Posts Tagged ‘Supply-side economics’

I’ve been writing about the Laffer Curve for decades, making the simple point that there’s not a linear relationship between tax rates and tax revenue.

To help people understand, I ask them to imagine that they owned a restaurant and decided to double prices. Would they expect twice as much revenue?

Of course not, because people respond. Customers would go to other restaurants, or decide to eat at home. Depending on how customers reacted, the restaurant might even wind up with less revenue.

Well, that’s how the Laffer Curve works. When tax rates change, that alters incentives to engage in productive behavior (i.e., how much income they earn). In other words, to figure out tax revenue, you have to look at taxable income in addition to tax rates.

For some odd reason, this is a controversial issue.

My wayward buddy Bruce Bartlett posted a video on Facebook from Samantha Bee’s Full Frontal show. The goal was to mock the Laffer Curve, and here’s the part of the video featuring economists dismissing the concept as a “joke.”

Wow, that’s pretty damning. Economists from Stanford, Harvard, MIT, and the University of Chicago are on the other side of the issue.

Should I give up and retract all my writings and analysis?

Fortunately, that won’t be necessary since I have an unexpected ally. As shown in this excerpt from the video, Paul Krugman agrees with me about the Laffer Curve.

And Krugman’s not alone. Many other left-leaning economists also admit there is a Laffer Curve.

To be sure, as Krugman noted, there is considerable disagreement about the revenue-maximizing tax rate. Folks on the left often say tax rates could be 70 percent while folks on the right think the revenue-maximizing rate is much lower.

I have two thoughts about this debate. First, if the revenue-maximizing rate is 70 percent, then why did the IRS collect so much additional revenue from upper-income taxpayers when Reagan lowered the top rate from 70 percent to 28 percent?

Second, I don’t want to maximize revenue for government. That’s why I always make sure my depictions of the Laffer Curve show both the revenue-maximizing point and the growth-maximizing point. At the risk of stating the obvious, I prefer the growth-maximizing point.

The bottom line is that I think the revenue-maximizing point is probably closer to 30 percent, as shown in my chart. Especially in the long run.

But I wouldn’t care if the revenue-maximizing rate was actually 50 percent. Politicians should only collect the relatively small amount of revenue that is needed to finance the growth-maximizing level of government spending.

P.S. As tax rates get closer and closer to the revenue-maximizing point, that means an increasing amount of economic damage per dollar collected.

P.P.S. Paul Krugman is also right that value-added taxes are not good for exports.

Addendum: This post was updated on August 12 to add the clip of selected economists mocking the Laffer Curve.

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In the past few years, I’ve bolstered the case for lower tax rates by citing country-specific research from Italy, Australia, Germany, Sweden, Israel, Portugal, South Africa, the United States, Denmark, Russia, France, and the United Kingdom.

Now let’s look to the north.

Two Canadian scholars investigated the impact of provincial tax policy changes in Canada. Here are the issues they investigated.

The tax cuts introduced by the provincial government of British Columbia (BC) in 2001 are an important example… The tax reform was introduced in two stages. In an attempt to make the BC’s economy more competitive, the government reduced the corporate income tax (CIT) rate initially by 3.0 percentage points with an additional 1.5 percentage point reduction in 2005. The government also cut the personal income tax (PIT) rate by about 25 percent. …The Canadian provincial governments’ tax policies provide a good natural experiment for the study of the effects of tax rates on growth. …The principal objective of this paper is to investigate the effects of taxation on growth using data from 10 Canadian provinces during 1977-2006. We also explore the relationship between tax rates and total tax revenue. We use the empirical results to assess the revenue and growth rate effects of the 2001 British Columbia’s incentive-based tax cuts.

And here are the headline results.

The results of this paper indicate that higher taxes are associated with lower private investment and slower economic growth. Our analysis suggests that a 10 percentage point cut in the statutory corporate income tax rate is associated with a temporary 1 to 2 percentage point increase in per capita GDP growth rate. Similarly, a 10 percentage point reduction in the top marginal personal income tax rate is related to a temporary one percentage point increase in the growth rate. … The results suggest that the tax cuts can result in significant long-run output gains. In particular, our simulation results indicate that the 4.5 percentage point CIT rate cut will boost the long-run GDP per capita in BC by 18 percent compared to the level that would have prevailed in the absence of the CIT tax cut. …The result indicates that a 10 percentage point reduction in the corporate marginal tax rate is associated with a 5.76 percentage point increase in the private investment to GDP ratio. Similarly, a 10 percentage point cut in the top personal income tax rate is related to a 5.96 percentage point rise in the private investment to GDP ratio.

