Category Archives: Ronald Reagan

Dan Mitchell article: Is the Economy a Fixed Pie or Growing Pie?

Is the Economy a Fixed Pie or Growing Pie?

A few days ago, I shared a clip about capitalism and big business from a recent speech in Poland. Here’s something else I said, in this case about whether free markets can produce more prosperity for everyone.

The answer, of course, is that capitalist societies have produced mass prosperity. Yes, some people have become astoundingly rich, but the rest of us became much better off as well.

In other words, Walter Williams was right.

In a free market, you only get rich by serving the needs of others.

As I mentioned in the video, many of our friends on the left instinctively reject the idea of a growing pie. They genuinely seem to think that one person’s success means another person’s failure. And this flawed thinking seems to be a big problem with young people.

So let’s revisit the data.

We’ll start with this chart from Our World in Data at Oxford University. As you can see, mass poverty was the norm until capitalism appeared on the scene a couple of hundred years ago.

What about if we look at more recent data.

Here’s another chart from the folks at Oxford, this time looking at the past 200 years. Lo and behold, we see how living standards began to skyrocket as capitalism took hold.

As you can see, living standard rose the most in nations with more economic freedom.

I’ll close with a final chart to debunk the notion that progress has somehow ground to a halt in modern times.

And since most of my readers are in the United States, we’ll look just at what’s happened in post-war America.

Some people point out that growth rates have declined the past two decades.

But that’s not an indictment of capitalism. Every president this century has expanded the size and scope of government. So it is hardly a surprise that the economy is slowing down.

The obvious lesson is that we need a return to the recipe that generates prosperity.

P.S. There is no such thing as a laissez-faire paradise. Even Switzerland has some bad policies, as does Singapore. And the United States may be capitalist compared to the average nation, but we have many bad policies today (and we had some bad policies in the past).

And when there are bad policies such as cronyism, it is possible for people to get rich dishonorably. Those are the people who do hurt the rest of us. The right response, of course, is to get rid of the bad policies, not to condemn all rich people or to condemn the system that allows all of us to enjoy mass prosperity.

P.P.S. Just as one person’s success does not mean another person’s failure, the same is true for nations.

Thatcher, Lawson, and Pro-Growth Tax Policy

As documented in Commanding Heights: The Battle of Ideas, Margaret Thatcher and Ronald Reagansaved their nations from economic malaise and decline.

Today, let’s focus on what happened in the United Kingdom.

Economic liberty greatly increased during the Thatcher years.

She deserves the lion’s share of the credit for the U.K.’s economic rebirth and renaissance, but she also had the wisdom to appoint some very principled and very capable people to her cabinet.

Such as Nigel Lawson, who served as her Chancellor of the Exchequer (akin to a combined Treasury Secretary/OMB Director in the U.S.).

Lawson died last week, leading to many tributes to his role is resuscitating the U.K. economy.

The Wall Street Journal‘s editorial summarized his achievements.

…our problems are solvable, as they were a half century ago. One of those crucial problem solvers was British politician Nigel Lawson, who died this week at age 91. …the 1970s…was even more miserable in the United Kingdom than it was in the U.S. By the time Margaret Thatcher led the Tories into office in May 1979, inflation was raging and the country had been wracked by strikes in its “winter of discontent”… Lawson entered Thatcher’s administration… He made his historic mark as Chancellor of the Exchequer starting in 1983. He’s best known for his tax reforms, which reduced the top personal income-tax rate to 40% from 60% and brought the top corporate rate to 35% from a 1970s high of 52%. He also was a steward of the Thatcher administration’s privatizations of large state-owned firms and the “Big Bang” financial reforms that would transform London into a global financial center.

In a column for CapX, Madsen Pirie examines Lawson’s work.

Nigel Lawson left a huge legacy. Under his stewardship Britain went from being the sick man of Europe into becoming an economic powerhouse and one of the world’s leading economies. He is regarded by many as the finest Chancellor of the 20th century… Lord Lawson held the firm conviction that lower taxes created space for enterprise and opportunity, and made it his policy that in every Budget he would lower the burden of taxation and abolish at least one tax.…During his tenure, Britain was transformed from being an economy in which most major businesses and services were owned and run by the state, into one in which they became private businesses, paying taxes instead of receiving taxpayer subsidies. Failing and outdated state enterprises became modern, successful private ones. …His 1988 Budget…announced that all taxes above 40% would be abolished, and that the basic rate would be cut to 25%, its lowest for 50 years… Within a very short time, more money was coming into the Treasury from the lower rates than it had been taking in from the higher ones. It was a vindication of the Laffer Curve. …The top 10% of earners had been paying 35% of the total income tax take. Under Lawson’s lower rate that went up to 48%. In rough terms this meant that the top 10% went from paying just over a third to just under a half of total income taxes.

