This week I want to wander a bit from our discussions on management problems to discuss the insane debate going on in Washington about tax rates. As businessmen and women, we all recognize the impact that Federal tax rates have on our business planning and investment. The debate in Congress about whether to let the Bush tax cuts expire or not has been the most unfocused discussion imaginable.
It is very hard for me to believe that these representatives of ours can participate in this discussion in the face of the most overwhelming evidence that lower tax rates encourage more investment and a larger GDP and more revenue to the treasury as a result. The data is available to anyone who takes the time to investigate.
The first hard evidence was the Kennedy tax cuts in 1963. In 1963, the top marginal rate was 91%. By 1966, the top rate had been reduced to 70%. Between 1963 and 1966, revenue to the Treasury had increased from $130.8 billion to $160.6 billion – a 22.7% increase. At the same time, the revenue as a percent of GDP went from 17.8% to 17.3% - virtually no change.
Next came the Reagan tax cuts in 1981. The 70% top rate was reduced to 50%. From 1981 to 1983, the revenue increased from $599.3 billion to $808.4 billion – an astounding 34.9% increase! As a percent of GDP, the range went from 19.6% in 1981 to 17.5% in 1983. The GDP had grown so fast that even the higher rate of tax collection ended up as a lesser percent of the GDP.
The top rates were further reduced to 38.5% in 1987 and 28% in 1989 as part of the phased Reagan cuts. In 1987, revenue was $854.3 billion. By 1989 it was $991.1 billion, another 16% increase. The percent of GDP was unchanged at 18.4%
Between 1991 and 1993, the tax rate was raised back to 31 and then 39.6%. Revenue did increase during this period, which was free of any recession, from $1,055.0 billion in 1991 to $1,154.3 billion in 1993, a 9.4% increase over those three years – basically inflation. It is important to note that the percent of GDP remained in the range 17.8 to 17.5%.
Then came the Bush phased tax cuts from 2001 to 2003, where the rates went from 39.6 to 39.1 to 38.6 and finally to 35% in 2003. In 2003, revenue was $1,782.3 billion and went to $2,153.6 billion in 2005, a 20.8% increase. As a percent of GDP the range, once again, was 16.2 to 17.3%.
The most obvious result of these studies from the year 1960 to the present is that the revenue to the Treasury as a percent of the GDP varies very little around the 17 to 18% - regardless of the tax rate. However, since that revenue increases dramatically at the lower tax rates, the GDP expands.
How can anything be clearer to those bumpkins – both Democrats and Republicans – in Washington when they continuously blame tax revenues for the deficits and play class warfare pitting the rich against the upper middle class. The poor and lower middle class in this country actually pay no tax, so it is silly to include them in this drama all aimed at our Representative’s own re-election prospects.
One wonders if there is any hope whatsoever.