History Argues Against Tax Increases
According to Bureau of Labor Statistics data, Americans pay more in taxes today than they spend on food, clothing, healthcare and entertainment combined.
Nonetheless, congressional Democrats propose to “fund” massive spending proposals by increasing income, estate, corporate and capital gains tax rates “on the wealthy.”
It won’t work. And people in every tax bracket, including “none,” will be hit.
Counterintuitively, perhaps, it was tax cuts – and investment of the freed assets – that increased Treasury revenues when Presidents John Kennedy, Ronald Reagan, George W. Bush and Donald Trump oversaw tax rate reductions.
In fact, although congressional Democrats increased income tax rates during President Bill Clinton’s first term, it was really tax relief that boosted Clinton’s economy.
Congressional Budget Office and IRS reports agreed that, despite their magnitude, the 1993 income tax increases never approached CBO revenue forecasts and added very little to treasury receipts.
Only a communications revolution and a normal growth cycle as America emerged from a mild recession prevented even more disappointing revenue results.
Although their 1993 income tax increases cost Democrats congressional majorities in 1994, in order to justify their appetite for new increases, today’s Democrats attribute the improved economy of the Clinton years to tax increases, but ignore the success of one crucial tax reduction.
Balanced budgets didn’t occur until a Republican Congress passed (and Clinton reluctantly signed) a 1997 bill that lowered the capital gains tax rate to 20 from 28 percent, added a child tax credit, increased IRA and estate tax exclusions – and unleashed the economy.
Capital investment tripled in 1998 and doubled again in 1999, dramatically increasing jobs and Treasury receipts. Without capital gains tax relief and the internet/communications revolution, the second Clinton term would likely have seen revenues – and the economy – decline.
George W. Bush’s presidency provided a pure, easily-illustrated example of tax decreases boosting both the economy and Treasury receipts.
In 2003, Democrats protested that revenues would drop when Congress dropped the capital gains tax rate to 15-percent.
Citing Congressional Budget Office capital gains tax revenue forecasts of $42 billion for 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006, Democrats who opposed the 2003 bill insisted that the rate cut would “cost” the Treasury $5.4 billion in fiscal years 2003-2006.
CBO forecasts – and congressional Democrats – were spectacularly wrong.
Follow-up CBO/IRS reports revealed that 2003 capital gains/dividends tax collections were actually $51 billion, 2004: $72 billion, 2005: $97 billion, and $110 billion in 2006 – the last two years nearly doubling initial forecasts. CBO forecasts for the four-year period were low by a total of $133 billion.
Indeed, capital gains tax rate reductions were undoubtedly the most successful fiscal initiatives in decades, perhaps ever.
The 2017 Trump-era rate reductions yielded similar results.
Investors Business Daily: “…[B]uried in [its 2018] report was…CBO’s tacit admission that it vastly overestimated the cost of the Trump tax cuts, because it didn’t account for the strong economic growth they would generate.”
Plus, consumers benefitted from lower corporate tax pass-throughs, American companies repatriated and invested $40 billion of profits earned overseas, and employment soared.
How does the CBO get things so wrong?
Easy. Forecasts are guesses.
When tax rates change, up or down, the CBO does the only thing its congressional overseers permit – linear forecasts with no consideration of any economic stimulation or retardation resulting from the changes. Accordingly, CBO forecasts for tax rate changes are always wrong.
But CBO’s recorded results are facts, the same facts that appear in IRS reports.
Four years of factual history on the 2003 tax rate reduction on capital gains and dividends in the CBO’s own report showed that, contrary to their expectation of reduced revenues, the Treasury actually received record revenues from this class of tax obligation.
For that matter, overall Treasury revenues set records following the 1964, 1981, 2001 and 2017 rate reductions on income, too. The CBO was also wrong about those.
Yet, it’s never enough. For years, America’s budget deficits and ballooning national debt have resulted from overspending rather than revenue shortfalls.
There is no reason to believe that new tax increases will produce different results this time under a different aggregation of big-spending Democrats.
Frankly, politicians who embrace always-wrong guesses and ignore the facts that disprove them are a little stupid, or just think we are.