In other words, the lower tax rates in the U.K. had the same positive impact as the lower tax rates in the U.S., both in terms of encouraging growth and confirming the Laffer Curve.

But let’s not forget that there also was spending restraint during the Thatcher years, particularly when Lawson was Chancellor of the Exchequer.

Just like we got spending restraint during the Reagan years.

The moral of the story is that it’s great to have good leaders, and it’s great when those leaders appoint good people.

P.S. If you want the U.S. equivalent of Nigel Lawson, the best historical example would be Andrew Mellon.

The Big Question for Tories (and Republicans): What’s the Alternative to “Free-Market Fundamentalism”?

Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation.What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell “Good folks on the left (and every other part of the spectrum) push for equality of opportunity. And what’s great about that approach is that more opportunity for one person does not require less opportunity for another person!”

Class Warfare and Utility Pricing

Good folks on the left (and every other part of the spectrum) push for equality of opportunity. And what’s great about that approach is that more opportunity for one person does not require less opportunity for another person.

Bad folks on the left push for equality of outcomes. And that’s unfortunate because an agenda of coerced equality (based on the notion of “positive rights“) means that one person has to suffer for another person to benefit.

Or, in really crazy circumstances, the goal is simply to deny good things for some people simply because they are not available to other people.

Or they simply want to punish success because of spite and resentment.

I wrote about an example of this last week. Here’s another example, as reported by  and  for a California TV station.

Three major utility companies in California are looking to restructure customer billing, and part of that means customers could be charged based on how much money they make. Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric filed a joint proposal this weekfor a flat-rate charge based on income. …Under the proposal, it would cost as little as $15 a month for low-income households and up to $85 more per month for households making more than $180,000 a year. …The income-based bill proposal is part of the companies’ compliance with legislation passed by the California state government last year requiring these types of plans for utilities. …The fixed rate could start showing up on bills as soon as 2025.

The Wall Street Journal opined on this policy. As you might imagine, class-warfare pricing was not celebrated.

Climate policies are driving up California electric rates… Now Democrats plan to double down on their policy distortions by charging electric customers based on income. Democrats snuck this second progressive income tax into a budget trailer bill last year… No other investor-owned utilities in the country link electricity costs to income. …Pacific Gas & Electric floated charging customers fixed fees ranging from $15 a month for those earning less than $28,000 annually, up to $92 a month for those making $180,000 or more. …California’s electric rates have surged over the last decade to an average of 26.5 cents a kWh—more than twice as much as in neighboring states… California’s electric rates are currently both regressive and progressive. Middle- and higher-income folks subsidize discounts for lower-income customers. However, lower- and middle-income households also subsidize the affluent with solar panels and electric vehicles. …Thus they want to impose this de facto graduated income tax to light up your home. This is another form of income redistribution… The very rich will cope, but the middle class will get soaked, as they always do.

I wonder if our friends on the left will expand this approach. Maybe require McDonald’s to charge rich people more for a Big Mac? Or tell gas stations that they have to lose money when poor people fill up their tanks?

That’s a recipe for quicksand and beatings.

As captured by my Eighth Theorem of Government, it is far smarter to push policies that are designed to reduce poverty rather than reduce inequality.

Thatcher, Lawson, and Pro-Growth Tax Policy

As documented in Commanding Heights: The Battle of Ideas, Margaret Thatcher and Ronald Reagansaved their nations from economic malaise and decline.

Today, let’s focus on what happened in the United Kingdom.

Economic liberty greatly increased during the Thatcher years.

She deserves the lion’s share of the credit for the U.K.’s economic rebirth and renaissance, but she also had the wisdom to appoint some very principled and very capable people to her cabinet.

Such as Nigel Lawson, who served as her Chancellor of the Exchequer (akin to a combined Treasury Secretary/OMB Director in the U.S.).

Lawson died last week, leading to many tributes to his role is resuscitating the U.K. economy.

The Wall Street Journal‘s editorial summarized his achievements.

…our problems are solvable, as they were a half century ago. One of those crucial problem solvers was British politician Nigel Lawson, who died this week at age 91. …the 1970s…was even more miserable in the United Kingdom than it was in the U.S. By the time Margaret Thatcher led the Tories into office in May 1979, inflation was raging and the country had been wracked by strikes in its “winter of discontent”… Lawson entered Thatcher’s administration… He made his historic mark as Chancellor of the Exchequer starting in 1983. He’s best known for his tax reforms, which reduced the top personal income-tax rate to 40% from 60% and brought the top corporate rate to 35% from a 1970s high of 52%. He also was a steward of the Thatcher administration’s privatizations of large state-owned firms and the “Big Bang” financial reforms that would transform London into a global financial center.

In a column for CapX, Madsen Pirie examines Lawson’s work.

