The Myth of Tax Cuts Equating to Increased Tax Revenue

During a discussion with a conservative friend of mine the inevitable subject of tax cuts came up. When I pointed out the mathematical absurdity that reducing revenue could increase revenue my friend responded with, “it worked for Kennedy, Reagan and Bush.” He explained to this simple mind that by reducing taxes, especially taxes on the wealthy, more money can be invested in business and in hiring, thus increasing income and increasing revenue. I have to admit, it sure sounds like a sound argument. Sound, that is until you look at the actual facts, and find that they do not support the hypothesis.

I spent a little time researching historical data on tax revenue. I found that the Office of Management and Budget offered a fine table in current dollars and 2005 dollars. I chose the 2005 dollar values as being a happy median. I then graphed the results. I also included information on debt, again in 2005 dollar values. As you can see, revenues increased steadily except for the famous (or rather infamous) Tea Party holy years: Ronald Reagan’s vaunted tax bill in 1981 and George W. Bush’s touted tax cut for the wealthy in 2001.

During these years we also witness a sharp increase in the deficit. My friend explained the deficits away with military spending. Reagan increased military spending, thus increasing his record deficit spending. Hmm…not hardly. It wasn’t until 1987 when Reagan’s military budget reached its peak at $428 Billion, a $110 Billion increase in spending. This does not explain almost $500 Billion in deficits. Of course, George Bush had two wars to fight, so of course his deficits will increase. Again, not hardly. Afghanistan was not invaded until late 2001, by which time revenues were already in deadfall and the deficit was on its way to reaching Reagan era levels. Iraq didn’t happen until 2003, by which time revenues were about to level off and the deficit was falling due largely to an artificially lucrative housing market.

It’s clear that cutting taxes, especially on the wealthy, simply does nothing to increase overall tax revenues. I can also argue that it does nothing to help the economy either, but it’s pushing eleven o’clock and I’m too tired to make another chart.

What I did find interesting was that revenues during the Reagan era did appear to increase at first. Indeed, based on this data I thought my friend might be right and I would have to eat a whole plate of crow. So I looked deeper. I knew that Reagan had ultimately raised taxes as predicted by Walter Mondale (the poster child for why politicians simply can’t afford to tell the truth during campaigns). What I didn’t realize is just how many times the Gipper raised taxes. If one were to listen to the Tea Partiers one would think that Reagan was the paragon of tax cutting virtue. In fact he raised taxes four times in his first term. His 1982 Tax Equity and Fiscal Responsibility Act is the largest tax increase in history as measured against GDP, and his 1986 Tax Reform Act cut taxes on individual income but, GASP! was one of the largest tax increases on corporations in history. That Commie!

So I designated the most significant tax increases with little orange dots. Most significantly, the Clinton tax increase stands out as the ultimate example of raising revenue and decreasing deficits. Between the Reagan and Clinton tax increases, increases that took place during a recession I might add, 40 million jobs were created.

Sorry, my friend, your thesis about cutting taxes just doesn’t hold water. For ten years America’s wealthiest Americans have benefited from the lowest marginal tax rates in about a hundred years, lax enforcement of the few regulations that remained after twenty years of neo-liberalism, and a virtual beehive of holes in the tax code by which they could wiggle through. In return they’ve squandered their largesse on hedge funds and derivative schemes, perfectly legal thanks to free market politics, off-shored their profits and shipped manufacturing overseas. All of this while working Americans have increased their productivity despite stagnant wages. It’s time for the top 2% to give back to the society from which they have prospered.