The Great Tax Divide

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There was a time when Democrats and Republicans alike could talk sense about tax rates, in terms of what is best for the economy, without demagoguery about “tax cuts for the rich.”

Democratic presidents Woodrow Wilson and John F. Kennedy spoke plainly about the fact that higher tax rates on individuals and businesses did not automatically translate into higher tax revenues for the government. Beyond some point, high tax rates on those with high incomes simply led to those incomes being invested in tax-free bonds, with the revenue from those bonds being completely lost to the government — and the investments lost to the economy.

As President John F. Kennedy put it, “it is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” This was because investors’ “efforts to avoid tax liabilities” make “certain types of less productive activity more profitable than more valuable undertakings,” and this in turn “inhibits our growth and efficiency.”

Both Democratic president Woodrow Wilson and Republican presidents Calvin Coolidge, Ronald Reagan and George W. Bush said virtually the same thing.

This disconnect between higher tax rates and higher tax revenues is not peculiar to the United States. Iceland and India both collected more tax revenue after tax rates were cut. In Iceland the corporate tax rate was cut from 45 percent to 18 percent between 1991 and 2001 — and the revenue from corporate taxes tripled at the lower rate.

It doesn’t always have to be this way. Everything depends on how high the tax rate is initially and how other things are going in the economy. But at least we can do without the claims that tax cuts are just ways of helping “the rich” or that we have to raise the tax rate because we have a deficit. We need more tax revenue, not higher tax rates that can backfire.

This has not always been either a partisan issue or an ideological issue.

John Maynard Keynes said in 1933 that “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

New York Times economics writer David Leonhardt recently took the “no panacea” approach to rebut the argument for tax cuts. Presidents Bush 41 and Bill Clinton both raised tax rates, and the economy continued to grow, while the economy declined after President Bush 43′s tax rate cuts, Leonhardt argued.

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  • PaulRevereNow

    Calvin Coolidge's Treasury secretary, Andrew Mellon, cut taxes twice in the 1920's–1923 and 1926, and thus postponed the onset of the Great Depression, in the United States. The Depression of 1929 was actually world-wide; beginning in 1927 in the Far East. But liberal college professors almost never mention Mellon's tax cuts, or that the 1929 Disaster wasn't limited to America. Dr. Sowell's article is a good case for extending the Bush tax cuts.

  • guest

    Low hanging fruit exists to avoid this division on tax policy. Obama's corporate friends pay no taxes. Jeffrey Immelt's GE, Westinghouse, Disney, Warren Buffet and the UAW not only pay no taxes but receive money from the federal government in subsidies. Media Matters is tax exempt. We should ask Obama why can't his grafting friends pay anything before he takes more of our money. Ryan has a good message in increase the tax base, lower the rates. If GE wants to move to China and Mexico, let them go. Other companies, like Caterpillar and Boeing, will be happy to take their market share.

    Liberals today are focused on greed and avarice. Conservatives should focus on fraud. Fraud has the face of an honest man and the tail of a scorpion and acts as the true root of all evil. No law can prevent fraud. Fraud, not greed, caused the 2008 housing crisis. Barney Frank and Chris Dodd had explicit conflict of interests and GSEs fraud started in the early 90s.

    • trickyblain

      "Media Matters is tax exempt."

      As is FPM.

  • OregonBuzz

    I cannot believe that in the upper right hand corner of this page there is a petition to "Denounce The Violent Rhetoric of Michelle Bachmann". This is a joke, right Mr. Horowitz? What a travesty.

  • dmw

    Dr. Sowell's assertion that: "Today, the uncertainties generated by an activist and anti-business administration probably have more of a chilling effect on investments than the tax rate does." reminds me of a commencement address given by talk show host Neal Boortz to a group of graduating college seniors. Boortz warned the graduates that, when they endeavor to start a business of their own, they will automatically take on a large and influential partner — the federal government; and depending on where they are located and what they're doing, local and State partners as well. Taxing can be more than just "taxes".

  • cynthia curran

    Republicans are also against urban environment versus the suburbs. A study showed more process for immigrants in Santa Clara County versus La or La versus Orange or San Diego. Santa Clara is a blue county but its more suburban compared to LA. I think Suburban counties have an advantage of more job opportunities and upward mobility. Orange is slightly red and San Diego purple. Fresno is the rural example and its immirgants do poorly since they remain to do farm work or go on to casual labor read Victor Hansen on this Besides Tax policy encouarge Suburban development over urban. In fact among large counties in Ca,Santa Clara around 8.2 and Orange County and 7.9 have the lowest unemployment in California.

    • objectivefactsmatter

      "I think Suburban counties have an advantage of more job opportunities and upward mobility"

      When high tech industries took off, that is where the real estate was to open businesses quickly. The jobs grew more rapidly there from the mid-1980s onward till today as far as I know. The banking crash did not help matters either with so many urban office locations.

      You might have a point among those with children who prefer the suburbs on ideology but most of the jobs with attractive upward mobility potential appeared in the suburbs. Funny how liberals don't care as much about whether their children have room to play etc.

  • objectivefactsmatter

    "As President John F. Kennedy put it, “it is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” This was because investors’ “efforts to avoid tax liabilities” make “certain types of less productive activity more profitable than more valuable undertakings,” and this in turn “inhibits our growth and efficiency.”

    Now you've confused Obama supporters. That is the problem. Truth has gone out of fashion because it's too damn hard to teach to the unconverted.