Income Tax Cuts Increase Revenues and Help Low Income Families

No this isn’t a misprint.  The debate continues on extending the Bush tax cuts in the face of mounting government deficits.  While many issues such as health care reform, social security and immigration are often difficult to quantify objectively since we have not had experience with proposed changes the issue of income tax rates is not.  Critics, often with the best of intentions,  have said that extending tax cuts and further reducing income taxes will  benefit the rich over the poor and will lead to more deficit spending.  The public is told we cannot afford  tax cuts due to government spending on entitlements, defense and all of the other important things the government does.  While cutting taxes in the face of mounting deficits may seem counterintuitive critics are ignoring history.  Past income tax rate cuts have increased government revenues, boosted our economy, created jobs and shifted the tax burden away from low income families to the middle and upper income folks.

According to US Treasury statistics, for example, the 1982 tax act increased revenues by $130 billion in its first four years – after tax rates were cut dramatically. The 1984 Deficit Reduction Act increased tax collections by $72 billion in the four years after taxes were cut again.  The bulk of these revenue increases came from the wealthiest Americans.  This should not have been a surprise.

Across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts.  In   both cases the reduction of high marginal tax rates actually increased tax payments by “the rich,” and also increased their share of total individual income taxes paid.   According to the IRS in 1981 the top 1 percent of income earners paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent – after the top tax rate had been cut from 69.13% in 1981 to 28% in 1988.

The broad-based income tax cuts that President Reagan implemented in the 1980’s set off an entrepreneurial boom that propelled the growth of the economy for the next 20 years.  Certainly the Clinton Presidency benefited from the tax cuts, and to Clinton’s credit, he even added his own cut by reducing the Capital Gains Tax. 

Reagan’s detractors point to his lack of sensitivity for social issues and the legacy of his deficit spending- yet the legacy is a positive one.    In the seven years following the Reagan tax cuts almost 20 million good paying jobs were created (US Dept. of Labor).

According to Joint Economic Committee for the US Congress report (1996) the share of the income tax burden borne by the top 10 percent of taxpayers increased from 48 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.

The middle class also benefited,   middle class being defined as those between the 50th percentile and the 95th percentile for income.    Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

According to the Bureau of Labor statistics inflation, measured by the consumer price index, increased by 49.5% between 1977 and 1981.  Between 1982 and 1986 inflation was 19.1% – much lower than prior to the tax cuts.

Those who objected to the tax cuts in President Bush’s Fiscal 2004 Budget and extension this year need a vision that takes into account these lessons of history.  This is a case where those who would benefit the most from lower taxes could be hurt, with the best of intentions.  Clearly, there is an optimal point below which taxes should not be cut but certainly increasing taxes today does not make sense from an economic or social standpoint.  Lower income taxes stimulate growth, create good jobs, increase government revenues,  and shift the tax burden from low income families to upper income payers.   

If all the intellectual energy that is being used to debate historically established facts is channeled into other subjective issues, and not promoting partisan rhetoric, all Americans will benefit.   

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.