The Case for Tax Cuts

Micha Gisser is a former UNM professor and currently serves as a Senior Fellow with the Rio Grande Foundation. He had a very interesting article (subscription required) on taxes in the Business Journal section of the newspaper recently. Gisser essentially went through the tax cutting successes and failures of the last three Presidents to have cut taxes significantly — JFK, Reagan, and George W. Bush and discussed their impact on the overall economy. I have previously compared the size and scope of these tax cuts here.
To sum up his arguments, Kennedy’s tax cuts were Keynesian in nature with the top income tax rate dropped from 91 percent to 70 percent and they succeeded in reducing unemployment from 5.7 percent to 3.8 percent while the deficit was actually reduced at the same time.
Gisser goes on to discuss Reagan’s tax cuts which included reducing the top income tax rate from 70 percent to 28 percent. He calls the record of these cuts “mixed” because budget deficit increased dramatically under Reagan. Where I disagree with Gisser is that the deficit and tax cuts are separate matters. The deficits under Reagan were at least partly spending induced as this chart shows.
Lastly, there is Bush whose capital gains tax cuts in particular Gisser calls a success. Although Gisser gives Bush an undeserved pass on his spending (see previous chart), it is important to recognize at a time when Bush’s economic policies are increasingly unpopular that his tax cutting policies are not to blame. Rather than raising taxes as Obama proposes, we should make the Bush tax cuts permanent and look for ways to reduce our corporate tax burden which is among the heaviest in the world.
Overall, Gisser makes a compelling case, but rather than saying that a particular tax cut has a “mixed record,” we should look at cutting taxes as a way to shrink government. Ultimately, that should be the goal.