Nigel Lawson left a huge legacy. Under his stewardship Britain went from being the sick man of Europe into becoming an economic powerhouse and one of the world’s leading economies. He is regarded by many as the finest Chancellor of the 20th century… Lord Lawson held the firm conviction that lower taxes created space for enterprise and opportunity, and made it his policy that in every Budget he would lower the burden of taxation and abolish at least one tax.…During his tenure, Britain was transformed from being an economy in which most major businesses and services were owned and run by the state, into one in which they became private businesses, paying taxes instead of receiving taxpayer subsidies. Failing and outdated state enterprises became modern, successful private ones. …His 1988 Budget…announced that all taxes above 40% would be abolished, and that the basic rate would be cut to 25%, its lowest for 50 years… Within a very short time, more money was coming into the Treasury from the lower rates than it had been taking in from the higher ones. It was a vindication of the Laffer Curve. …The top 10% of earners had been paying 35% of the total income tax take. Under Lawson’s lower rate that went up to 48%. In rough terms this meant that the top 10% went from paying just over a third to just under a half of total income taxes.

In other words, the lower tax rates in the U.K. had the same positive impact as the lower tax rates in the U.S., both in terms of encouraging growth and confirming the Laffer Curve.

But let’s not forget that there also was spending restraint during the Thatcher years, particularly when Lawson was Chancellor of the Exchequer.

Just like we got spending restraint during the Reagan years.

The moral of the story is that it’s great to have good leaders, and it’s great when those leaders appoint good people.

P.S. If you want the U.S. equivalent of Nigel Lawson, the best historical example would be Andrew Mellon.

The Big Question for Tories (and Republicans): What’s the Alternative to “Free-Market Fundamentalism”?

Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation.What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Article by Dan Mitchell: A Grim Assessment of British Fiscal Policy

A Grim Assessment of British Fiscal Policy

I have been very pessimistic in recent years about the United Kingdom. Now, having just finished giving speeches in Bristol and London, I’m even more pessimistic.

The core problem is that the burden of government spending has expanded dramatically in recent years,in part because of the pandemic.

But there’s been no move to undo the damage. Instead, the (supposedly) conservative governments of Boris Johnson and Rishi Sunak have kept the spigots open.

So there’s a new spending baseline showing a permanent expansion in the fiscal burden.

And this does not even include all the additional spending that almost surely will get added because of demographic change.

Sadly, none of the experts I met with on my trip expressed much hope of reversing the nation’s fiscal decline.

Indeed, most of them have a a glum outlook. Including the ones I didn’t talk to. For instance, Fiona Bulmer authored some depressing analysis for CapXabout the U.K.’s faux conservatives.

Now a Tory government boasts that it is spending “£407 billion on support for families, jobs and businesses”, borrowing is at its highest level since the war – and that’s only the start. …Ministers, commentators, the Bank of England…seem to believe that we have now finally created a climate in which the magic money tree can flourish. …spending discipline has been completely abandoned over the past year. …We used to believe that individuals and businesses would always be better at spending their own money than government, instead we must now celebrate that the Department of Transport is giving people £50 vouchers to get their bikes mended. The problem is that once public spending becomes celebrated as a virtue then the culture of cost constraint disappears and every part of government will adopt the Oliver Twist approach and constantly come back for more.

As you might expect, governments that spend too much also have bad tax systems.

That certainly is true in the United Kingdom. But, as reported by the Economist, the U.K. seemingly tries to make taxes as punitive as possible.

People in England, Wales and Northern Ireland pay a basic rate of income tax of 20% on annual earnings over £12,570 ($15,612)… Britons must also pay national-insurance contributions (NICs) of 12% of weekly earnings over £242… Recent university graduates with student debt must pay an additional 9% on anything they earn over £27,295. A 40% income-tax rate kicks in at slightly over £50,000, which is when parents also begin to be taxed on a welfare payment known as child benefit.The result can be a 60% marginal tax rate for those with two children and a 70% rate for those with three. For every £1 earned above £100,000, you lose 50p of the £12,570 tax-free allowance; the allowance falls to zero if your income is £125,140 or more. That means at least a 60% marginal tax rate for high-earning taxpayers—rising to over 100% for parents who start losing tax-free child-care benefits as well. …Value-added tax…is levied at a 20% rate on most final purchases by consumers. …Britain has some of the highest taxes on property of any country in the OECD.

Is there any hope of fixing this mess?

That is unlikely, given the profligacy of today’s Tory politicians.

But there is a solution if any of them eventually decide to be on the side of taxpayers. Writing for CapX, Gavin Rice opines that it is time to reform the welfare state and limit spending growth.

