May 22, 2001 | Executive Summary on Taxes
The decision to scale back the level of tax relief over the next 10 fiscal years means that less than 25 percent of the projected $5.6 trillion budget surplus will be returned to taxpayers. For this reason, it is more important than ever for lawmakers to craft the best possible package of tax cuts if they want to improve the economy's lagging performance.
One of the best ways to accomplish this goal would be to lower marginal tax rates on income, particularly the top income tax rate. This reform would have both immediate and long-term beneficial effects on entrepreneurship, investment, and small businesses.
By every reasonable measure, the tax burden in the United States is excessive and tax rates are too high. As the following statistics indicate, the time has come for across-the-board reductions in the rate of taxation.
Federal tax revenues in 2001 are projected to consume 20.5 percent of domestic economic output--the highest level of taxation the United States has ever experienced. It is matched only by the level reached in 1944, at the height of World War II.
The federal government is expected to collect $2.24 trillion in tax revenue this year--more than $16,500 for every worker in the country. The $2.24 trillion pouring into Washington is nearly double the amount of revenue raised as recently as 1993.
There is a distinct pattern throughout U.S. history: Simply stated, when tax rates are reduced, the economy prospers, tax revenues grow, and lower-income citizens bear a lower share of the tax burden. This experience teaches three lessons.
The tax cuts of the 1920s: Spurred in part by lower tax rates, the economy expanded dramatically. In real terms, the economy grew 59 percent between 1921 and 1929, and annual economic growth averaged more than 6 percent.
The Kennedy tax cuts: The Kennedy tax cuts helped to trigger a record economic expansion. Between 1961 and 1968, the inflation-adjusted economy expanded by more than 42 percent. On a yearly basis, economic growth averaged more than 5 percent.
The tax cuts of the 1920s: Personal income tax revenues increased substantially during the 1920s despite the reduction in rates. Revenues rose from $719 million in 1921 to $1.164 billion in 1928, an increase of more than 61 percent (during a period of virtually no inflation).
The tax cuts of the 1920s: The share of the tax burden paid by the rich rose dramatically as tax rates fell. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.
The Kennedy tax cuts: Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those earning more than $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.
High rates of taxation and a tax code that punishes working, saving, and investing do not add up to a recipe for long-term prosperity. History shows clearly that lower tax rates are an integral part of a reform package that maximizes freedom and prosperity. Reducing all income tax rates is a responsible way to promote long-term economic growth.
Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy at The Heritage Foundation.