Tax Cuts Would Restore Prosperity

To stimulate economic recovery, America needs tax rate reductions and an even larger reduction in government spending.

Tax cuts worked for Democratic President John Kennedy and Republican President Ronald Reagan. Presidents Kennedy and Reagan oversaw significant reductions of confiscatory tax rates on high earners and taxpayers generally. In both cases, records show that Treasury revenues increased with the rate of investment of the freed assets.

Often overlooked in the debate about tax policy is the success of the Clinton-era tax reductions.

The Clinton years provide lessons on the effects of tax increases and decreases. The American left attributes the successful economy of the Clinton years to the former and ignores the effect of the latter as they promote increases "promised" to provide additional tax revenues today.

The effects on Treasury receipts of increasing taxes can be seen in the Clinton and Democrat-controlled congressional tax increase of 1993, among the largest in history. Despite their magnitude and a more robust job market following a recession, IRS, Office of Management and Budget and Congressional Budget Office reports reveal that the 1993 tax increases added only modestly to treasury receipts.

The balanced budgets of the Clinton years didn’t occur until after a Republican-controlled Congress passed and the president reluctantly signed a 1997 tax bill lowering the capital gains rate from 28 percent to 20 percent, adding a child tax credit and establishing higher limits on tax exclusion for IRAs and estates.
The 1997 rate reductions unleashed the economy, causing capital investment to more than triple by 1998 and double again in 1999. Treasury receipts for this category of tax obligation increased dramatically. Without tax relief and the Internet/communications revolution, the second Clinton term would likely have seen tax revenues decline in a lagging economy.

The Bush-era 2003 rates on capital gains and dividends provide a pure, easily illustrated example of tax decreases boosting the economy and Treasury receipts. When Congress passed the 15-percent tax rate on capital gains in 2003, and again following the 2006 extension, Democrats protested that large deficits would result.

For anyone willing to read it, the January 2007 CBO annual report settles the debate. Citing the original CBO forecasts of capital gains tax revenue of $42 billion in 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006, Democrats who opposed the rate reduction in 2003 claimed that the capital gains tax cut would "cost" the federal treasury $5.4 billion in fiscal years 2003-2006.

Those forecasts were embarrassingly wrong. The 2007 CBO report revealed that capital gains and dividends tax collections were actually $51 billion in 2003, $72 billion in 2004, $97 billion in 2005, and $110 billion in 2006, the last two years nearly doubling initial forecasts.

In other words, forecasts in earlier CBO reports were low by a total of $133 billion for the four-year period. This tax rate reduction stimulated enough additional economic activity to more than offset forecast losses.

How could the CBO and Democrats have gotten it so wrong?

It’s very simple. Forecasts are guesses.

When rates change in either direction, CBO policy permits only linear forecasts on tax revenues, never estimating the stimulation or retardation of economic activity resulting from the changes. Accordingly, CBO forecasts for rate changes are always wrong.

CBO results, on the other hand, are facts – also confirmed in reports from the OMB and the IRS.

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 revenue declines, the Treasury actually received record revenues from this class of tax obligation. For that matter, including the 2001 rate reductions on income, Treasury revenues set records through 2007, at that point exceeding original forecasts by roughly twice the cost of the two wars in which America was engaged. The CBO was wrong about that as well.

Despite the costs of war, homeland security and natural disaster, at the rates of economic growth through 2007 and with simple spending restraint, the Bush-era 2001 and 2003 tax rate reductions should have yielded a surplus by 2008.
Unfortunately, federal expenditures have been setting records, too. A typical Congress has a spending problem, not a revenue problem. Since 2009, Congress has been spending at exceptional rates and shows little will to stop.

Millions of Americans fell off the tax rolls following the 2001 rate reductions on income. Today, the top 1 percent of earners pays more taxes than the bottom 95 percent. Who really believes that taxing this top group even more will pay everyone’s tab for the ambitious and irresponsible spending objectives of Washington Democrats?

Unless clearer heads prevail, we will all pay.