How Tax Cuts Really Impact The Economy

In the rare case that my Republican friends talk politics with me these days, the conversation always end up with discussions about tax cuts.  I hear about how rich job creators are the reason any of us have jobs, and that if we raise their taxes, we’ll all be jobless and homeless. Get government’s hand out of the wealthy’s pockets, and the economy will soar.  High taxes is a jobs killer, they opine, usually with a hint of condensation towards anyone who doesn’t automatically agree.

As someone who rarely just “automatically” agrees on anything, I thought I’d take a look at the history and data, and see if my unwillingness to just agree tax cuts help the economy is due to a liberal bias that keeps me from thinking clearly.

Usually, when I ask my conservative buddies to give me an example where a tax cut helped the economy, the go-to response is Ronald Reagan.  So let’s look at his tenure and analyze the data.

Reagan’s 1981 Tax Cuts

In 1981, Congress passed, and President Reagan signed The Economic Recovery Tax Act of 1981.  Over 3 years, the bill aimed to cut taxes for the wealthiest among us at the time from 70% to 50%.  It cut less and less as you fell down the economic ladder, all the way down to the lowest income earners, who saw their tax rates drop from 14 to 11%.

A 20% tax rate cut for job creators should, using conservative logic, be a boon for the economy, right?  Unemployment should go to near 0, the stock market should reach new highs and interest rates.

  • The unemployment rate jumped from 7.4% in August of 1981, when the bill was signed to 10.8% in November of 1982. – Source
  • In 1982, the government had to bail out 42 banks, the highest number since the great depression – Source
  • In 1981, the debt was $789.4 billion, by 1983 it had jumped to 1.13 trillion – Source


I’m no economist, but it seems to me like a 32% increase in unemployment, record bank failures and a nearly 70% balooning of the debt is bad for the economy.  In fact, Reagan thought it was bad too. So bad that he signed several laws that increased income taxes and used other government intervention to help bail-out banks.  The debt continued to soar, however, standing at $2.1 billion in 1989, when he left office.

So I say to my conservative friends, give me an example of when tax cuts helped the economy.  Not one that WILL happen, but one that actually happened.

Sometimes I hear this: “What about George W. Bush’s tax cuts?”

Bush’s 2001 Tax Cuts

The Economic Growth and Tax Relief Reconciliation Act of 2001,  the 39.6% tax bracket was be lowered to 35% ,  The law was signed in June 2001

In pushing the tax cut in, the Heritage Foundation said this –

The Bush plan would decrease Federal debt to the lowest possible level at which it could be redeemed–$818 billion in FY 2011 – Source

  • In 2008, the Federal Debt was $10,024,724,896,912.49, which is nearly 10 billion more than the esteemed Heritage predicted – Source
  • In June 2001, the unemployment rate was 4.5%.  In  June 2003, the rate was 6.3% – Source
  • From 2001-2004, there were 11 bank failures.

We all know what happened in 2008 with bank failures, but I pin that more on bank deregulation than on tax cuts.

The Kennedy Tax Cuts

The so-called Kennedy Tax cuts were tax cuts that were signed into law in 1964 by President Johnson.  They cut the rate by 20% across the board. – Source

  • In 1964 the Federal debt was $3.11, and in 1966 it was 3.19% – Source
  • Unemployment in 1964 was 5.3% and in 1966 it was 3.8% – Source
  • Bank Failure data was unavailable for this time period.

I’m always astonished this never gets mentioned.  On it’s face, it looks like the tax cuts of 1964 actually helped the economy. I’m waiting for one of my Republican friends to bring this up so I can respond with this

The tax cuts of 1964 were  signed on the eve of The Great Society program. That’s right, just after signing tax cuts, President Johnson began the Great Society, which created programs like Medicare, Medicaid, a 7% increase in Social Security, food stamps, National Foundation on the Arts and Humanities Act, Public Broadcasting, meat inspection, motor vehicle act, The Housing and Urban Development Act, generous increases in the minimum wage, and that’s just the start. – Source

I would argue that government programs and spending, not tax cuts were the cause of a very good economy in the mid-to-late 1960s.  Despite all these programs, the economy improved at a steady level, but it wasn’t the kind of growth we’ve seen in administrations that raised taxes, like Presidents Roosevelt, and Clinton.  I’d venture to guess that if it weren’t for the tax cuts in 1964, the economy would have done better considering the additional spending and government programs that helped middle and lower class Americans

Tax cuts are great for the wealthy, nobody will argue that. The middle and lower class, however, always seems to pay the price for the monetary windfalls pulled in by the wealthiest among us.  That’s why I’ve come to the conclusion that Tax cuts do not help, but rather hinder the economy.  Mixed with a whole lot of spending (almost New Deal level spending), the damage can be remediated, but don’t let anyone tell you tax cuts help everyday hard-working Americans; There is no evidence to back that statement up, and boat-loads of data that shows the opposite is true.

So the next time one of your conservative friends tell you tax cuts will light the economy on fire, ask them to prove it.  They won’t, because they can’t.  Tax cuts alone have never helped the economy, and there’s no reason to believe that they ever will.



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