History Debunks Obama’s Tax Cut Nonsense

No historical precedent supports Obama’s wild allegation that Romney’s tax plan will result in a $5 trillion revenue loss.

First of a three part series:  Part 2   Part 3

The Charts below demonstrate that Mitt Romney’s tax proposals are perfectly reasonable and, based on historical precedent, can increase income tax revenue without increasing the tax burden on individual, middle class taxpayers.

Tuesday’s fundraising email summarized the “Romney-lied” message the Obama campaign has  slathered onto swing state TV screens since the first debate.  Under the subject line, “Dishonesty” It says that as a candidate you can either explain your positions or:

…in the event that you know your plans would actually hurt the middle class, you can just refuse to tell the truth about what your actual positions are.

Most of the media have joined the Obama campaign in a pious display of indignation, openly calling Mitt Romney a liar because he irreverently rejected their claim, based on the opinion of one left leaning think tank,  that his income tax proposal would slash government revenue by $5 trillion and jack up the middle class tax burden to offset benevolence for the wealthy.

During the debate Jim Lehrer the moderator asked, “What are the differences between the two of you as to how you would go about tackling the deficit problem in this country?”  Part of Romney’s answer was:

…mathematically there are — there are three ways that you can cut a deficit.  One, of course, is to raise taxes. Number two is to cut spending. And number three is to grow the economy because if more people work in a growing economy they’re paying taxes and you can get the job done that way.

History provides plenty of data to support Romney’s position that tax rate cuts will help encourage economic growth, which in turn will produce more tax payers, more taxable wages more taxable  profits and thus more tax revenue to the government without an increase in tax rates.  [continued below the chart]

There have been four major reductions in all tax bracket rates since World War II.  The chart above tracks the first, known as the Kennedy tax cut, as it was implemented in two steps in 1964 and 1965.  There was political resistance to lowering tax rates and predictions of crisis due to massive drops in income tax revenue.  But reality defied the predictions as income tax revenue began a sharp increase the very next year.

The first of two Reagan tax rate reductions was phased in over three years, during a deep recession and multiple financial crises.  [continued below the chart]

The tax bracket rates were reduced in 1982 and the income threshold for each bracket was increased in 1983 and again in 1984.  As a result the tax bill for a taxpayer with adjusted gross income of $20,000, (equivalent to about $46,000 in 2012 dollars) went down 21%, from $5,600 in 1981 to $4,400 in 1984.  All taxpayers at all income levels saw their tax bills reduced by 20% – 25%

As the chart shows tax revenue went down initially, largely due to the severe recession.  In 1985, the first year after the three year series of tax rate reductions, revenue came back to the same level as 1981, the last year before the tax rate reductions began.  This result utterly defied the doomsday predictions of the time, that were based on the same flawed analysis that today drives predictions that Romney’s proposal will cause a $5 trillion reduction in tax revenue.

The second round of Reagan tax cuts were implemented in 1988 and 1989, and again revenue increased.  Note that when the first President Bush broke his famous “no new taxes” pledge and approved an increase in top bracket rates starting in 1991, revenue went down, instead of up as the political-media establishment had predicted.  This was the negative effect of increasing tax rates in a week, post recession economy, like the economy we’re experiencing today.

In both the 1960s and the 1980s tax revenue increased after tax rate reductions because a lower tax burden contributes to greater economic growth which in turn generates more jobs, more taxable wages and more taxable profits. 

A higher tax on any activity results in less of that activity.  That’s why the progressive left wants higher gasoline taxes to discourage driving and higher cigarette taxes to discourage smoking and new taxes on sodas to discourage sugar consumption.  However, the progressives never seem to comprehend the corollary:  A lower tax results in more of the targeted activity.  A lower tax on wages and profits results in more work, and most importantly more of the profit seeking investment that inevitably creates jobs.

The last round of major tax rate reductions came in 2003, establishing the Bush tax rates that are still in effect, but under current law will expire at the end of 2012. [continued below the chart.]

Income tax revenue had reached an all time high in 2000, due entirely to record breaking capital gains tax collections from millions of investors who sold off their computer and internet stocks in the market downturn at the end of the tech bubble.  The resulting recession, with  job losses, began the month President Bush took office, January 2001.  

Bush’s first idea was a seven year schedule of tiny, incremental, annual tax rate reductions.  After 2002 it was clear that this strategy was not achieving the desired results so he persuaded Congress to accelerate all scheduled tax cuts to become effective as of 2003.  Revenue was flat in 2004 but then began a sharp increase starting in 2005.   As the chart shows, four years after the new, lower tax rates were implemented income tax revenue had increased by 30%, after adjusting for inflation.

When the mortgage crisis yet caused another recession in 2008 tax revenue dropped, mostly because the taxable income of small business taxpayers declined dramatically.  But as the chart shows income tax revenue has begun to increase again, even though the same tax rates remain in effect and we’re suffering through the slowest post-recession recovery since the government began collecting quarterly GDP data in 1947. 

The history of three major tax cuts more than supports Mitt Romney’s claim that a reduction in tax bracket rates will not cause a $5 trillion revenue loss.  In fact, it’s more likely that income tax revenue will increase than decrease.

 

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