"The math is the math. You can't lower (tax) rates and raise revenues."
- Barack Obama, December 11, 2011
When I heard the President make the above statement to Steve Kroft during an interview on the CBS News program 60 Minutes…well, I thought of Ronald Reagan. No, not because Obama seemed Reaganesque, as he would want us to believe, but because Ronald Reagan believed just the opposite, and proved that he was right.
And, I thought of Presidents Harding, Kennedy, and George W. Bush, too. All Presidents that had lowered tax rates that stimulated more economic activity – and increased the total revenue sent to the U.S. Treasury.
But, Obama seemed so sure of himself, as he is pretty good at doing, that I just had to go check the record. After all, he's the one who said, "The math is the math." So, I figured the numbers would hold the truth.
Warren G. Harding took office in March 1921 inheriting a huge debt from World War I and an economy in shambles. Harding had campaigned on a promise to slash spending, and once elected he put Charles Dawes, an experienced businessman and banker, in charge of the budget. In 1921, they reduced federal spending from $6.3 billion to $5 billion. In 1922, they slashed it to $3.3 billion – a reduction of 47.6% in just two years – and had the budget back in balance.
Harding believed the way to increase revenue was to stimulate economic activity and that meant going after the tax code. Harding and his Treasury Secretary Andrew Mellon understood that the top tax rate of 77 percent was encouraging wealthy Americans to seek tax shelters and investments that allowed them to avoid sending the government nearly 4 of every 5 dollars they made. Mellon said the following:
"The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people."
Harding and Mellon cut all individual income tax rates. The top rate gradually dropped from 77 to 25 percent by 1929. The lowest income earner's rate was cut from 4 to just 1/2 percent. It worked.
The economy roared and the Treasury was the beneficiary of the surge in incomes and corporate profits. Harding's policies even created a budget surplus which he used to pay down the wartime debt. Furthermore, even though the top marginal rates were dramatically reduced, wealth did "carry its share of the tax burden" as Mellon predicted. The tax burden paid by what qualified as "the wealthy" at the time ($50,000 and up) increased from 44.2 percent in 1921 to 78.4 percent by 1928. Harding never lived to see many of the benefits of his bold leadership. He died of a heart attack in August of 1923, but his policies were ably continued by his successor, Calvin Coolidge.
During the Great Depression, opponents demonized Harding and Coolidge claiming their low taxes somehow caused the recession. Herbert Hoover and then Franklin Roosevelt reversed the policies of Harding and Coolidge raising tax rates asserting that the government needed the money, that higher rates were only fair, and that somehow there would be no negative economic consequences. Sound familiar?
Amity Schlaes's great book, The Forgotten Man: A New History of the Great Depression documents in detail how the Keynesian policies of Hoover and FDR prolonged both the misery and recovery of that era, and established a legacy of big government that is at the root of our nation's fiscal problem today.
John F. Kennedy inherited an economic recession in 1961 and an economy still recovering from World War II and the after effects. But, he also faced the growing national security threat from the Soviet Union, The Cold War. Sounding very much like Andrew Mellon, President Kennedy said the following:
"Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now."
Just as happened four decades earlier, after Kennedy pushed through tax rate reductions, economic activity increased and with it, the wealthy paid a larger portion of all income taxes. Total revenue increased 16.9 percent between 1963 and 1966 (inflation adjusted dollars), and the portion of income taxes paid by those making over $50,000 increased by 57 percent while those earning less than $50,000 increased by just 11%. Once again, lower rates led to more total revenue receipts and a more progressive tax code (higher income earners paying a proportionately larger share).
Twenty years later, Ronald Reagan came to the Oval Office following the Carter era of double digit inflation and interest rates with high unemployment resulting in a deep and stubborn recession. Reagan became the champion of what would be known as Supply Side Economics, or Reaganomics. With a capable assist from economist Art Laffer and Congressman Jack Kemp, Reagan successfully made the case again that lower rates stimulated economic activity and would lead to increased total revenue. The now legendary across the board tax rate cuts worked again. Nominal tax revenue increased between 1981 and 1989 a phenomenal 65.4 percent, with most of the growth after 1985 when the full effect of the tax cuts was in motion. Even in inflation adjusted dollars, revenues grew by nearly 21 percent for the period. "Not bad. Not bad, at all," as the Gipper might have said.
