University of Chicago economist, John Cochrane, states: "No country ever solved a debt problem by raising tax rates." Higher marginal tax rates create a drag on economic growth while lower tax rates encourage innovation and investment. This probably goes without saying, but Representative Paul Ryan's "Path to Prosperity" proposal cuts taxes. And this economic theory proves itself time and time again; I will list three examples below...
The "Forgotten Depression" occurred in 1920, where gross national product decreased by 17% and unemployment skyrocketed from 4 to 12%. Warren G. Harding was sworn in as President in 1921 and immediately cut tax rates for all income levels. The economy rebounded at lightning speed: by 1922, unemployment was cut in half; by 1923, it was down to 2.4%. The "Roaring Twenties" followed.
From the end of WWII to 1960 the US experienced four minor recessions. In 1961, unemployment reached 7.1% and (newly-elected) President John F. Kennedy wanted to stop these cycles of recessions. In 1964, shortly after his assassination, his tax cut plan was signed into law; it cut the top bracket from 91 to 70% and the lowest bracket from 20 to 14%. Once again, the economy benefited immediately: $14 billion increase in gross national product (which was an even higher leap than predicted), 22% increase in auto production, 21% increase in corporate profits, and 7% increase in personal income.
In 1981, Ronald Reagan was inaugurated as President and came into the "Carter Recession." Newsweek announced: "When Ronald Reagan steps into the White House next week, he will inherit the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago." He immediately cut tax rates and, eventually, reduced the top marginal rate from 70 to 28% by the time he left office. The US economy reached full employment (3-5% unemployment is "full employment") with 16 million jobs generated over the course of his presidency. The inflation rate dropped (13.5 to 3.2%) while real median family income grew by $4,000. Most importantly, the Reagan tax cuts nearly doubled federal revenue! Revenues from individual income taxes rose by 82% ($244.1 billion in 1980 to $445.7 billion in 1989.) Corporate income taxes rose by 60% ($64.4 billion to $103.3 billion.)
A quick side note: a similar thing occurred after the Bush tax cuts. After President Bush cut the dividend and capital gains taxes to 15% each in 2003, within two years, the stocks rose 20% and $15 trillion of new wealth was created. With the 2003 tax cuts, individual and corporate income tax receipts went up 40%, so the federal tax revenues from 2004-2007 increased by $785 billion-- the largest 4-year jump in US history. The reason why the federal deficit increased under the Bush administration had nothing to do with cutting tax rates, it was because he and the Democratic Congress spent into oblivion! Now, just like then, spending is our #1 problem, not taxes or revenue.
The Obama administration wants to raise the top tax rate to 44.8%, which would amount to $1.5 trillion tax increases on families and job creators. You may think that is fine-- they are rich, they can afford it. I guess that is partially true. But have you ever been hired by a poor man? If the rich get squeezed, you can be sure they will squeeze their workers to soften the blow to themselves, and we will all feel it eventually. Like Paul Ryan stated in a recent speech: "This class warfare is clever politics, but it is stupid economics. Redistribution of wealth does not create wealth. And bottom line, the government cannot close its enormous fiscal gap by simply taxing the rich."
The Obama administration wants to raise the top tax rate to 44.8%, which would amount to $1.5 trillion tax increases on families and job creators. You may think that is fine-- they are rich, they can afford it. I guess that is partially true. But have you ever been hired by a poor man? If the rich get squeezed, you can be sure they will squeeze their workers to soften the blow to themselves, and we will all feel it eventually. Like Paul Ryan stated in a recent speech: "This class warfare is clever politics, but it is stupid economics. Redistribution of wealth does not create wealth. And bottom line, the government cannot close its enormous fiscal gap by simply taxing the rich."
In addition to cutting taxes, Ryan's budget scales back and eliminates loopholes in the current tax code that distorts economic incentives. For example, 25 years ago, the GE CEO Jack Welch introduced himself at the Economic Club of Chicago by saying: "I represent a company that does not pay taxes." That is just not okay.
Finally, like I stated above, this budget proposal did not pass the Democratic-held Senate, however, Ryan has set the stage for debates on concrete examples of what this country needs to get back on its feet. I truly believe that the Obama administration is currently putting us on a path for decline, the American decline. Hopefully, Washington wakes the hell up and something like the "Path to Prosperity" will continue to be discussed (or passed!) as the 2012 elections near. So, I will end this post with a quote by John Kemp, Paul Ryan's mentor, which illustrates the difference between the above proposal and President Obama's strategy:
"We cannot progress as a society by using government to diminish one another. The only way we can all have more is by producing more, not by bickering over how to share less. Economic growth must come first..."
No comments:
Post a Comment