NCPA - National Center for Policy Analysis

Cut Taxes To Raise Government Revenues

January 17, 1996

Study after study arrives to reinforce the evidence that lower taxes mean greater economic growth, leading to increased government revenues. But those who apparently enjoy the status quo and want it to continue keep deriding the concept as "supply-side alchemy" and charge that a flat tax will give the wealthy a free ride. Not true, say many analysts who have studied the question. They note:

Tax rate reductions in the 1920s, 1960s and 1980s resulted in increases in government revenue, while taxes paid by the wealthy rose.

Tax rate increases in the 1930s prolonged the Great Depression, and inflation-induced bracket creep in the 1970s and early 1980s hindered economic growth in the 1973-82 period.

Looking at the 1920s:

  • In the first half of that decade, the top tax rate was slashed from 73 percent to 25 percent.
  • Tax revenues surged from $719 million in 1921 to $1.16 billion by 1928.
  • The share of the tax burden paid by the rich -- $50,000 and up in those days -- rose to 78 percent in 1928 from 44 percent in 1921.

Now consider what happened in the 1960s.

  • The top tax rate was reduced from 91 percent in 1963 to 70 percent by 1965.
  • Tax revenues climbed more than 16 percent between 1963 and 1966.
  • Tax collections from those making more than $50,000 a year climbed 57 percent during that period, but grew just 11 percent for those making less.
  • Those in the upper income brackets saw their portion of the income tax burden increase to 15 percent from 12 percent.

Then there were the 1980s:

  • Between 1980 and 1988, the top tax rate was reduced from 70 percent to 28 percent.
  • Revenue surged from 1983 to 1989, increasing by more than 54 percent (or an inflation-adjusted 28 percent).
  • The top 1 percent of earners saw their share of the income tax bill rise from 18 percent in 1981 to 28 percent by 1988.

During the current decade:

  • Taxes were increased in 1990 and 1993.
  • The result was that taxes paid by those earning above $200,000 fell 6.1 percent in 1991, while taxes paid by those with lower earnings rose 1 percent.
  • Between 1992 and 1993, taxable income among those with earnings of less than $200,000 climbed 3.3 percent, while it declined 2.3 percent for those making more.

Proponents of cutting tax rates are convinced these findings will silence those who sing the Sirens' song of class warfare.

Source: Daniel J. Mitchell (Heritage Foundation), "Supply-Side 'Alchemy' at Work," Wall Street Journal, January 17, 1996.


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