Primer – Income Tax Cuts

Income tax cuts are overdue. Every thoughtful, historically grounded observer of income tax cuts eventually says the same thing: At first reducing government’s revenue stream, income tax cuts invariably increase consumption, investment, employment, and overall tax revenues. Returns increase – as the government has more individual and business earners to draw upon.

How this works is worth review. In this election cycle, Democrats are testing the idea that mass spending (seven trillion in 20 months, with revenue of four), which has generated high inflation and interest rates, is better policy than reducing taxes, spending, and interest rates. 

By contrast, Republicans – including those running for House, Senate and Governorships, like Maine’s Republican gubernatorial candidate Paul LePage, argue income tax cuts are overdue, will elevate revenue, reduce the burden on taxpayers when they most need it.  

The argument is not political, but economic. Lepage and Republicans have it right. Even John F. Kennedy, a Democrat President, would agree.  If the question is policy, what works and what does not, reducing the tax burden on earners is what works.

In 1963, Kennedy was in the minority on economic policy. Many wanted to ramp up spending on Vietnam and domestic programs. Kennedy resisted. He favored lower taxes, strong defense, and balanced economic policies. He believed higher economic growth, lower unemployment, and increased federal revenue would flow from reducing the tax burdens both individuals and businesses.

Why? Because Kennedy’s intuition told him, and told Ronald Reagan, who switched from Democrat to Republican at about that time, that more commerce, business, earning, employment, spending, and consumption would produce more economic activity, more tax revenue.

Kennedy was right, and so was Ronald Reagan – the living embodiment of fiscal responsibility, keeping spending, taxing, and government budgets low – when it came to tax cuts. 

How right? Look at the data, not at politics, but at economic data. In January 1963, Kennedy proposed a major tax cut for individuals and companies, plus a simplified tax code, reduced IRS footprint.

Crazy, right? We live in a time when Democrats are leadfooted, pushing more spending, higher taxes, more IRS agents, no attention to second order effects. They force Americans to go broke paying for heating oil and gas, taxed for things they do not want, need, and cannot afford. But Kennedy differed.

Kennedy’s program, enacted after he died, produced spikes in commerce, consumption, employment, profits, reinvestment, and stability. Kennedy’s income tax cuts, like Reagan’s, initiated a virtuous cycle.

In a long-forgotten twist – months after Kennedy died – Johnson briefly assumed his platform, pushing tax cuts and budget cuts, reducing federal spending by $100 billion. He passed the “1964 Revenue Act.”

What impact? Huge. Incomes, consumption, employment, and capital investments grew, while direct federal spending fell. Unemployment dropped from 5.2 percent in 1964 to 3.8 percent in 1966. And – through it all – tax revenues increased!

Fast forward to Ronald Reagan who, as a former governor, believed individual earners and government both did better when people kept more of what they earned, triggering a cascade, more commerce, prosperity, and revenue, reinforcing limited government, freer markets, and fiscal discipline.

How did Reagan’s tax cuts pan out? Rather well. Reagan, a former economics major, governor, and student of William F. Buckley’s school of ordered liberty, limited government, anticommunism, and lower taxes, Milton Friedman’s school of free and unfettered markets, went a step further.

True to his promises, Reagan cut the top marginal rate from 73 percent to 28 percent, lowest since 1925. While maintaining the federal “safety net” for low earners, he was able to swiftly reverse Carter’s double-digit inflation, unemployment, interest rates, energy scarcity, weak defense, Soviet expansion.

Reagan stopped it all, with sound economic policy. He cut federal income taxes by 25 percent in three years. The result was a dramatic uptick in employment, consumption, investment, prosperity, and quality of life, plus added federal revenue.

Unemployment fell from 7.5 percent in 1981, after Reagan succeeded Carter, to 5.4 percent in 1989.  Good things take time, but it worked. Unemployment was 4.7 percent when Reagan left office, having delivered 18 million net new jobs, average income having grown 16.8 percent.

In other words, rather than having income fall, dollar’s value and savings shrink with inflation, Kennedy and Reagan knew what worked – and did the reverse of modern Democrats, blindly spending.

Rather than spend non-existent revenue to buy votes with cheap money, Kennedy and Reagan did the reverse. They took time to explain that good things – is it not always true? – take time. If you cut taxes, incentivize people to earn and keep what they earn, they will work hard, prosper, spend and save.

In this highly polarized time, there is a great tendency to think all things MUST be political. But that is not true. Physics, chemistry, math, biology – and economics – do not change. Reality is that income tax cuts work, always have, along with limited government, personal responsibility, humility not hubris.

If we want to get back on track, we MUST elect those who understand what Kennedy and Reagan, William F. Buckley, Milton Friedman, monetarists, supply-siders, limited government constitutionalists, and everyday Americans understand. Sometimes less is more, much more. So, let us make it so.