By Annie Lowrey
Posted Friday, June 24, 2011, at 5:18 PM
Since even before Arthur Laffer drew his
curve on a napkin, Republicans and
Democrats have been having the same
fight about taxes and growth. Republican
politicians insist that tax cuts “pay for
themselves,” increasing receipts by
goosing economic growth. Democrats and
virtually all economists say they’re
wrong. Today, this very dispute animates
the showdown between Republicans and
Democrats over whether to include any
tax increases in the long-term plan to
reduce the deficit. But there are a few
cases where tax cuts have arguably
raised receipts. These cases are
instructive, as they are so specific and so
Let’s look at three. First, back in the
1920s, Treasury Secretary Andrew Mellon
pushed Congress to enact a series of tax
cuts. The U.S. dropped the top marginal
income-tax rate from 73 percent to 25
percent. Tax receipts from the wealthiest
Americans rose. According to Treasury
data, income taxes paid by Americans
making more than $100,000 per year
increased from $302 million to $714
million between 1922 and 1928, with the
rich’s share of income taxes paid rising
from 35 to 61 percent.
Second, Kennedy-era income tax cuts
brought the top marginal rate from an
eye-watering 91 percent down to a still-
eye-watering 70 percent in 1964. The
wealthiest earners paid more tax after
the tax cut, some say, even though the
rate dropped 21 percentage points. An a
nalysis by Laffer showed, for instance,
that in 1965 people making more than $100,000 a year paid $3.76 billion in taxes, versus the $2.1 billion forecast under the higher rate. A few economists say that Ronald Reagan’s income-tax cuts, which dropped the top bracket’s rate to 50 percent, had a similar effect. Berkeley economist Brad DeLong, for instance, writes, “Arthur Laffer is probably right at the top end: reducing the top tax rate from 70 percent to 50 percent is probably a revenue gainer and surely not much of a loser.”
Third, we look abroad. In the 1990s, Ireland’s parliament enacted legislation that took certain corporate income tax rates down to 12.5 percent, one of the lowest rates on earth. Receipts climbed. The country, in its “Celtic Tiger” boom period, rapidly became richer. Corporate tax revenues jumped from less than 2 percent of GDP to more than 3 percent of GDP.
In all three cases, the tax cuts likely helped to increase tax receipts. How do lower taxes raise the amount the government takes in? Three answers are commonly given. First, tax cuts encourage businesses and individuals to be more honest about their earnings. Rather than hiding income, taxpayers just fess up and pay their share. Second, lower taxes encourage businesses and individuals to move money from lower-productivity, tax-free investments and shelters to more productive, taxable investments. Third, most importantly, perhaps, tax cuts goose growth. The government might be taking a smaller piece of the pie, but the tax cuts make the pie bigger. (In Ireland’s case, of course, there’s a fourth: The country became a kind of tax haven.)
The problem, according to most economists, is that Republicans now apply that dogma to all taxes, in all situations, even though there are few times when tax cuts actually pay for themselves. And even the case studies that do argue for supply-side economics are more ambiguous than they seem at first blush.
Both the Kennedy and Mellon tax-cut packages actually lowered overall revenue, relative to a baseline where the tax cuts did not happen. They just increased some receipts from richer families. Take a Congressional Budget Office analysis of the Kennedy-era cuts. No studies “showed that the increased economic activity generated by the tax cut raised revenues and lowered countercyclical transfer payments enough to make the tax-rate reductions self-financing,” it wrote in 1978. “Instead, the models showed a net increase in the federal deficit, after three years, of $5 billion to $13 billion,” versus models where the tax cuts never took effect. Shorthand: The tax cuts did pay for themselves a little bit by inducing growth, but not nearly enough to pay for themselves entirely.
Moreover, economists stress that tax cuts (and increases, for that matter) hardly work in a vacuum to bring about changes in receipts. Income-tax payments tend to naturally increase year-on-year because of population growth, GDP growth, and inflation. Monetary policy, government spending, and the business cycle also have a major impact. Thus, showing causation becomes a tricky exercise when it comes to taxes. Receipts often climb after tax cuts, but not necessarily because of them.
The Irish case also offers little support for the idea that tax cuts always pay for themselves by goosing growth. The cut in the corporate tax rate did not aid Irish companies’ bottom lines so much as it attracted extraordinary amounts of foreign capital. International firms like Pfizer relocated their European headquarters to the country to take advantage of the low tax rates. All those new companies contributed to an expanded corporate tax base. (Now, Ireland, suffering from crippling debts, is scared to raise the tax rate, which might encourage the companies to leave.)
In short, those who say that every tax cut pays for itself are simply wrong. President Bush, for instance, insisted, “You cut taxes, and the tax revenues increase.” GOP presidential hopeful Tim Pawlenty thinks the same (but adds a wan caveat): “As people look back to the historical examples, there’s been other chapters where tax cuts have been enacted, and almost always they raise revenues if you just isolate the effect of the tax cuts.” Sorry, governor. A few examples hardly prove the rule.
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Do Tax Cuts Ever Increase Government Revenues?
Three historical examples of tax cuts paying for themselves, and how they undercut the
GOP claim that tax cuts always do that.
The Constitution’s framers were flawed like today’s politicians, so it’s high time we stop embalming them in infallibility.
