NCPA - National Center for Policy Analysis

Federal Revenues High

August 6, 1995

Now that GOP presidential contender Bob Dole has unveiled his program for tax cuts, political observers say he'll be bombarded with questions about cutting taxes versus reducing the federal deficit. Supporters say one answer is the historical record of tax cuts.

Dole's program embraces a combination of a 15 percent across-the-board cut in rates over three years, a $500 per-child tax credit, a reduction in the rate on capital gains to 14 percent and an expansion of Individual Retirement Accounts.

Historically, tax cuts have raised -- not lowered -- federal revenues.

  • From 1981 to 1988 -- when President Reagan's tax cuts affected the economy -- federal receipts grew at an average rate of 1.8 percent a year, after inflation.
  • During those seven years, real gross domestic product grew at an average rate of nearly 4 percent -- compared to only 2.3 percent under Clinton's tax increasing policies.
  • Similarly, receipts also rose following President Kennedy's tax cuts in the early 1960s.
  • And capital gains rate reductions are economic stimulants as well.

Moreover, by historical standards, "Federal revenues are very, very high," according to National Center for Policy Analysis economist Bruce Bartlett.

  • According to the Office of Management and Budget, all taxes -- federal, state and local -- consumed a record 30.4 percent of GDP in 1995.
  • Between 1993 and 1995, federal receipts as a share of GDP rose 0.9 percentage points to 19.3 percent of GDP.

An immediate 15 percent across-the-board tax cut only takes federal revenue back to 1992 levels according to Bartlett, who is credited with conceiving the plan.

Critics blame Reagan's tax cuts for big deficits, but they were caused by a 2.3 percent-a-year average increase in spending, not a revenue crunch. Dole's supporters argue that with a Republican White House and Congress, federal spending will grow more slowly, while the economy will soar on the heels of the tax cuts and revenues will climb.

Source: Laura M. Litvan, Thomas McArdle and John M. Merline, "Great Tax Debate Begins Anew," Investor's Business Daily, August 6, 1995.

 

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