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Your Views: Data show loose ties between tax cuts, revenue rise

POSTED: April 20, 2011 1:00 a.m.

Both political parties have clearly shown a lack of will to cut entitlement program spending, so increasing tax revenue seems to be the only solution to the nation's growing fiscal crisis. If that is the case, what is the best way to increase tax revenue?

We often hear that income tax cuts result in increased revenue. Widely respected columnists, talk show hosts and some members of Congress often point to tax cuts during the Kennedy, Reagan, G.W. Bush and Coolidge administrations, saying that in each case federal tax revenues increased in the following years. This sounds too good to be true, so I decided to look at the data.

The Kennedy-era tax cut took effect in 1964, when the top tax bracket was cut from 91 percent to 70 percent and tax rates on lower income brackets were cut by two or more percentage points. Tax receipts had been steadily increasing for five years prior to 1964 and they continued to increase at a slightly higher rate in the following years.

It would be hard to argue that the lower tax rates beginning in 1964 did not have at least a slight positive effect on tax receipts. Even after the 1964 cut, however, top earners were still taxed at a 70 percent rate.

The next tax rate cuts came in 1982, when the top bracket was reduced from 70 percent to 50 percent and lower income brackets were again cut. Then in 1986, a major overhaul of the tax code reduced the number of brackets from 15 to five, with the top bracket at only 38.5 percent beginning in 1987. If tax cuts really increase revenue, these cuts should demonstrate the effect.

In the 15 years prior to 1982, income tax revenue rose at an average rate of about 10 percent each year. In the next 15 years, revenue rose at an average annual rate of less than 6 percent. So the claim that revenue increased is correct, although meaningless, because the rate increase declined significantly.

The 1980s also saw huge increases in annual budget deficits, resulting in the national debt nearly tripling during the Reagan years. One might expect increased deficit spending alone to increase tax revenue because of the stimulating effect such spending would have on the economy. However, any such benefit was more than offset by the decreased contribution of the highest income earners to the total tax receipts.

Following the Bush tax cuts in the early 2000s, tax receipts actually dropped for a few years, but then only saw an average increase of less than 1 percent per year from 2001-09.

If tax cuts result in revenue increases, then it follows that tax increases should result in decreased revenue. Not so. The tax increases effective in 1991 and 1993 were followed by an average annual gain in revenue of 7 percent from 1991 through 2000.

The logical conclusion of this analysis is that those who propose cutting taxes or maintaining the Bush tax cuts as a solution to the growing fiscal crisis facing our nation are clearly out of touch with reality. It is high time for serious debate about how this nation can fund its ever more expensive entitlement programs and which of those programs it can indeed afford.

Russ England


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