Soak the Rich Through Tax Cuts !!!!

[MORTARDUDE]

JFK had the right idea and it worked !!!!



Soak the Rich Through Tax Cuts


The pro?tax lobby continues to skewer George W. Bush's tax scheme by insisting that it would help only the wealthiest 1 percent of Americans. Bush has tended to retreat when his tax plan comes under attack. He shouldn't. History is solidly on his side when he proposes to cut income tax rates to keep this economic expansion going. History also teaches us that tax rate cuts often raise overall tax collections and the tax share paid by the very rich.

And with the stock market continuing to slide and the 80 million American investors getting fidgety about their disappearing savings, Bush should emphasize another tax cutting lesson from history: supply?side tax cuts tend to initiate bull market rallies and eruptions of new wealth.

In the 20th century in the US there were three episodes of significant tax rate reductions. These reductions occurred in the 1920s under Presidents Warren Harding and Calvin Coolidge; in the 1960s under President John F. Kennedy, and in the 1980s under President Ronald Reagan. In each case, the tax cuts were predicted to reduce revenues and benefit the affluent (just as Gore charges today), but instead, federal revenues increased after the tax rates were cut ? especially taxes paid by the top 1 percent of taxpayers.

The Harding?Coolidge tax rate reductions brought the top income tax rate down in stages from the wartime high of 73 percent in 1921 to 25 percent in 1925. This was a very large and unprecedented reduction in rates on the wealthy. Coolidge confidently predicted that his plan "would actually yield more revenues to the government if the basis of taxation were revised downward."

He was right. Between 1923 and 1928 real tax collections nearly doubled as the economy surged. The rest of the world languished as most other nations kept their World War I tax regime in place. As America's tax rates were chopped by almost two?thirds, the share of taxes paid by those earning over $50,000 (the rich back then), rose from 44 percent in 1921 when the rate was 73 percent to 78 percent in 1925 when their rate was 25 percent. No tax increase in world history ever pried that much tax out of the wealthy.

John F. Kennedy's tax cuts had the same salutary effects. "It is a paradoxical truth," Kennedy proclaimed in the 1962 commencement address at Yale to try to sell his tax cut program, "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 tax rates." JFK's tax plan cut the top tax rate from 91 to 70 percent.

Here's what happened, as described in a 1966 article in the US News and World Report. "Tax collections are beginning to astonish even those who pushed hardest for tax cuts in the first place." Indeed, after the tax cuts took effect, income tax collections rose by more than 50 percent from 1963 to 1968. Even more shocking was the impact on the distribution of taxes paid. Americans earning over $50,000 per year (the equivalent of almost $200,000 today) increased their share of taxes paid from 12 percent of the total in 1963 to almost 15 percent in 1966.

In 1981 Ronald Reagan proposed and signed into law a 30 percent across?the?board tax?rate reduction plan that was modelled after JFK's successful tax cut 20 years earlier. It produced the very same positive results. Tax revenues grew by $52 billion per year in the 1980s with tax cuts, versus just $35 billion per year after tax increases in the 1970s.

And once again, despite lower tax rates, the rich paid a larger share of the total. In fact, the top 1 percent paid 17.6 percent of all taxes when the top rate was 70 percent in 1981, but 27.5 percent in 1988 when the rate hit its low of 28 percent. The super?rich, the top 0.1 percent of income earners saw their share of income taxes paid double from 7 percent to 14 percent.

The Reagan tax cuts did not cause the budget deficits of the 1980s. Here's why from 1980 through 1990 federal tax receipts doubled from $517 to $1,035 billion. This was a 7 percent annual growth rate in tax revenues. As David Rosenbaum reported in the New York Times in 1992: "One popular misconception is that the Republican tax cuts caused the crippling federal budget deficit now approaching $300 billion a year. The fact is, the large deficit resulted because the government vastly expanded what it spent each year..."

Now it is true that George Bush and Bill Clinton raised top marginal tax rates from 28 to 39.6 percent in the 1990s. It is also true that this would seem to contradict the notion that increasing tax rates is economically harmful. Income tax revenues have increased enormously in recent years. We ourselves were strong critics of Clinton's tax hike and predicted that it would hurt the economy more than the temporary economic slowdown that it caused in 1993 and 1994. But the adverse impact of the tax hikes was more than neutralized by the positive effects of declining inflation rates, the passage of huge tax cuts on trade (NAFTA and GATT), and a supply?side capital gains tax cut. Economist Larry Kudlow of ING Barings has found that thanks to the retreat in inflation, real tax rates were not much higher at all.

The most vivid example of the curve in action is the story with capital gains taxes. In 1997, the capital gains tax rate was slashed from 28 to 20 percent. Since then, capital gains revenues have exploded. In 1996, the last year with the 28 percent rate, the government collected $62 billion in capital gains receipts. In 1999, the government took in an estimated $110 billion in receipts.

Seldom in economics does real life so conveniently confirm economic theory as this example. Lower tax rates change people's economic behaviour, stimulate economic growth, and thus often create more, not less tax revenue.

What is striking is that all of the critics of the 1997 capital gains cut and the Reagan tax cuts in 1981 ? the very same crowd of sceptics who have been proven wrong twice now ? continue to crusade with their discredited class warfare rhetoric against the Bush tax cut plan. Al Gore's charge that the top 1 percent get 50 percent of the tax cut comes from the union?funded Citizens for Tax Justice. Guess what? That outfit predicted that the 1997 capital gains cut would lose billions of dollars to the federal treasury when, in fact, it will have gained $100 billion in collections since 1997.

The Bush tax plan would probably not have these dramatic effects on increased tax collections. The supply side effects of cutting income tax rates when they are in the 70 to 90 percent range is much more pronounced than when they are in the 40 percent range, as they are today. But the case for lowering tax rates today is that we now live in an era of instantly mobile global capital markets. The major economic impact of eliminating our death tax and lowering our income tax rates will be to inspire a continued surge in foreign capital investment in the US. This capital infusion translates directly into more jobs and higher productivity for US workers and not just for the richest 1 percent. Al Gore may not understand this modern economic reality, but the leaders of other nations do. In recent months, Japan, Germany, and France have all cut their tax rates to gain ground on the US.

History proves that tax cuts are an effective antidote to economic slowdowns. The opponents of tax cuts are simply waging a war of greed and envy. That's no way to run US economic policy.