Despite Thatcher’s revolutionary attempt to shift responsibility back onto individuals and families, …the welfare state has grown and grown. Since 1948, welfare spending has risen from £11bn to well over £200bn, in today’s money – that’s 18 times more spent on social security than under Clement Attlee’s supposedly socialist Labour government.…spending…has also risen as a proportion of national income from around 4% in 1947 to over 10% by 2019, and is projected to rise to over 12% by 2065. …to sustain even pre-Covid spending habits over the medium term, the Office for Budget Responsibility has estimated that taxes would need to rise by one third in order to stabilise debt… Britain has an ‘inverse pyramid’ society with a minority of working adults sustaining a majority of economically inactive citizens. …when public spending requirements outstrip that growth, there’s a problem.

Since it reflects my Golden Rule, I particularly appreciate the last sentence in the above excerpt.

But I don’t appreciate how recent British Prime Ministers have violated that rule.

Makes me wonder whether Boris Johnson and Rishi Sunak are doing more damage to good fiscal policy in the U.K. than George Bush and Donald Trump did to good fiscal policy in the U.S.?

Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell article: Thatcher, Lawson, and Pro-Growth Tax Policy

Thatcher, Lawson, and Pro-Growth Tax Policy

As documented in Commanding Heights: The Battle of Ideas, Margaret Thatcher and Ronald Reagansaved their nations from economic malaise and decline.

Today, let’s focus on what happened in the United Kingdom.

Economic liberty greatly increased during the Thatcher years.

She deserves the lion’s share of the credit for the U.K.’s economic rebirth and renaissance, but she also had the wisdom to appoint some very principled and very capable people to her cabinet.

Such as Nigel Lawson, who served as her Chancellor of the Exchequer (akin to a combined Treasury Secretary/OMB Director in the U.S.).

Lawson died last week, leading to many tributes to his role is resuscitating the U.K. economy.

The Wall Street Journal‘s editorial summarized his achievements.

…our problems are solvable, as they were a half century ago. One of those crucial problem solvers was British politician Nigel Lawson, who died this week at age 91. …the 1970s…was even more miserable in the United Kingdom than it was in the U.S. By the time Margaret Thatcher led the Tories into office in May 1979, inflation was raging and the country had been wracked by strikes in its “winter of discontent”… Lawson entered Thatcher’s administration… He made his historic mark as Chancellor of the Exchequer starting in 1983. He’s best known for his tax reforms, which reduced the top personal income-tax rate to 40% from 60% and brought the top corporate rate to 35% from a 1970s high of 52%. He also was a steward of the Thatcher administration’s privatizations of large state-owned firms and the “Big Bang” financial reforms that would transform London into a global financial center.

In a column for CapX, Madsen Pirie examines Lawson’s work.

Nigel Lawson left a huge legacy. Under his stewardship Britain went from being the sick man of Europe into becoming an economic powerhouse and one of the world’s leading economies. He is regarded by many as the finest Chancellor of the 20th century… Lord Lawson held the firm conviction that lower taxes created space for enterprise and opportunity, and made it his policy that in every Budget he would lower the burden of taxation and abolish at least one tax.…During his tenure, Britain was transformed from being an economy in which most major businesses and services were owned and run by the state, into one in which they became private businesses, paying taxes instead of receiving taxpayer subsidies. Failing and outdated state enterprises became modern, successful private ones. …His 1988 Budget…announced that all taxes above 40% would be abolished, and that the basic rate would be cut to 25%, its lowest for 50 years… Within a very short time, more money was coming into the Treasury from the lower rates than it had been taking in from the higher ones. It was a vindication of the Laffer Curve. …The top 10% of earners had been paying 35% of the total income tax take. Under Lawson’s lower rate that went up to 48%. In rough terms this meant that the top 10% went from paying just over a third to just under a half of total income taxes.

In other words, the lower tax rates in the U.K. had the same positive impact as the lower tax rates in the U.S., both in terms of encouraging growth and confirming the Laffer Curve.

But let’s not forget that there also was spending restraint during the Thatcher years, particularly when Lawson was Chancellor of the Exchequer.

Just like we got spending restraint during the Reagan years.

The moral of the story is that it’s great to have good leaders, and it’s great when those leaders appoint good people.

P.S. If you want the U.S. equivalent of Nigel Lawson, the best historical example would be Andrew Mellon.

The Big Question for Tories (and Republicans): What’s the Alternative to “Free-Market Fundamentalism”?

Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation.What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: Mirror, Mirror, on the Wall, Which Nation Punishes Success Most of All?

Mirror, Mirror, on the Wall, Which Nation Punishes Success Most of All?

Marginal tax rates (how much you are taxed for earning additional money) have a big impact on incentives to engage in productive activity such as work, saving, investment, and entrepreneurship.

This is why governments should keep tax rates at modest levels.