The authors look specifically at what happened when British Columbia adopted supply-side tax reforms.

…In this section, we attempt to gauge the magnitude of the growth effects of the CIT and PIT rate cuts in BC in 2001… the growth rate effect of the tax cut is temporary, but long-lasting. Figure 2 shows the output with the CIT rate cut relative to the no-tax cut output over the 120 years horizon. Our model indicates that in the long-run per capita output would be 17.6 percent higher with the 4.5 percentage point CIT rate cut. …We have used a similar procedure to calculate the effects of the five percentage point reduction in the PIT rate in BC. …The solid line in Figure 3 shows simulated relative output with the PIT rate cut compared to the output with the base line growth rate of 1.275. Our model indicates that per capita output would be 7.6 percent higher in the long run with the five percentage point PIT rate cut.

Here’s their estimate of the long-run benefits of a lower corporate tax rate.

And here’s what they found when estimating the pro-growth impact of a lower tax rate on households.

In both cases, lower tax rates lead to more economic output.

Which means that lower tax rates result in more taxable income (the core premise of the Laffer Curve).

The amount of tax revenue that a provincial government collects depends on both its tax rates and tax bases. Thus one major concern that policy makers have in cutting tax rates is the implication of tax cuts for government tax receipts. …The true cost of raising a tax rate to taxpayers is not just the direct cost of but also the loss of output caused by changes in taxpayers’ economic decisions. The Marginal Cost of Public Funds (MCF) measures the loss created by the additional distortion in the allocation of resources when an additional dollar of tax revenue is raised through a tax rate increase. …if…government is on the negatively-sloped section of its present value revenue Laffer curve…, a tax rate reduction would increase the present value of the government’s tax revenues.

And the Canadian research determined that, measured by present value, the lower corporate tax rate will increase tax revenue.

…computations indicate that including the growth rate effects substantially raises our view of the MCF for a PIT. Our computations therefore support previous analysis which indicates that it is much more costly to raise revenue through a PIT rate increase than through a sales tax rate increase and that there are potentially large efficiency gains if a province switches from an income tax to a sales tax. When the growth rate effects of the CIT are included in the analysis, …a CIT rate reduction would increase the present value of the government’s tax revenues. A CIT rate cut would make taxpayers better off and the government would have more funds to spend on public services or cut other taxes. Therefore our computations provide strong support for cutting corporate income tax rates.

Needless to say, if faced with the choice between “more funds to spend” and “cut other taxes,” I greatly prefer the latter. Which is why I worry that people learn the wrong lesson when I point out that the rich paid a lot more tax after Reagan lowered the top rate in the 1980s.

The goal is to generate more prosperity for people, not more revenue for government. So if a tax cut produces more revenue, the immediate response should be to drop the rate even further.

But I’m digressing. The point of today’s column is simply to augment my collection of case studies showing that better tax policy produces better economic performance.

P.S. The research from Canada also helps to explain the positive effect of decentralization and federalism. British Columbia had the leeway to adopt supply-side reforms because the central government in Canada is somewhat limited in size and scope. That’s even more true in Switzerland (where we see the best results), and somewhat true about the United States.

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I’ve been in China this week, giving lectures about economic policy at Northeastern University in Shenyang.

I’ve explained that China has enjoyed reasonably impressive growth in recent decades thanks to pro-market reforms. But I’ve also pointed out that further economic liberalization is needed if China wants to avoid the middle-income trap.

That won’t be easy. Simply stated, I don’t think it’s possible to become a rich nation without free markets and small government.

The good news is that China’s economic freedom score has increased dramatically since reforms began, rising from 3.64 in 1980 to 6.40 in the latest edition of Economic Freedom of the World. And there’s been a dramatic increase in prosperity and a dramatic reduction in poverty.

The bad news is that a score of 6.40 means that China is only ranked #112 in the world. That’s way too low. The country needs a new burst of pro-market reform (especially since it also faces serious demographic challenges in the not-too-distant future).

In other words, China should strive to be more like #1 Hong Kong, which has a score of 8.97, or #4 Switzerland, with a score of 8.44.

Or even the #11 United States, which has a score of 7.94, or also #19 Netherlands, with a score of 7.74.

The bottom line is that China won’t become a rich nation so long as it has a score of 6.40 and a ranking of #112.

