The United States economy runs on tax revenues.
There is no other income source for the US Federal Government.
Since the United States economy is so cash poor, some believe if you raise marginal income tax rates, total tax revenues will increase.
History tells us that’s not true. We would do best to remember history.
In the best article I’ve read recently by Arthur Laffer, Mr. Laffer reminds us when Herbert Hoover raised marginal tax rates from24% to 63% and passed the Smoot Hawley Tarriff, he took a sledgehammer to GDP.
Hoover’s policies did a superb job of deepening and lengthening the Great Depression.
When it came to the United States economy, FDR accelerated the destructive policies Hoover began.
FDR raised the marginal income tax rates from 63% to over 83%.
He did this in the middle of the Great Depression.
This was not policy. It was financial suicide.
So many millions of people suffered needlessly.
FDR was actually considering a 99.5% tax rate.
No, I’m not making this up. At that rate, it’s not a tax.
You can read greater detail in “Great Myths of the Great Depression” by Lawrence W. Reed. This is all a matter of public record.
As I read current tax policy, it feels like history is repeating itself with similar disastrous consequences.
Before you accuse me of being an ideologue, recognize this.
Any time an administration has lowered marginal income tax rates in this country, the country has prospered. Here is a quote from John F. Kennedy cira 1963.
“Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.
—President John F. Kennedy,
Economic Report of the President,
When taxes decrease, there is an increase in overall tax revenues.
That generates more revenues for businesses which generate more profits. That additional demand means businesses need to hire more people to satisfy the increase in demand for their goods and services.
As profits grow, so do tax receipts. As the law of gravity will draw objects toward earth, this economic law of lowering taxes will always increase total tax receipts. That is, all other things being equal.
Whenever individuals decide how to allocate assets, they’re much more efficient and the results, much more immediate, than when the US Government does so.
This is the essence of long term job creation. It starts with sustainable demand. It is the customer, not the government, who determines when we exit a recession.
From 1921-1928, the highest marginal income tax rates were reduced from 73% to 25%. That helped fuel the “roaring twenties”.
When President John Kennedy lowered the highest marginal tax rates from 91% to 70%, total tax revenues increased.
Does this mean we don’t have a problem with the deficit?
No. We have a huge problem with the deficit. I respectfully disagree with Mr. Krugman that spending is the answer. Spending is a big part of the problem.
The first way to gain back some financial credibility in the United States economy is to reign in spending.
We do that with our households.
The US government should be no different.
For example, GM should have gone bankrupt and then restructured.
Jobs would have been lost in the short run, but under new management, the company might have had a fighting chance to build cars people actually wanted to buy. If demand increased, then new jobs would be created.
Bankruptcy and reorganization laws (chapter 11 or chapter 7) allow poorly run businesses to dismantle in an orderly fashion or to restructure.
It allows those organizations who run high cost, low value enterprises to become more competitive and efficient or to leave the marketplace.
We’re all better off without them absorbing resources better deployed elsewhere.
Next, we need to eliminate well-meaning, but ill-conceived policy (like no income verification mortgage loans) to drive risk down to manageable levels.
Then we all need to live within our means.
My parents always taught me that.
It was good advice for households.
It was good advice for companies.
It was good advice for governments too.