But as you can see from this map from the Tax Foundation, European governments generally cannot resist the temptation to impose onerous top tax rates on investors, entrepreneurs, business owners, and other successful taxpayers.

Congratulations to Hungary for having the lowest rate, followed by Estonia, the Czech Republic, and Slovakia.

And “congratulations” to Denmark for having the highest top tax rate, followed by France, Austria, and Spain.

At this point, a few caveats are necessary. A nation’s top income tax rate is important, but it’s not the only thing that matters for tax policy.

  • It’s also important to look at social insurance(payroll) taxes, particularly if they apply to all income.
  • It’s also important to look at the level of “double taxation” on income that is saved and invested.
  • It’s also important to look at VATs, which increase the wedge between pre-tax income and post-tax consumption.

Needless to say, other economic policies also matter. A nation might have a good tax system but very dirigiste policies in other areas. Or vice-versa.

For instance, even though Hungary has the lowest top tax rate on personal income and Denmark has the highest, there’s actually more overall economic liberty in Denmark.

Some readers may be wondering how the United States compares to the European nations shown in the above map.

The good news (relatively speaking) is that the top tax rate in the United States is 42.9 percent, so that’s lower than the average in Europe.

The bad news is that the US would have the highest tax rate if Biden’s budget was approved.

However, the top income tax rate in the United States can vary substantially depending on state.

A resident of New York or California, for instance, will face a much higher top tax rate than a resident of a zero-income-tax state such as Texas or Florida.

The same thing is even more true in Switzerland, where top tax rates vary substantially.

A successful taxpayer in Zug pays a top tax rate of 22.22 percent, less than half as much as a similar taxpayer in Geneva.

I’ll close by noting that this map is another example of the advantages of genuine federalism.

When the central government is small and most government takes place at the state and local level (or, in the case of Switzerland, at the cantonal and municipal level), there is more diversity, choice, and jurisdictional competition.

That type of federalism still exists in Switzerland, but unfortunately is eroding in the United States.

The Big Question for Tories (and Republicans): What’s the Alternative to “Free-Market Fundamentalism”?

Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation.What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: A New Member for the Bureaucrat Hall of Fame

A New Member for the Bureaucrat Hall of Fame

My primary problem with bureaucrats is that they often work for agencies and departments that should not exist.

My secondary problem is that they generally get overcompensated compared to workers in the economy’s productive sector.

And my tertiary problem with government employees is that they have job protections that encourage bad behavior – everything from sloth to crime.

When selecting new members for the Bureaucrat Hall of Fame, I usually pick from that final group.

And that’s the purpose of today’s column. We have a bureaucrat from Washington, DC, who deserves to be honored.

But he’s not a federal bureaucrat. He’s a cop with the DC metropolitan police. Here are some details of his misdeeds, as reported by Amanda Michelle Gomez.

The former vice chair of D.C. Police Union, Medgar Webster Sr., was arrested on Saturday for allegedly defrauding the D.C. government by working a second job at Whole Foods Market while reporting as on duty for the Metropolitan Police Department.…MPD paid Webster $33,845, including overtime and holiday pay, for hours he was simultaneously on the clock at Whole Foods, according to an arrest affidavit. Webster allegedly worked at two locations for the grocery chain between January 2021 and April 2022, and earned $45,946 at one of those stores along H Street Southeast. …Webster earned an hourly rate of $53.11 as an officer, which was adjusted to $79.67 for overtime work, per the affidavit.

If nothing else, I guess we can say he’s not lazy. I imagine other cops don’t bother doing any work, but they’re probably home napping instead of working a second job.

So congratulations…sort of.

But here’s the part of the story that definitely makes Mr. Webster a Hall of Famer.

He was caught double-dipping only because he got in trouble for sexual harassment at his second job.

The police spokesperson says agents discovered Webster was allegedly working a second job while on the clock at MPD during an “unrelated [Internal Affairs Division] investigation.” Webster was being investigated for engaging in an “unwanted sexual contact” with an individual at the Whole Foods.

Apparently he was trying to double-dip in more than one way.

Seems like he has something in common with Mr. Geary.

P.S. My all-time favorite example of anti-bureaucrat satire is this video, though this top-10 list from David Letterman is a close second.

P.P.S. Since we’re making fun of bureaucrats, here’s a good jab at the Post Office from Jimmy Kimmel and a clever one-liner from Craig Ferguson. And to see how government operates, we have the Fable of the Ant. But this Pearls before Swine cartoon strip is very clever. Also, here’s a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

Protecting Individual Savings from Double Taxation

While speaking last year in Hawaii on the topic of good tax policy, I explained why it is misguided to impose extra layers of tax on saving and investment.

Regarding the problem of double taxation, I’ve addressed how various features of the tax code need to be fixed.

