The Need to Pay for Tax Cuts ? Debunking the Myth

Politicians, and their spokespersons, have recently been repeating a myth that tax cuts cost the government money and thus must be funded. During his many speeches in support of Democrat candidates Obama refers to the Bush tax cuts as an unfunded $700 billion dollar liability. Nothing could be further from the truth.

Bush was not the first to implement tax cuts as a means of stimulating the economy. Presidents Kennedy and Reagan both used tax cuts to successfully improve the economy. Reagan had perhaps the most impact. When he took over the presidency from Carter the highest tax rate was an astonishing 70%. In Reagan?s second term he was able to cut that top tax rate from 70% to 35%. But rather than having to pay for the tax cut, the annual federal revenue derived from taxes nearly doubled by the end of his second term. That?s right, almost doubled; the income to the federal government from taxes grew from $244 billion in 1980 to $446 billion in 1989.

Another noteworthy statistic for those who want the rich to pay more, they did. In 1989 the top 1% percent, the super rich, paid doubled from the Carter era. Even though the top tax bracket was cut from 70% to 35%, the top 1% paid 38% of all taxes vs. 19% under Carter. By the way, in 2006 the top 1% paid 40% of all taxes; 40%!

Go a little further back in history and consider the much respected President Kennedy who successfully lowered the top tax rate from an incredible 90% to 70% and lowered the corporate tax rate from 52 to 48% (amazingly high by today?s standards which is 35%). As a result federal tax revenues increased 6.4 % per year for next 7 years, 5 times the rate of increase in the previous 10 years. As Kennedy said at the time, ?Prosperity is the real way to balance our budget. . . . By lowering tax rates, by increasing jobs and income; we can expand tax revenues and finally bring our budget into balance?. Current politicians on both sides should take a lesson.

Kennedy?s reference to increasing jobs and incomes is especially important. Politicians on both sides have been unable to affect our unemployment problem. Those unemployed do not pay taxes, and yet we who are working and paying taxes must support those unemployed for more than two years. That?s a double whammy of no income taxes, but taxes paid out to support the unemployed.

If our politicians will vote to extend the entire Bush tax cuts and do it with impact by making the extension either permanent or for at least 4 years, the immediate affect will be investment by businesses that can then successfully plan their future operations knowing what the future tax impacts will be. If you really want to see growth, the politicians need to forget the value added tax and the cap and trade tax. The unemployed will be back to work and producing taxes. The business world will be making money again, and yes, paying even more taxes. If all that happens, one more thing will be needed. The government must reduce itself; local, state and federal.
Greg Young
Mammoth Lakes