He may have written the Declaration of Independence, but were he around today Thomas Jefferson wouldn’t have a prayer of winning the Republican nomination, much less the presidency. It wouldn’t be his liaison with the teenage daughter of one of his slaves nor the love children she bore him that would be the stumbling block. Nor would it be Jefferson’s suspicious possession of an English translation of the Quran that might doom him to fail the Newt Gingrich loyalty test. No, it would be the Jesus problem that would do him in. For Thomas Jefferson denied that Jesus was the son of God. Worse, he refused to believe that Jesus ever made any claim that he was. While he was at it, Jefferson also rejected as self-evidently absurd the Trinity, the Virgin Birth, and the Resurrection.
Jefferson was not, as his enemies in the election of 1800 claimed, an atheist. He believed in the Creator whom he invoked in the Declaration of Independence and whom he thought had brought the natural universe into being. By his own lights he thought himself a true Christian, an admirer of the moral teachings of the Nazarene. It had been, he argued, generations of the clergy who had perverted the simple humanity of Jesus the reformer, turned him into a messiah, and invented the myth that he had died to redeem mankind’s sins.
All of which would surely mean that, notwithstanding his passion for minimal government, the Sage of Monticello would have no chance at all beside True Believers like Michele Bachmann. But Jefferson’s rationalist deism is not the idle makeover of liberal wishful thinking. It is incontrovertible historical fact, as is his absolute determination never to admit religion into any institutions of the public realm.
So the philosopher-president whose aversion to overbearing government makes him a Tea Party patriarch was also a man who thought the Immaculate Conception a fable. But then real history is like that—full of knotty contradictions, its cast list of heroes, especially American heroes, majestic in their complicated imperfections.
Take another of the Founders routinely canonized in the current fairy-tale version of American origins that passes muster for history by those who don’t actually read very much of it: Alexander Hamilton. Outed by the Andrew Breitbart of his day, James Thomson Callender, for having had an “amorous connection” with the married Maria Reynolds, Hamilton responded by making an unapologetic preemptive confession—insisting that since on the truly serious issue of whether he had profited from the management of public finances he was innocent, the rest was nobody’s business but his own. Callender retorted that Hamilton had owned up to the sexual impropriety as a cover for the more serious financial one.
True history is the enemy of reverence. We do the authors of American independence no favors by embalming them in infallibility, by treating the Constitution like a quasi-biblical revelation instead of the product of contention and cobbled-together compromise that it actually was. Even the collective noun “Founding -Fathers” planes smooth the unreconciled divisiveness of their bitter and acrimonious disputes. History is a book of chastening wisdom to which we ought to be looking to deepen our understanding of the legitimate nature of American government—including its revenue-raising power, an issue that deeply captivated the antagonized minds of that first generation. But unfortunately, there is little evidence of citizens engaging in close, critical reading of The Federalist Papers, of the debates surrounding constitutional ratification, or of the dispute that pitted Hamilton and James Madison against Patrick Henry over what was at stake in Congress’s authority to make laws “necessary and proper for carrying into Execution the…Powers vested by this Constitution in the Government of the United States.”
Instead of knowledge, we have tricorn hats. Staring at a copy of the Constitution in the National Archives and making promotional pilgrimages to revolutionary New England didn’t prevent Sarah Palin from butchering the truth of Paul Revere’s ride, turning it into some sort of NRA advisory to the British to keep their gosh-darned hands off American firearms.
Facts, as John Adams insisted when defending British redcoats after the Boston Massacre, “are stubborn things.” He would be horrified by the regularity with which American history is mangled in the interests of confirming prejudices. It matters when Glenn Beck’s guest Andrew Napolitano pins the responsibility for the 17th Amendment, instituting direct election of senators, on a Wilsonian plot against American liberties, rather than the proposal of a Republican senator in 1911 that was approved by Congress before Wilson ever set foot in the White House. It matters when Bachmann mischaracterizes the Founding Fathers as working “tirelessly until slavery was no more in the United States.” What made the Constitution acceptable throughout the Union was a Faustian bargain that counted slaves as three fifths of a citizen, thus artificially bloating the political representation of the slaveholding South.
With adult history buffs so deluded about the reality of the American past, it’s even more alarming that the National Assessment of Educational Progress recently rated history as the subject at which students are least proficient. This wouldn’t matter if history were just some recreational stroll down memory lane. But it isn’t. In the fiery debates of Americans long dead can be discerned the lineaments of the same core issues that divide us today. Right now, the education that might inform such a debate has turned into a schoolyard shouting match.
As the electioneering rises to a din, those who dare to read history for its chastening wisdom will be fatuously accused of “declinism.” But it is those who reduce history’s hard and honest reckonings to exceptionalist chest-thumping who will be the true agents of degeneration. As one of Jefferson’s favorite books, Gibbon’s Decline and Fall of the Roman Empire, so luminously argued, there is no surer sign of a country’s cultural and political decay than an obtuse blindness to its unmistakable beginnings.
Schama, a professor of history at Columbia University, debuts as a NEWSWEEK/DAILY BEAST contributor in this issue.
Books: The Historical Founders
Revolutionaries: A New History of the Invention of America by Jack Rakove.
Compulsive and compulsory reading on the Revolution and forging of the Constitution.
Defiance of the Patriots: The Boston Tea Party & the Making of America by Benjamin L. Carp.
A wise and illuminating study of the original tea party.
American Scripture: Making the Declaration of Independence by Pauline Maier.
The definitive book, and a thrilling read, on the writing of the Declaration.
The Federalist Papers. The priceless document of two mighty intellects, Alexander Hamilton and James Madison, united in common cause of creating an enduring American government.