Today, we’re going to focus on the fixing the tax treatment of household savings. And the problem that needs fixing is that the federal government taxes you when you earn money and also taxes any interest you earn if you decide to save some of your after-tax income.

As you can see from the chart, this creates a tax wedge.

And that tax wedge distorts people’s decisions and makes them more likely to choose immediate consumption rather than savings (which can be viewed as deferred consumption).

As mentioned in the video, every economic theoryrecognizes that saving and investment (again, just another way of saying deferred consumption) are critical to future growth and rising living standards. So there are good reasons to fix the tax code.

The good news is that there are two ways to fix this problem.

  1. Tax income only one time when it is first earned.
  2. Tax income only one time when it is consumed.

In practical terms, the first option treats all savings like a “Roth IRA,”, which means you pay tax the year you earn your income, but the IRS does not get another bit at the apple if you save some of your after-tax income and it earns interest or otherwise grows in value.

The second option treats all savings like a 401(k), which means you are not taxed on any income that you place in a savings vehicle, but you are taxed on any money (including any interest or other returns) that you withdraw from the account.

As shown by Adam Michel of the Heritage Foundation, both of these approaches lead to the same long-run result (and thus are superior to what happens when people save without being protected from double taxation).

The good news is that Americans can protect their savings from double taxation by using either individual retirement accounts (IRAs) or 401(k)s.

The bad news is that those “qualified accounts” are restricted. Only people who are saving for retirement can protect themselves from double taxation.

That needs to change.

Here’s what I wrote back in 2012 and I think it’s reasonably succinct and accurate.

…all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn. If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings. From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

The key takeaways are in the first and last sentences. All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income.

This means we need universal savings accounts, sort of like they have in Canada.

Here’s what Robert Bellafiore of the Tax Foundation wrote about the idea back in 2019.

USAs do not penalize withdrawals on account of their purpose or timing. In contrast, some types of existing savings accounts are not neutral, penalizing people who withdraw their money for anything but approved purposes at approved times. For example, withdrawals from 529 accounts can only be made without penalty if they are used to fund education.If a parent has a 529 account for a child but must make a withdrawal to cover emergency expenses, he or she must pay income taxes on the earnings, plus a 10 percent penalty. Withdrawals from 401(k)s before the age of 59½ incur the same penalty, though there are certain exceptions. USAs’ neutrality would likely boost saving, for two reasons. First, when savings are not hit by multiple layers of taxation, savers can expect a higher return and are therefore likely to save more. Both IRAs and 401(k)s tax savings only once, and studies have estimated that roughly half of 401(k) balances, and roughly a quarter of all IRA contributions, constitute new saving—in other words, dollars that would have been spent are saved instead.

The bottom line is that we need to copy jurisdictions such as Hong Kong and Singapore that have little or no double taxation of any kind.

Especially since we now live in a world where inflation has become an issue, which acts as a hidden tax on saving and investment.

I’ll close with this chart from the OECD. It’s a few years old, so I’m sure some nations have changed their policies, but it gives one a good idea of how savings is treated around the world.

The bottom line is that it’s good to avoid Norway and the United States is unimpressive.

I’m very surprised to see that Argentina and Germany have good policy.

P.S. For some of our friends on the left, policies that protect from double taxation are akin to an entitlement.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: Government vs. Poor People

I

Government vs. Poor People

My Fourteenth Theorem of Government explains that when government intervenes for the ostensible purpose of providing help to poor people in the short run,it is all but inevitable that such policies will hurt poor people in the long run.

It is hardly a revelation that bigger government causes problems, but it is particularly discouraging when such policies victimize the least fortunate members of society.

I’m discussing this issue today because I recently discovered a 2018 article by Brian Balfour.

Published by the Foundation for Economic Education, the article lists seven ways that government traps people in poverty.

At the risk of over-simplifying, four of those policies directly hurt poor people.

  1. The “quicksand effect” of the welfare state, which discourages self-advancement.
  2. Minimum wage laws that remove the bottom rungs of the economic ladder.
  3. Green energy policies that make basic utilities needlessly expensive.
  4. Protectionist trade policies that increase the price of essential products.

And three of those policies indirectly hurt poor people.

  1. Punitive tax policies that discourage job creation and productivity advances.
  2. Regulatory policies that impose high costs and cause inefficiency.
  3. Inflationary monetary policies by central banks that cause higher prices.

There’s nothing in the article that’s wrong, but I’m going to conclude today’s column by pointing out a big sin of omission.

The author’s list should have included the government education monopoly. Especially since poor families tend to live in the areas with the worst-performing government schools.

Failing government schools have a very direct and very negative impact on the life prospects of low-income kids.

So I’ll end by noting that I’m very excited that school choice is beginning to sweep the nation.

