Historical Epitomes of Tax Cuts' Efficacy
Taxation is a perennial issue upon which conservatives and liberals distinctly disagree. This disagreement has significantly intensified after the enactment of the Tax Cuts and Jobs Act, a significant tax cut and reform legislation passed under the Trump administration in December of 2017. Democrats acrimoniously and adamantly excoriated the act as a law that does literally nothing to help the working and middle classes but rather further enrich the already affluent and somehow exacerbates the state of the economy. They have constantly disseminated similar messages on virtually every tax cut proposed by Republicans in recent years, from the Reagan tax cuts in the 1980s to the Bush tax cuts in the 2000s. For the novel Tax Cuts and Jobs Act, there is still not enough evidence to make a conclusion as to the effects it has on the economy, whether nocuous or beneficial. There are, however, numerous precedents of tax cuts being effective in attaining their goals of stimulating the economy and helping people of every class. Every of them can doubtlessly confute every sophistical attack by the left on tax cuts. In this article, we are taking a glance at the major ones.
In 1920, with precipitous demobilization of the armed forces which let the labor market inundated with decommissioned troops and the labor costs consequently depressed and also the exorbitantly high taxes and excessively stringent regulations imposed by the Democratic Woodrow Wilson administration, an economic downturn struck the US. During this downturn, unemployment steeply skyrocketed to 11.7% while the gross domestic product decreased by 17%. This downturn was severe enough to stigmatize the progressive Democrats in power and catapult into the federal government conservative Republicans in that year’s general elections. Among those Republicans was Warren Harding who was elected to the presidency in an electoral landslide, easily defeating his Democratic opponent, Ohio governor James Cox. Upon assuming the office, Harding partially fulfilled his campaign promise of small government by reducing federal spending and rescinding regulations and the economy did recuperate. The recession ended in circa July 1921, but the economy still dawdled. After all, unemployment rate lingered at 6.7% in 1922, in fact relatively higher than the 5.2% rate before the downturn. Treasury Secretary Andrew Mellon and others in the Harding administration suggested a significant tax reduction was necessary to provide a facilitative environment for the economy to fully recover and burgeon. Therefore, in November of 1921, the Revenue Act of 1921 was passed by Congress and signed into law by President Harding. The act cut taxes considerably, decreasing top income tax rate from 73% to 58% and proved to be a key factor in ameliorating the economy as in 1923, only a year after the implementation of the new lower tax rates, unemployment plummeted to 2.4% and remained that low throughout the century and the country entered an era of stupendous prosperity, known as the “Roaring 20s” which lasted until 1929 when the stock market crashed and the Great Depression started. During this era, stock market rapidly grew and the economy significantly burgeoned. Dow Jones Industrial Average soared to 381.17 points in 1929 from below 80 points in the beginning of the decade whereas gross domestic product steadily increased every year by an average of 4.2%. Average income also rose from 6,460 to 8,016 dollars, a 24% increment. An era of prosperity indeed.
4 decades afterwards, there came another epitomic precedent of an effective tax reduction. In 1960, the Federal Reserve espoused contractionary monetary policy in order to curtail and circumscribe the growth of inflation. As a result, economic growth decelerated, falling from 6.9% to 2.1%, precipitating an economic recession which started in the same year. Although not as severe as other recessions, the 1960 Recession was considerably formidable as, during its presence, gross domestic product declined by 1.6% and the apex of unemployment rate was at the high of 7.1% in May 1961. This downturn prompted Senator John F. Kennedy of Massachusetts, the Democratic party’s nominee for president in the 1960 presidential election, to campaign on reducing tax, which was at the time forbiddingly high, and deficit spending as a measure to accelerate growth and reinstate America’s economic vigor. Kennedy went on to triumph on election night, defeating incumbent Republican Vice President Richard Nixon in a close and suspenseful contest. Once inaugurated, JFK began to fulfill his campaign promises, initially implementing new domestic programs and starting to popularize and push for tax reduction in public speeches. However, not until when he comprehended in his State of the Union address the issue of tax cuts in 1963, did he officially advance to the Congress his tax reduction plan. That plan stipulated that the top tax rate be decreased from the insanely high of 91% to 65%, the bottom rate be reduced from 20% to 14% and the corporate tax rate be dropped from 52% to 47% in order to stimulate the economy. Unfortunately, with the 1964 elections imminent, Republicans in the legislative branch were unwilling to acquiesce in Kennedy’s proposal and give him a legislative victory, thereby impeding his effort to cut taxes, notwithstanding their own profound concurrence with his agenda. The plan stagnated until one tragedy betided the nation. On November 22, 1963, traveling in a convertible limousine through Dealey plaza in Dallas, Texas, Kennedy was assassinated and his presidency came to an abrupt termination. The appalling assassination arguably sanctified his legacy and popularized his agendas and this, combined with JFK’s successor, President Lyndon Johnson’s superior congressional skills, led a tax bill to pass the Congress in February 1964, 3 months after this assassination, albeit slightly altered from JFK’s original proposal as Johnson compromised with legislators, promising the 1965 budget would not surpass 100 billion dollars in return for the bill’s enactment. This Kennedy tax cut reduced the top income tax rate from 91% to 70% and the corporate tax rate from 52% to 48% and it proved to have favorable effects on the economy. The nation happened to rejoice in one of the longest and prosperous economic booms in its history, lasting until the December of 1969. During this boom, income and wages steadily increased whereas poverty rate steeply declined. Meanwhile, unemployment rate decreased from 5.2% to 4.5% in the first year this cut was effectivized and plunged to 3.5% in 1969. In fact, nary a single month between December 1965 and January 1970 did the rate appear above 4.0%. The country’s gross domestic product also grew substantially. In 1965, it was growing at a robust rate of 6.5% and in 1966, the growth rate heightened to 6.6%. However, it slowed in the following years and the economy would soon enter an age of chronic rampant recessions. Regardless, contrary to some fallacious notions and erroneous expectations, the federal revenue waxed continually every year notwithstanding a considerable abatement in tax rates. To portray, in 1964, the federal revenue constituted 113 billion dollars. In 1969, it did 187 billion. All of this superbly accentuated the positive potency of this noteworthy tax cut and dispelled the false notion that it would have reduced tax revenue.
