By Michael D. LaFaive, published on Nov. 1, 1997
Why does debate over the effects of income tax cuts on revenues and the budget deficit never end? Do we not have ample empirical data that demonstrates that lowered taxes produce "more" revenue, not less, by stimulating economic activity?
The answer to these questions first requires a little background information.
In each of the last three cuts in marginal tax rates, revenues received by the U.S. Treasury have increased. Coolidge cut tax rates in the 1920s, Kennedy cut marginal tax rates in the 1960s, and Reagan cut them in the 1980s.
Under Coolidge, marginal tax rates were cut from the top rate of 73% to 24%. The economy rewarded this policy by expanding 59% from 1921 to 1929. Revenues received by the federal treasury increased from $719 million in 1921 to more than $1.1 billion 1929. That's a 61% increase (there was zero inflation in this period). Growth averaged more than six percent annually. We are currently growing at 2.5%.
Under Kennedy, marginal tax rates were cut from a top rate of 91% to 70%. In real dollar terms, the economy grew by 42%, an average of 5 percent a year from 1961 to 1965. Tax revenue to the U.S. Treasury increased by 62%. Adjusted for inflation, they rose by one-third.
Under Reagan, marginal tax rates were cut from a top of 70% to 28%. Revenues (from all taxes) to the U.S. Treasury nearly doubled. According to the Budget of the U.S. Government, FY 1997, Office of Management and Budget. Revenues increased from roughly $500 billion in 1980 to $1.1 trillion in 1990.'