As George W. Bush took office a recession was just beginning. Bush passed a round of tax cuts in 2001 scheduled for gradual implementation. Then, with the effects of the recession still taking hold, the terrorist attacks of 9/11/01 dealt the economy an enormous blow. It was obvious that the economy needed a big push faster than the slow implementation schedule passed in 2001 was providing. In 2003, Congress passed legislation to accelerate the implementation of the 2001 tax rate reductions and added more, particularly for businesses. Although Barack Obama tries to tell a different version of history, the lower across the board tax rates led to more total revenue in the U.S. Treasury for the fourth time in a century.
Total revenue increased from $1.782.3 billion in 2003 to $2,524.0 billion in 2008. That's a 41.6 percent increase in just five years; 20.3 percent in inflation adjusted dollars. In addition, during that same period 8.7 million more jobs were created according to the Bureau of Labor Statistics. As Obama said, "the math is the math." And, these numbers don't lie.
Numbers available from the Internal Revenue Service also prove that the current tax rates – the Bush tax rates – have yet again led to a more progressive tax system. The top income earners are paying a larger share of all taxes after the Bush Tax Cuts than they were before. For all the President's demagoguery against those at the top of the income ladder, as the following chart demonstrates, whatever the definition of "wealthy" is, the top few are carrying most of the load, and more low income earners are paying less or in many cases none at all. Here is a breakdown as provided by the IRS for the percentage of all income taxes paid for 2009 and 2001 ranked according to income category:
Percentage of Total Income Tax Paid by Income (AGI) Category
While total revenue to the federal government increased following significant tax reductions during each of the four mentioned Administrations, it is also noteworthy that the percentage of the GDP extracted by the government in tax receipts went down – another healthy indicator.
In the big Kennedy growth years, government receipts declined from 17.8% of total GDP in 1963 to 17.3% in 1966. Federal revenue equaled 19.6% of GDP as Reagan took office in 1981, but just 18.4% as he left in 1989. In 2000 as Bush was getting elected and just before the recession began, the government take of the GDP was 20.6%. By the time he left office in 2008 it was 17.5%. I couldn't find comparable numbers for the Harding years, but these make the point. Lower rates dramatically increased economic activity creating more total revenue for government while leaving a larger percentage of the GDP in the private sector for further economic growth.
During the current recession because of the massive unemployment and decline in economic activity, federal revenue has declined to just 14.9% of GDP in 2009 and 2010. Unfortunately, spending by the government was 25.0% of GDP in 2009 and 23.8% in 2010 adding $2.7 trillion to the federal debt. The challenge facing government is to significantly restrain spending and adopt policies that encourage economic expansion that will restore revenue to normal levels. Historical data clearly indicates that lower tax rates – not tax increases – is the right means to that end.
Democrats like to posit that the Bush Tax Cuts somehow destroyed both jobs and the economy and caused the current economic rut we find ourselves in. Harding, Kennedy, and Reagan critics made the very same false arguments. In every case, after their policies led to more economic activity and more federal revenue, the politicians ramped up spending and eventually raised taxes. We also know what that did to the economy.
Democrats also like to point to the Clinton economic policies – he raised taxes in 1993 – as evidence that tax increases somehow work. But, the numbers tell a different story; it didn't work all that well, after all. Clinton was the beneficiary of some very good fortune including the end of the Cold War, the dot.com boom, exceptionally low energy prices and low inflation. Giddy with the afterglow of the Reagan economy and his good luck, Clinton and a Democrat Congress raised taxes in 1993. Curtis Dubay, a senior analyst for economic policy at the Heritage Foundation explains that from 1993 until 1997 the economy "grew at a pedestrian 3.3 percent per year." That is solid performance, but not exceptional according to Dubay, and he further notes that "real wages declined, despite the perception that the 1990's were an era of unmitigated abundance."
As the above chart demonstrates, it wasn't until after a 1997 tax cut, passed by the Republican-led Congress, a tax cut "President Clinton resisted but eventually signed," Dubay notes, that things took off in a big way. In particular the 1997 reduction of the capital gains rate from 28 percent to 20 percent "opened the floodgates necessary for entrepreneurs to develop, harness, and bring to market the wonders of the new information technologies," according to Dubay's analysis.
In their frequent "it's all George Bush's fault" rants about our economic woes, Obama and the Democrats conveniently forget to mention other names like Barney Frank, Chris Dodd, Franklin Raines, Fannie and Freddie, or the Community Reinvestment Act. And, when Obama demonizes all those "fat cat bankers" he fails to hold up his good friend John Corzine as "Exhibit-A."
