"Can we afford Bob Dole's proposed 15 percent cut in taxes?" That is the question being asked by reporters and pundits as well as most Democrats and some Republicans. By at least one standard-the historical record on tax cuts and federal revenues-Dole's proposal is probably a good idea. Each time we have cut rates across the board, the U. S. Treasury collected more, not less, revenue.
Those presidents who have slashed tax rates along the lines proposed by Dole have been vindicated by the results. They have triggered economic booms; they have won overwhelming support from the voters; and they have increased federal revenues.
Let's look at the evidence. The first income tax became law in 1913, the year Woodrow Wilson was inaugurated. From Wilson through Bush, we had fourteen presidents. The misery index, which adds inflation and unemployment, tells us much about economic growth during these fourteen administrations. The three presidents with the lowest misery indexes-Coolidge, Kennedy, and Reagan-are also the only three who had major tax cuts in their administrations. The average annual Clinton misery index may prove to be an exception to the rule-low in spite of tax hikes-but his presidency isn't over yet.
What's even more remarkable is that in the Coolidge, Kennedy, and Reagan presidencies, the revenue from income taxes went up sharply after the rates went down. The experiences of these presidents teaches that cutting taxes is dynamic policy with dynamic effects-it changes the way people behave and invest. When this first happened in the 1920s, Coolidge's secretary of the treasury, Andrew Mellon, was not surprised. He had predicted it. "It seems difficult for some to understand," Mellon wrote, "that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may often be obtained by lower rates."
Under Mellon's direction, income taxes were cut from a range of 4 percent to 73 percent when Mellon first took office in 1921, to a range of 1/2 of 1 percent to 24 percent by 1929. In proportional terms, this was an eightfold cut for the lowest income group and a threefold cut for the highest. The results were astonishing. Investors took capital out of municipal bonds, collectibles, and foreign investments and plowed it into the American economy. The 24-percent top rate was, as Mellon predicted, small enough to attract capital for industry and large enough to generate new cash for the treasury. The revenue from income taxes gradually rose from $719 million in 1921 to over $1 billion in 1929.
A similar jump in revenue occurred after Presidents Kennedy and Reagan cut tax rates in the 1960s and 1980s. Tax revenues doubled in the eight years after the Kennedy tax cuts, even though tax rates had been chopped dramatically.
The Reagan tax cuts of 1981 were followed by further reductions in 1986. The top income tax rate was slashed from 70 percent when Reagan took office all the way down to 28 percent in 1986. Yet during the 1980s, tax revenues almost doubled from about $500 billion in 1980 to over $1 trillion in 1990. If spending had been held in check during those years, the U. S. Treasury would soon have been running surpluses, as it had in each year of the 1920s.
When President Clinton says he wants a tax cut only "as long as I can pay for it," he fails to understand the historical dynamics of cutting high tax rates. His tax increase of 1993 flattened, not boosted, the steady rise in federal tax receipts. Spending restraint has more to do with the shrinking deficit today than does the Clinton tax hike.
Cutting tax rates across the board is not voodoo economics or smoke and mirrors. It offers a timely lesson from history. Cutting tax rates to jump start the economy and slash the budget deficit are more than just compatible goals; the first can actually facilitate the second.