over twelve years with his massive spending, turning the thirties decade into what should only be spit out of the mouth as the Dirty Thirties. Tell them to drastically reduce spending, cut the size of government, lower taxes and cut regulation so the economy can recover and people can have jobs. Start phoning and emailing, American neighbor.
Again, analysis trumps ideology, American neighbor. And again, self-interest trumps groupthink. The choice to direct your own life includes the choice to think as you choose, not as others choose for you through their presumptions. It is the choice of analysis of the results of tax cuts over the irrationality of liberal presumptions about deficits based on demagoguery. Your choice of analysis over ideology is commendable, American neighbor. It also again reveals that at your core you are not a liberal. Here is a summation of some of the points made above with some good research links if you wish to explore more about tax cuts: [*6s4pu8b] And here are some interesting videos for your entertainment – choose at will, but definitely check out the GPA ones: [*3pkkkux]
• Humor, sort-of
Riddle me this, American neighbor: What is the difference between California voters and the passengers on the Titanic? Answer: The passengers on the Titanic didn’t vote to hit the iceberg. [*2c6eth5, *8mqmqcl, *cwptkdk, *nd3u7a2]
What was the difference between the voters of the Dirty Thirties and the passengers on the Titanic? Again, the passengers on the Titanic didn’t vote to hit the iceberg.
What was the difference between the misery of the Dirty Thirties and the prosperity of the Roaring Twenties? Everything! (Much more in #11 Austerity Versus Stimulus – What Is the History?.)