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Tax Cuts: The B.S. and the Facts

That tax cuts stimulate the economy is taken as a matter of faith, but the brute facts suggest otherwise.

The Myth

Do tax cuts stimulate the economy?

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

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

The Realities

The brute facts are these:

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

The Three Great Tax Cuts: Boom, Bubble, Crash

1. Hoover




It was followed by the Great Crash of 1929.

There were bank failures and the Great Depression.

2. Reagan





There was a boom. But it was a bubble.




3. Bush II



Eventually, the economy began to grow.


Which should have made it obvious to someone, that it was â€¦ a bubble.

There was a crash.

Bank failures. A bailout.


High Taxes Correlate with Strong Economic Growth






Tax Increases Are Followed by Economic Growth

Three of the four high-growth periods cited above followed significant tax hikes.

The fourth, the Truman-Eisenhower years, began with a top tax rate of 91 percent -- it couldn't get much higher.

Moderate Tax Increases Are Followed by Flat Growth

John F. Kennedy is generally credited with starting the tax cut craze.

He proposed it, but, as with all his ideas, it was Lyndon Johnson who actually got it enacted. The top rate was cut from 91 percent to 77 percent, then to 70 percent, on all income over $200,000 for a single person and over $400,000 for a married couple.

That's where it stayed, through Nixon, Ford and Carter.

The Dow Jones average was pretty much the same when that period ended as when it began. Median personal income stayed roughly the same.

These are the brute facts.

I call them that because there doesn't appear to be any theory to explain them.

A noted conservative (a sane one, not William Kristol) recently wrote to me in a private e-mail exchange on this subject:

"I am unaware of any (or many) respectable economists (maybe I've missed some) who have suggested that higher taxes have proved to be a formula for better economic growth."

Actually, I am too.

Even now, in the midst of the Bush disaster, I constantly see and hear tax cuts, particularly at the top, described as "pro-growth." So I went and looked at the numbers -- tax rates, tax cuts and tax hikes -- and placed them alongside job growth, the Dow Jones, growth in the GDP and median income.

The brute facts say the opposite of the myth.

The belief in tax cuts is a subset of the belief in Free Markets, with a capital F & M, which is a theological belief.

How do we distinguish a theological idea from a scientific (or rational) one?

According to Karl Popper, the great thinkers in the philosophy of science, a scientific idea has to be capable of being refuted. There has to be some theoretical test that could come out the wrong way, which would then say the theory is wrong.

On that basis, Popper rejected Marxism and Freudianism, along with religious theology, because no matter how many times they didn't work, there was always some explanation that said that the theory was right and if you just looked at the facts in some other way; you could make up some story that said your theory was still right.

The quintessence of theological thinking goes like this. The preacher says, "The world will end next Saturday night! The Bible says it must be so." Everyone in the congregation wakes up safe and sound on Sunday morning. They head off to church and believe whatever he says in that sermon, too.

In science, we come up with a hypothesis. Then we set up an experiment. We see what happens.

Economics is complex. It takes place in the real world where many factors are at play and we can't control for them all. Still, none of the major tax cuts since 1913 have led to significant, sustained growth. Two them were followed by instant recessions (Reagan and Bush), and three of them, when they were sustained, were followed by bubbles which were then followed by the three worst crashes and sets of bank failures in modern times.

It's time to throw out the theory, accept the facts, and come up with new ideas.

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Larry Beinhart is the author of " Wag the Dog ," " The Librarian ," and " Fog Facts: Searching for Truth in the Land of Spin ." His latest book is Salvation Boulevard . Responses can be sent to beinhart@earthlink.net.

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