P.S. There are many other government policies that have a disproportionately negative impact on poor people. Everything from Social Security to revenuepolicing, but don’t forget government lotteries, licensing laws, and nanny state protections (all of which may help to explain why poor people are skeptical about the supposed benefits of bigger government).

The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expandthe burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

  • Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
  • Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explainswhy this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370.Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program,severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant.If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in SwitzerlandHong KongNetherlands, the Faroe IslandsDenmarkIsrael, and Sweden.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: The Case Against Biden’s Class-Warfare Tax Policy, Part V

I

The Case Against Biden’s Class-Warfare Tax Policy, Part V

In 2020 and 2021, I wrote a four-part series (here, here, here, and here) about Biden’s class-warfare tax agenda.

And I also wrote a series of columns about some of his worst ideas.

He even proposed taxes that don’t exist anywhere else in the world.

The main purpose of those columns was to explain why it would be economically harmful to impose punitive tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

Unsurprisingly, Biden still wants all these tax increases, even though Democrats lost control of the House of Representatives.

Today, let’s look at his awful proposal to tax unrealized capital gains (an idea so absurd that no other nation has enacted this destructive levy).

Eric Boehm’s article in Reason debunks Biden’s proposal (the president calls it a billionaire’s tax).

Say what you will about the Biden administration’s approach to tax-the-rich populism: It’s creative. …Taxpayers with net wealth above $100 million would have to pay a minimum effective tax rate of 20 percent on an expanded measure of income that adds unrealized capital gains to more conventional sources of income, like wages, business income, and investment income. …By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output. …An annual tax on paper gains would be conspicuously complex. The largest administrative problems relate to valuing non-tradable assets like privately held businesses and taxing illiquid taxpayers with large gains on paper but little cash on hand to pay a minimum tax bill. …Given these problems, it’s unsurprising the idea hasn’t caught on around the world.

And the Wall Street Journal has an editorial about this class-warfare scheme.

After the November midterm election, President Biden was asked what he would change in his last two years. “Nothing,” he said, and…he proved it by reproposing…enormous tax increases that he couldn’t get through even a Democratic Congress. Start with a reprise of his “billionaire minimum tax.” …For starters, it isn’t a billionaire tax and it isn’t an income tax. It would apply to households worth more than $100 million in accumulated assets, and its target is wealth. …if your assets rise in value during a year, you will pay taxes on that increase even if you realized no actual gains through a sale. …If your assets fell in value, you would not be able to deduct the full loss from your overall income. Heads the government wins, tails you lose.

The bottom line is that the capital gains tax is an awful levy.

But rather than abolishing the tax to boost American competitiveness, Biden has latched on to an idea to make a bad tax even worse.

And that’s in addition to his other proposals to make the capital gains tax more burdensome!

P.S. I guess we shouldn’t be surprised at bad ideas since the president is infamous for economically illiterate tax tweets.

The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expandthe burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

  • Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
  • Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explainswhy this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370.Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program,severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant.If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in SwitzerlandHong KongNetherlands, the Faroe IslandsDenmarkIsrael, and Sweden.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

I

The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expandthe burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

  • Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
  • Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explainswhy this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370.Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program,severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant.If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in SwitzerlandHong KongNetherlands, the Faroe IslandsDenmarkIsrael, and Sweden.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring

Dan Mitchell: All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income!

Protecting Individual Savings from Double Taxation

While speaking last year in Hawaii on the topic of good tax policy, I explained why it is misguided to impose extra layers of tax on saving and investment.

Regarding the problem of double taxation, I’ve addressed how various features of the tax code need to be fixed.

Today, we’re going to focus on the fixing the tax treatment of household savings. And the problem that needs fixing is that the federal government taxes you when you earn money and also taxes any interest you earn if you decide to save some of your after-tax income.

As you can see from the chart, this creates a tax wedge.

And that tax wedge distorts people’s decisions and makes them more likely to choose immediate consumption rather than savings (which can be viewed as deferred consumption).

As mentioned in the video, every economic theoryrecognizes that saving and investment (again, just another way of saying deferred consumption) are critical to future growth and rising living standards. So there are good reasons to fix the tax code.

The good news is that there are two ways to fix this problem.

  1. Tax income only one time when it is first earned.
  2. Tax income only one time when it is consumed.

In practical terms, the first option treats all savings like a “Roth IRA,”, which means you pay tax the year you earn your income, but the IRS does not get another bit at the apple if you save some of your after-tax income and it earns interest or otherwise grows in value.

The second option treats all savings like a 401(k), which means you are not taxed on any income that you place in a savings vehicle, but you are taxed on any money (including any interest or other returns) that you withdraw from the account.

As shown by Adam Michel of the Heritage Foundation, both of these approaches lead to the same long-run result (and thus are superior to what happens when people save without being protected from double taxation).

