Tax Cuts: The B.S. and the Facts

The Myth

Do tax cuts stimulate the economy?

Yes. Tax cuts allow people to keep more of their own money. Therefore, they have more to invest and spend into the economy, and they have more money to start business and create jobs, therefore also helping to stimulate the economy. -- Yahoo Answers

I think when people take a look back at this moment in our economic history, they'll recognize tax cuts work. They have made a difference. -- George W. Bush

The Realities

The brute facts are these:

• Large income tax cuts are followed by a bubble and then a crash.
• High income taxes correlate with economic growth.
• Income tax increases are followed by economic growth.
• Moderate income tax cuts are followed by a flat economy.
• All of this is especially true as applied to the top tax rates, the amount paid on income that exceeds the highest bracket.

The Three Great Tax Cuts: Boom, Bubble, Crash

1. Hoover

During World War I, the top marginal tax rate went up to 73 percent -- not the highest ever, but pretty high.

In 1922, a series of rate cuts began. Down to 56 percent, 46 percent, and finally, in 1925, it went down to 25 percent.

The stock market took off. There was a boom. But the boom was a bubble.

It was followed by the Great Crash of 1929.

There were bank failures and the Great Depression.

2. Reagan

From Franklin Roosevelt's second term all the way through to Jimmy Carter -- from 1936 until 1982 -- the top rate was in the 70 to 92 percent range.

Then along came Reagan in 1981. In 1982, he cut that down to 50 percent.

The economy went into "the worst recession since the Great Depression."

His supporters argued that it was all Carter's fault and that the new policies would take time to work. The tax cuts stayed in place. In 1987, there was another round of tax cuts. They took the top rate down to 38.5 percent. It would stimulate the economy!

There was a boom. But it was a bubble.

Then, in October 1987, there was a crash -- the worst since '29. It was called Black Monday.

Much of the bubble money had gone into -- ohmigod! -- real estate.

Suddenly there were bank failures! More than during the Great Depression. There was a Savings & Loan crisis! There had to be a bailout.

3. Bush II

George Bush came into office with the healthiest, post powerful economy in American history.

He immediately cut taxes. The top marginal rate went down from 39 percent to 35 percent. He also cut capital gains taxes and inheritance taxes. A recession immediately ensued. But he persisted.

Eventually, the economy began to grow.

Employment didn't grow very much. Median income went down. The stock market was pretty flat. But the financial sector -- and only the sector -- grew.

Which should have made it obvious to someone, that it was … a bubble.

There was a crash.

Bank failures. A bailout.

The three worst economic disasters in American history follow the exact same pattern: tax cuts, boom, bubble, crash.

High Taxes Correlate with Strong Economic Growth

The four periods of greatest economic growth in American history, by pretty much any measure, are:

• World War II (1941-45): top tax rate varied from 88 to 94 percent
• Post-war under Truman and Eisenhower: top rate bounced around from 81 to 92 percent
• Clinton years: Clinton raised Bush's top rate of 31 percent to 37 percent and then to 39 percent
• First two Roosevelt administrations (1933-40). When Roosevelt came into office, Hoover had already raised the tax rate in 1932 from 25 percent to 63 percent. Roosevelt raised it again in 1936 to 79 percent.

A lot of ink, sweat and ranting have gone into proving that the New Deal did not end the Great Depression. Nonetheless, the economy grew 58 percent from the time Roosevelt came into office and when the United States entered the war.

Some of that anti-New Deal rhetoric also claims that the recovery began under Hoover. Perhaps, but to say so is also to say that it began with tax hikes.