Lower tax rates increase incentives to work, save and invest,
and these rate reductions will provide a significant stimulus when
they take effect. Consider the historical pattern. Cuts in tax
rates during the 1960's and 1980's resulted in faster growth,
rising incomes and more job creation. Critics in those decades
complained that rate cuts would allow the rich to keep too much of
their money, but upper-income taxpayers actually wound up paying a
greater share of the tax burden during those decades, in part
because lower rates reduced the incentive to hide, shelter and
In the 1960's, President John F. Kennedy cut the top rate to 70
percent from 91 percent. Between 1961 and 1968, as the economy
expanded by more than 42 percent and tax revenues rose by
one-third, the rich saw their share of the tax burden climb to 15.1
percent from 11.6 percent.
In the 1980's, the top marginal rate was cut to 28 percent from
70 percent. Critics charge that this caused higher federal budget
deficits, but they misread the evidence. Although the Reagan tax
cut was approved in 1981, it was phased in slowly (much as the Bush
tax cut is scheduled to be). Once the cuts were in place, the
economy grew and tax revenues soared. Revenues from personal income
taxes increased 28 percent (adjusted for inflation) by 1989. And
yes, the rich wound up paying more. The share paid by the top 10
percent jumped to 57.2 percent from 48 percent of total income tax
revenues. The share for the top 1 percent rose to 27.5 percent in
1988 from 17.6 percent in 1981.
Unfortunately, few members of Congress seem to understand how
taxes affect the economy. They cling to the belief that tax cuts
boost growth by putting money in the pockets of consumers. Because
they think consumer spending is the way to jump-start a weak
economy, they focus on temporary tax cuts like last year's tax
But government can't inject money into an economy unless it
first takes the money out. So even if rebates succeed in slightly
boosting consumer spending, the funds for the rebate came from a
reduction in spending elsewhere in the economy (probably from
private investment). This explains why last year's rebate was a
flop - and why Japan, for example, despite repeated stimulus
packages intended to pump up spending, has been mired in a 10- year
Last year's tax cut included the politically popular rebate
checks, but those checks didn't have much impact on the economy.
Only tax cuts that make saving and investment more attractive, like
lower income tax rates and a repeal of the inheritance tax, will
have a measurable impact.
Even the Organization for Economic Cooperation and Development
has noted that the United States has relatively high top rates for
income and estate taxes. It also suggests that tax revenues from
high-income taxpayers might rise if their tax rates fell.
The Bush tax cut is reminiscent of Clint Eastwood's old
spaghetti western "The Good, the Bad, and the Ugly." Last year's
tax bill included very good provisions to boost the economy. But
the vast majority of the good provisions don't take effect until
2004, 2006 and 2010. That's the bad news.
President Bush has won tremendous public support for his
leadership in the past five months. He is right to insist that his
pro-growth tax provisions be made permanent. President Bush is
right to say that any effort to undo his tax cut is "wacky," but
having a tax cut that's only good between 2004 and 2010 isn't much
better. The president wants to fix this mistake. He should also
push to speed up the tax cuts immediately. Congress should rally to
support these important improvements to last year's tax bill.
Daniel Mitchell is a senior fellow in political economy at the Heritage Foundation.
Originally appeared in the New York Times