In 1920 the top marginal tax rate was 73% of over1 million dollars earned. In 1925 the top marginal rate was lowered to 25% of over 1 hundred thousand dollars earned. And then in 1929 we had the Great Depression. Tax cuts ladies and gentleman…the myth, the math, the legend.

Nobody who has made any money seems to want to pay taxes. Despite painstaking explanations that it is in fact tax money that allows our country to operate, one may still hear constant complaining and abject aversion to the very concept of taxes. This is not a political issue as such seeing that both rich Democrats and Republicans find all sorts of creative ways to avoid paying their fair share of taxes. This idea that one should be able to keep all of the money he or she makes is as universal as love and hate. Even if you believe as Dave Ramsey does that one should go about the business of making a ton of money and then giving it all away, the theme is still constant; no taxes to the government. Apparently giving unto to Caesar what is his has become rather passé.

Where the two political sides seem to differ is how much one should be taxed. The Democrats purport that rich folks should be taxed at high amount in order to pay for services for those who are in need as well as the usual list of civil services we all enjoy (cops, firemen, sanitation, etc.) The Republicans counter-argument is that if you leave the tax rate somewhere near the bottom, the money saved in taxes will some how reappear in government coffers by way of an expanding Gross Domestic Product. In other words, let rich folks keep most of their money and the government will still be awash in the billions of dollars it takes to balance the budget. I’m not sure which fight has gone on longer, this one over taxes or the Civil War.

Not even abortion unites conservatives the way the issue of tax cuts does. No matter how far right one is, the thing they all want is a tax cut. They argue that Reagan cut taxes and the economy expanded. They argue that Bush cut taxes and the economy expanded. They argue that taxes were astronomical during Carter’s presidency and that retarded the economy until it was saved by Reagan. Whether we call it Trickle Down Economics, Supply Side Economics or Voo Doo Economics, it’s all the same; if taxes are low then the country will prosper and the GDP will grow exponentially. None of this is true.

The question over tax cuts can leave one scratching their heads wondering if anyone is telling the truth whether or not they work. Certainly pro-tax cut organizations like the Heritage Foundation will make a concerted effort to show how great they are while the opposition shows counter-evidence. So what’s the real answer? This is what I’ve attempted to answer here. Instead of being dependent on other people’s research I’ve pulled about a 100 years of economic data myself from the government’s own published database. I’ve painstakingly recorded the GDP, the top marginal tax rate, and unemployment in the graph below to show in concrete numbers what the effects of tax cuts have been. I will also address the effects of other variables such as federal spending, economic bubbles bursting, corporate scandals and taxation versus incentive to work.

The Effect of Tax Cuts on the Economy

Over the last century the US government has cut taxes a number of times. Conservatives state that when tax rates are lowered, the economy’s GDP improves and living standards increase. It is equally true that when you increase taxes the GDP improves and the living standards increase. In 1933 the top federal tax rate was almost tripled. Yet starting in 1934 the economy was expanding at a double-digit rate and in spite of the increasing federal tax rate of up to 91% continued to expand (with a few hiccups) for the next 30 years, according to the data in the chart above.

Of course there is also evidence in the above chart that despite a decrease in taxes, there was an accompanying contraction in GDP. From 1981 to 1982 the tax rate was dropped by almost 20 points (69.124% to 50%) yet the increase in the GDP dropped from 12% to 4% and did not get to double digits again until 1984. Since 1990 the GDP increase has never risen above 6.5% no matter what the tax situation was.

The arguments in favor of tax cuts have been premised on the idea there is a direct relationship between tax cuts and GDP growth. As is plainly evident in the chart above, not only is there no direct relationship at work but also there doesn’t appear to be any relationship at all. From about 1953 on the economy grows and contracts at no more than 5% regardless of where the tax rate was. The short answer to what the effect of tax cuts on the economy is that there is no effect. It would appear that other factors have a direct relationship on the GDP to explain expansion or contraction and tax cut are irrelevant.

The Effects Of Tax cuts on Employment

Another argument people make in favor of tax cuts is that it is the wealthy that create jobs and as such if you let them keep most of their dough, they will create jobs with them. In short, if you cut taxes, especially on the wealthy, you will create jobs and expand the GDP. This too is a myth based on wishful thinking.

Once again the chart shows that there is no effect on unemployment simply because tax cuts do not effect GDP. For the most part, the unemployment rate inversely follows the percentage increase in the GDP. In other words, in more years than not, if the GDP increased so did employment. This sounds great but if you look at the chart more closely you will see that despite massive changes in the tax rate, the unemployment rate has remained relatively stable within about 5% since 1949. Based on the chart above there is no significant relationship between job creation and tax cuts therefore there is little point in allowing the most rich amongst keep the lions share of their wealth based on the promise of jobs.