In the 1980s, another epitomes of effective tax cuts existed. As the decade emerged, the economy was mired in an almost inextricable severe downturn - a combination of contemporaneous economic recession and inflation known as “stagflation”. Starting as early as in 1972, this stagflation derived from an array of arguably failed and adverse economic policies of the government and was exacerbated by 2 coincidental oil shocks in 1973 and 1979 which dramatically augmented oil price and hence, inflation rate. It severely debilitated the country and despite originating in 1972, persisted into 1980. In that year, inflation rate was 13.5%, elevated from the 11.3% in 1979. This stupendously high rate was extremely concerning that the Federal Reserve under Jimmy Carter-appointed Paul Volcker determined to adopt contractionary monetary measures in order to stifle it. The Fed pertinaciously raised federal funds rate substantially to an astounding level. The rate was 11% in 1979 and hit its summit in July 1980 at unprecedented 20%. It proved to be effective in expunging inflation as inflation rate began to plummet and by 1983, stood under 4%. However, it also further increased unemployment and devastated the economy, thereby begetting a deflationary economic calamity named “the Early 1980s Recession”. During the presence of this recession, unemployment rate soared to the highest level since the Great Depression hitherto at 10.8% and although the Fed did inchmeal lower interest rates as inflation subsided, the rate remained largely unchanged. It required a more puissant change in rectifying things and capsizing the recession - a tax cut. In 1981, with the persuasion and pushing of the new president, Ronald Reagan, Congress passed a tax cut legislation - the Economic Recovery Tax Act (ERTA) - which was later signed into law by Reagan in August. The act extensively addressed tax issues and reduced tax rates, but most prominently, it decreased the top income tax rate from 70% to 50% and the bottom rate from 14% to 11% while cutting the maximum capital gains tax rate from 28% to 20%. With its enactment constellating interest rates continually dwindling and inflation diminishing, the economy began to expand, starting in December 1982. Lasting till July 1990, the expansion ushered the country into an age of economic recovery and prosperity. Unemployment plummeted to under 6% and over 15 million jobs were generated whilst the gross domestic product grew every year at an average rate of 4.3% annually and in 1984, even reached as high as 7.3%. Real GDP skyrocketed from 6.8 trillion dollars in 1982 to 9.3 trillion dollars in 1990, an upsurge of 2.5 trillion or approximately 37%. Amidst of this vast expansion, median household income increased by approximately 30% from less than 23,000 dollars at the beginning of the decade to almost 30,000 dollars.
Additionally, 5 years after the ERTA was passed, legislators on the Capitol Hill produced another tax bill - the Tax Reform Act (TRA) - and sent it to Reagan’s desk. Reagan signed the bill with alacrity in October, hoping to incentivize investment and enhance economic growth by providing a more facilitative and attractive economic environment. The TRA not only addressed tax reduction but also markedly revamped the tax code by simplifying it. The act amalgamated income tax brackets from 15 to 4 brackets and reduced the top income tax rate from 50% to 28% while increasing the bottom income tax rate from 11% to 15%. It also broadened the tax base by eradicating a plethora of tax loopholes, shelters and preferences. In the meantime, it mandated the capital gains tax be levied at the same rate as the individual income tax, which means the maximum capital gains tax rate was imposed at 28%, and reduced the corporate tax rate to 35% from 50%. The implementation of this act facilitated economic growth and cemented the expansion. As a result, unemployment rate fell, GDP growth rate accelerated and the economy continued to inexorably flourish until 1990. On the budget concern, these 2 Reagan tax cuts happened to boost, not depress, federal tax revenue. In 1982, the number was 618 billion dollars. In 1990, it was at 1.03 trillion dollars - a 400 billion dollar increase or thereabouts. And on the issue of taxation equality, in spite of considerable tax cuts to corporations and people of means, the top 1% earners viciously vilified nowadays actually paid more in taxes. In 1981, prior to the passage of the ERTA, the proportion of total federal income tax for which they were responsible was 18%. In 1988, it was 28% and has continued to increase to this day where they pay the majority of federal income tax. A virtually immaculate golden age of prosperity occasioned exclusively by the 2 tax cuts.
All of these historical exemplars, from the 1920s to the 1960s to the 1980s, splendidly illustrate the efficacy of tax cuts which have always produced satisfactory results. Although the effects of the newly enacted Tax Cuts and Jobs Act of 2017 remain rather fuliginous, they and the roseate momentum of the economy may have already suggested the act has spelt some positive impacts as conservatives have been claiming.