Stimulus: President Obama, a smart man, says that tax cuts for the wealthy are the main reason we're now in such economic trouble. Someone needs to tell him how utterly - and dangerously - wrong that is.
"We have tried that strategy time and time again," the president said Monday of "tax cuts for the wealthiest few Americans," and "it's only helped lead us to the crisis we face right now."
Well, he's half-right: We have tried it again and again. But rather than create crises, economic growth has been restored. The evidence is pretty much beyond dispute. Since World War I - the start of the modern financial era - we've suffered four major downturns. In three of them, the government cut tax rates. And each time an economic boom ensued. In only one did the government respond by raising taxes, erecting trade barriers and enacting massive new spending programs to get out of the slump. Today, we call that time the Great Depression.
As noted in a recent study by UCLA economists Harold Cole and Lee Ohanian, President Roosevelt's efforts at government direction of the economy likely extended the Depression by seven years. As history shows, lower taxes, not more government, work best:
The 1920s: When the income tax was established in 1913, the rate was 7%. But it quickly soared, especially for the rich, and by 1918 the top rate was 77%. Unfortunately, coming out of the war the economy was a mess, with prices falling, unemployment soaring and nominal GDP dropping by more than 15% in just one year. From 1921 to 1925, under Presidents Harding and Coolidge, tax rates were slashed to 25%, and GDP rose at an annual rate of 3.4% in the four years after the tax cuts vs. 2% before. All told, GDP swelled more than 50% during the 1920s.
All this was undone, however, on a bipartisan basis - first by President Hoover, a Republican, then by the Democrat FDR. Hoover boosted the top income tax rate to 63%. Then, FDR took it to 79%, while also doubling the corporate tax to 24%, imposing a Social Security tax of 2% and raising taxes on stocks and dividends, estates, and "excess" profits. Is it any wonder the economy went nowhere in the 1930s?
The 1960s: President Kennedy, a Democrat, believed strongly that lower taxes meant higher growth, and he was soon proven right. Before he was assassinated, JFK proposed cutting top tax rates from a punitive 91% to 70%. In 1965, his cuts were enacted under President Johnson by a Democratic Congress. Once again, growth took off, along with private investment. Real GNP, which averaged just 2.4% from 1952 to 1960, expanded at 4.5% during the '60s. The expansion that began in 1961 and ended in 1970 was, at the time, the longest ever.
The 1980s: President Reagan took over an economy with a 21% prime interest rate, double-digit unemployment and inflation, slowing productivity and flagging economic growth. But he too was a big tax cutter. His 25% across-the-board rate cuts snapped the economy out of its funk, creating the longest peacetime expansion ever at the time. During Reagan's two terms real GDP growth averaged 3.2% compared with 2.8% in the preceding eight years. After stagnating through most of the 1970s, real median family income grew $4,000 under Reagan. Investment boomed, as did the stock market, business creation and innovation. Some 20 million new jobs were created, due to the increased incentives to work, save and invest resulting from lower tax rates.
We all want our new president to succeed. But to do so, he needs to drop the class-warfare rhetoric on taxes and cut them instead. Like Coolidge. Like Kennedy. Like Reagan.
Posted by John Ray. For a daily critique of Leftist activities, see DISSECTING LEFTISM. For a daily survey of Australian politics, see AUSTRALIAN POLITICS Also, don't forget your daily roundup of pro-environment but anti-Greenie news and commentary at GREENIE WATCH . Email me (John Ray) here