The good news is that Americans can protect their savings from double taxation by using either individual retirement accounts (IRAs) or 401(k)s.

The bad news is that those “qualified accounts” are restricted. Only people who are saving for retirement can protect themselves from double taxation.

That needs to change.

Here’s what I wrote back in 2012 and I think it’s reasonably succinct and accurate.

…all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn. If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings. From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

The key takeaways are in the first and last sentences. All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income.

This means we need universal savings accounts, sort of like they have in Canada.

Here’s what Robert Bellafiore of the Tax Foundation wrote about the idea back in 2019.

USAs do not penalize withdrawals on account of their purpose or timing. In contrast, some types of existing savings accounts are not neutral, penalizing people who withdraw their money for anything but approved purposes at approved times. For example, withdrawals from 529 accounts can only be made without penalty if they are used to fund education.If a parent has a 529 account for a child but must make a withdrawal to cover emergency expenses, he or she must pay income taxes on the earnings, plus a 10 percent penalty. Withdrawals from 401(k)s before the age of 59½ incur the same penalty, though there are certain exceptions. USAs’ neutrality would likely boost saving, for two reasons. First, when savings are not hit by multiple layers of taxation, savers can expect a higher return and are therefore likely to save more. Both IRAs and 401(k)s tax savings only once, and studies have estimated that roughly half of 401(k) balances, and roughly a quarter of all IRA contributions, constitute new saving—in other words, dollars that would have been spent are saved instead.

The bottom line is that we need to copy jurisdictions such as Hong Kong and Singapore that have little or no double taxation of any kind.

Especially since we now live in a world where inflation has become an issue, which acts as a hidden tax on saving and investment.

I’ll close with this chart from the OECD. It’s a few years old, so I’m sure some nations have changed their policies, but it gives one a good idea of how savings is treated around the world.

The bottom line is that it’s good to avoid Norway and the United States is unimpressive.

I’m very surprised to see that Argentina and Germany have good policy.

P.S. For some of our friends on the left, policies that protect from double taxation are akin to an entitlement.

I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:

What Mitt Romney Said Last Night About Tax Cuts And The Deficit Was Absolutely Right. And What Obama Said Was Absolutely Wrong.

Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit.  He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.

Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”

Meanwhile, Obama has promised to cut the deficit in half during his first four years – but instead gave America the highest deficits in the history of the entire human race.

I’ve written about this before.  Let’s replay what has happened every single time we’ve ever cut the income tax rate.

The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt.  Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate.  And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues.  Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).

That’s something called a documented fact.  But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich.  Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates.  Liberals ignore reality, but it is simply true.  It is a fact.  It happened.

Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again.  Which is exactly what Obama wants to do.

People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTER who believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues.  He too cut taxes, and he too increased tax revenues.

So we get to Ronald Reagan, who famously cut taxes.  And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion).  And again, the taxes were paid primarily by the rich:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other.  And I can simply quote the New York Times AT the time:

Sharp Rise in Tax Revenue to Pare U.S. Deficit By EDMUND L. ANDREWS Published: July 13, 2005

WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.

A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.

Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well
.

And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.”   But it WASN’T ”unexpected.”  It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.

The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well.  And liberals simply dishonestly refuse to acknowledge documented history.

Meanwhile, liberals also have a perfect record … of FAILUREThey keep raising taxes and keep not understanding why they don’t get the revenues they predicted.

The following is a section from my article, “Tax Cuts INCREASE Revenues; They Have ALWAYS Increased Revenues“, where I document every single thing I said above:

The Falsehood That Tax Cuts Increase The Deficit

Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.

Let’s take a trip back in time, starting with the 1920s.  From Burton Folsom’s book, New Deal or Raw Deal?:

In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history.  Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment.  High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).

Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.”  And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”

And what happened?

“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent.  These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies.  Investors took more risks when they were allowed to keep more of their gains.  President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.

Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue.  In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million.  In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark.  Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).

Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935).  See Table 1 on page 125 of New Deal or Raw Deal for that information.

FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.

It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.

Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever.  Few realize that he was also a supply-side tax cutter.

Kennedy said:

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– John F. Kennedy, Nov. 20, 1962, president’s news conference


“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”

– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”


“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”

– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.


“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill

Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.

So let’s move on to Ronald Reagan.  Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.

Did Reagan’s tax cuts decrease federal revenues?  Hardly:

We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts.  And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.

So Reagan’s tax cuts increased revenue.  But who paid the increased tax revenue?  The poor?  Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall.  But that was exactly wrong.  In reality:

“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”

So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades.  Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering, “It would be misleading for me to tell any of you that there is a solution to it.”

Reagan whipped inflation.  Just as he whipped that malaise and that crisis of confidence.

________

The Laffer Curve, Part III: Dynamic Scoring