Obama would have us believe that if the wealthy only paid their "fair share" our problems would be over. But, contrary to his revisionist version of history, there is no evidence to back up his theory. There is no math to support "his math." Obama is making an all too familiar argument for America to commit more of the same mistakes of the past, not for adopting the wise lessons from history.
The President is careful to never define what his upper ceiling of tax rate "fairness" is. But, what history confirms is that Art Laffer was absolutely right when he demonstrated with his now famous graph that there is a relationship between tax rates and tax revenue. Specifically, as taxes increase from low levels, tax revenues also increase. However, there is a point (*T on the following chart) at which taxes become such a disincentive that people don't work as hard or eventually at all, and tax revenue declines. President Kennedy and Andrew Mellon made identical arguments.
Obama intimates that if only a handful of wealthy folks kicked in their "fair share" that all would be well in Washington. In Osawatomie, Kansas he even singled out the top "one hundredth of 1 percent" and the "breathtaking greed of a few" to make his case for higher taxes. But, he avoids the severity of the fiscal mess America is in which has been dramatically compounded by his policies.
Andrew Biggs is a scholar at the American Enterprise Institute and also the former Principal Deputy Commissioner of the Social Security Administration. So, he's familiar with numbers – big numbers – and, particularly aware of the challenges that await America if we fail to reform existing entitlement programs. Biggs knows that jacking up the tax rate on the wealthy is no real solution. According to his calculations, "to balance the budget over the next 25 years would require an immediate and permanent 30 percent increase in all federal taxes." All taxes, on everybody, by 30 percent, permanently – Harding, Kennedy, Reagan, Bush, and anyone with a little common-sense knows that would crush the economy, but it underscores that our problem is not that the wealthy or any other segment of the economy is taxed too little. Government spends way too much. The "fat cat" that Barack Obama should be demonizing is the one in Washington, DC.
When Steve Kroft suggested that Obama's $800 billion Economic Stimulus "didn't work," Obama got animated and interrupted saying the only thing wrong was that he hadn't spent enough. "We should have done an even bigger Recovery Act," he said. Based upon what? Certainly not the lessons of America's political and economic history!
If Obama were serious and really studied "the math," he would be siding with conservatives arguing that spending needs to be reduced to the 18-20% of GDP that sustained America throughout all but the war years of the last century.
He could champion scrapping the existing tax code and adopting a flat income tax or a consumption based plan like the Fair Tax. That would be a more logical "fairness" argument for him to make, but he won't.
He could stop his administration's deluge of new rules and regulations that are further burdening business and slowing recovery, but he won't do that either.
In Osawatomie, Obama declared that the America of the last 225 years was no more. The age of "you're on your own economics" has ended, he said. The "rugged individualism and healthy skepticism of too much government" – which he did allow was "in America's DNA" – well, apparently the President removed that gene from our gene pool. Henceforth, according to Obama, individuals and families will have to rely on the government to solve our problems and satisfy our wants. The nanny-state is open for business, and the business is "spreading the wealth" because income inequality is "the defining issue of our time." In this new age of enlightenment – or, entitlement - no longer are all men simply created equal, we're now committed to equal outcomes – regardless of input.
If you happen to be old-fashioned enough to still think that with low tax rates and limited regulation "our economy will grow stronger"... well, Obama says you're wrong. "It doesn't work. It never has worked," he said without offering his evidence. That's the "new math" in the Age of Obama. And, two plus two probably equals five, if Obama says so, too. Apparently the crowd was full of people who also shared his mistaken notion of history, and math, because they responded with roaring applause.
And, in this Age of Obama, the government – and most particularly the President – is no longer burdened by the restraint of deriving its "just powers from the consent of the governed" through an affirmative vote of the people's elected representatives in Congress. As Obama told Kroft, "I want to work with Congress…but what I'm not going to do is wait for Congress. So, wherever we have an opportunity…to get some things done…we're just going to go ahead and do them."
Obama is keeping one of his campaign promises – to transform America. We're witnessing it at frightening speed and massive consequence. Kroft pointed out to the President that 75% of people believe he has America heading in the wrong direction. But, Obama was unbowed, even indignant. "We did all the right things," he said, and "we've got a lot more work to do." Once again, Obama refuses to accept the truth in the numbers. Three out of four Americans are sending a message he refuses to accept.
Mr. President you can fool some of the people some of the time, but not enough of them to win -- and certainly not to deserve -- re-election.
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