Furthermore if you examine the relationship between small business taxes and state GDP you get a 0 correlation coefficient (a correlation coefficient lies in the amount of variation in one variable that is accounted for by the variable it is correlated with. As a rule of thumb, correlation coefficients between .00 and .30 are considered weak, those between .30 and .70 are moderate and coefficients between .70 and 1.00 are considered high) and if you look by state at the relationship between small business taxes and unemployment you get –0.195. Looking at today’s economic environment you have companies with huge capital reserves that are not expanding and therefore not creating jobs. In fact in many cases they are cutting jobs despite receiving gains in net profit. Giving them tax breaks will not change their minds on whether the money earned in their return on investment (ROI – A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments) is worth investing in jobs. When they believe they can make more money by hiring people they will but there is no evidence of this in today’s business culture.

Tax Cuts Pay For Themselves

Proponents of tax cuts argue that if people can keep most of their wealth, they will actually generate more tax revenue by spending than when they are taxed directly. I’ve already established the non-relationship between tax cuts and GDP growth but the idea that collected taxes increases when you cut taxes is a separate issue altogether, except that it isn’t because the GDP and collected taxes are directly proportional. Assuming there is no change in the tax rate when the GDP goes up, tax collections will go up too. This is much the same as when your salary goes up (assuming no other changes) your taxes go up as well. The argument that tax cuts pay for themselves is based on the idea that the economy grows because of the tax cuts. The reality is that the economy grows for many other reasons but not tax cuts. To put it another way, if the government increased it’s budget by 2% and the economy grew 4%, you could say that the 2% paid for itself by the increase in the economy. As long as the economy is growing then government receipts will increase in kind.

Some also argue that whatever the impact of tax cuts may be, the real problem is spending. The argument goes that tax cuts do increase federal revenue but the increase is devoured by increases in spending. It is said that if spending were to remain constant or even decreased, then the evidence of tax cuts expanding the economy would be apparent. The problem with this argument is that relies on the premise that tax cuts increases the GDP when the chart above shows no evidence. Spending ourselves into bankruptcy is a problem to be sure but the solution to insolvency is not more tax cuts. Tax cuts would actually create more problems than it would solve. In what world does one pay his bills when his employer cuts his salary? That doesn’t make any sense in terms of dealing with our deficits and neither does tax cuts.

If Tax Cuts Are Not Relevant to GDP, What Is?

Growth in GDP hasn’t grown much in 50 years. It ebbs and flows but as the chart shows it has remained relatively stable since the 1950’s. There have been a number of variables that have had an effect on the economy in both the long and short term. The primary ones are transportation, communications, computers, and the advent of a truly global economy. Add to this the change in our society from manufacturing to services and you end up still trying to absorb the changes of the last 30 years. So what can the government do to improve the GDP? Probably the best it can do is to encourage innovation. With a 14 trillion dollar and growing economy it is becoming more difficult for any one entity to move the needle.

Conclusion: The Conservative Case AGAINST Tax Cuts

The argument over tax cuts is primarily a political one. Liberals are against them because they want the tax revenue to fund their social welfare programs. Conservatives are for them because either they believe that it will benefit the economy or they are not thrilled about paying for social welfare programs. On the first point, there is no case to be made regarding how helpful tax cuts are to the economy. Since they have no effect one way or the other, saying you are for tax cuts amounts to the same as saying you are for keeping nearly all your wealth because you want to. It is as simple as that. We have a word for that in the English language and it’s called “greed.” Conservatives use the same roads, call on the same police and firemen, are serviced by the same sanitation crews and are represented by the same politicians as the rest of the country so as such, they are responsible for their fair share of taxes as well. The idea that somehow large segments of the population should be above paying taxes is neither conservative nor mature.

Conservatives cannot continue to have a conversation with itself and expect to win elections. I don’t believe conservatives are racist as such. Instead I believe the word we are looking for here is elitist. Conservatives don’t care if you are black or white, but poor or not poor, that’s a whole other problem. If that is not a fair categorization then why when the conservation turns to cutting spending the first thing a conservative suggests is to cut welfare when military spending represents 20% of the overall budget?

There are plenty of conservative solutions to social welfare problems such as the Basic Income Guarantee (see Milton Freidman) but today’s conservative doesn’t even bother to engage in the debate. Instead you have idiots like Walter E Williams suggesting we cut all social safety nets and return to life pre-New Deal (when the solution to poverty was usually death). This is not the way to bring more voters in to the big tent and win elections. It is however the way to prove to the critics that more and more the GOP is the party of filthy rich aristocrats and evangelical middle class Americans. Conservatives should be utilizing the vast cadre of ideas to deal with social problems not ignoring them and then demanding to keep almost all of their income.

Lastly, Dick Cheney once mused that Reagan proved deficits don’t matter. He meant that the average American doesn’t vote for or against a politician based on how much they’ve increased the deficit. That’s not the case anymore as the TEA Party can tell you. It is not conservative to whine about the deficit and then demand a tax cut, therefore making it ever more difficult to balance the budget and pay off the deficit. It is conservative to suggest both tax increases, which have no impact on the GDP, and to cut spending (starting with the biggest items first i.e. military, Social Security, Medicaid and Medicare). To do the opposite of that is to in fact prove the criticism of conservatives that we are all in a state of denial. Fiscal responsibility means paying your taxes as well as curbing your spending. It does not mean everybody keeps all of their wealth and to hell with the rest of the world.

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