Fortunately, there is a pre-existing recipe for growth and prosperity. China needs to change the various policies that undermine competitiveness.

Since I’m a public finance economist, I told the students how China’s fiscal score (“size of government”) could be improved.

I recommended a spending cap, of course, but I also said the tax system needed reform to enable more prosperity.

Part of tax reform is low marginal tax rates on productive behavior.

Chinese academic experts agree. As reported by the South China Morning Post, they’re urging the government to significantly reduce the top rate of the personal income tax.

China needs to slash its highest tax levy on the nation’s top income earners in its upcoming individual tax code review, or risk seeing an unprecedented talent exodus, argued eight academics… They called for authorities to scrap the top two tax brackets of 35 per cent and 45 per cent in the current seven brackets progressive tax system on individuals, granting high income earners more leeway with a five tax brackets system that will be capped at 30 per cent.

The scholars pointed out that high tax rates are especially harmful in a world where high-skilled people have considerable labor mobility.

The academics from esteemed mainland universities called for further revision of the code, as the current draft failed…high income earners, a group that is often highly skilled professionals China wants to attract and retain in the global fight for talent. …For the “highly intelligent groups”, remunerations and royalties were likely to surpass the monthly salary, meaning that the combination can add up to a higher taxable income base and “seriously restrain them from” pursuing innovation, the academics argued. “In a global environment [when tax cuts become mainstream], if China maintains its high individual income tax rates … it will push the high-income, high-intelligent group overseas,” they said.

Needless to say, I’ll be very curious to see what happens. I’ve now been to China several times and I think the country has huge potential.

But achieving that potential requires reforms that will reduce the size and scope of government.

Here’s a chart I shared with the students, which shows that Taiwan has much more economic freedom and is much richer (basically an updated version of some numbers I put together in 2014).

The bottom line is that the country can become a genuine “Chinese Tiger” rather than a “paper tiger” with the right policies.

P.S. Some people actually think China should become more statist. Both the Organization for Economic Cooperation and Development and the International Monetary Fund have urged staggering tax increases in China.

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Three years ago, I shared two videos explaining taxation and deadweight loss (i.e., why high tax burdens are bad for prosperity).

Today, I have one video on another important principle of taxation. To set the stage for this discussion, here are two simple definitions

  • The “average tax rate” is the share of your income taken by government. If you earn $50,000 and your total tax bill is $10,000, then your average tax rate is 20 percent.
  • The “marginal tax rate” is the amount of money the government takes if you earn more income. In other words, the additional amount government would take if your income rose from $50,000 to $51,000.

These definitions are important because we want to contemplate why and how a tax cut helps an economy.

But let’s start by explaining that a tax cut doesn’t boost growth because people have more money to spend.

I want people to keep more of their earnings, to be sure, but that Keynesian-style explanation overlooks the fact that the additional “spending power” for taxpayers is offset when the government borrows more money to finance the tax cut.

Instead, when thinking about taxes and prosperity, here are the three things you need to know.

1. Economic growth occurs when we increase the quantity and/or quality of labor and capital.

2. Taxes increase the cost of whatever is being taxed, and people respond by doing less of whatever is being taxed.

3. To get more prosperity, lower tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

All this is completely correct, but there’s one additional point that needs to be stressed.

4. The tax rate that matters is the marginal tax rate, not the average tax rate.

I discussed the importance of marginal tax rates in 2016, pointing out that Cam Newton of the Carolina Panthers was going to lose the Super Bowl (from a financial perspective) because the additional tax he was going to pay was going to exceed the additional income he would earn. In other words, his marginal tax rate was more than 100 percent.

Mon Dieu!

But I also included an example that’s more relevant to the rest of us, looking at our aforementioned hypothetical taxpayer with a 20 percent average tax rate on annual earnings of $50,000. I asked about incentives for this taxpayer to earn more money if the marginal tax rate on additional income was 0 percent, 20 percent, or 100 percent.

Needless to say, as shown in this expanded illustration, the incentive to earn $51,000 will be nonexistent if all of the additional $1,000 goes to government.

That’s why “supply-side economics” is focused on marginal tax rates. If we want more productive behavior, we want the lowest-possible marginal tax rates so people have the greatest-possible incentive to generate more prosperity.

Here’s a very short video primer on this issue.

One very important implication of this insight is that not all tax cuts (or tax increases) are created equal. For instance, as I explained in a three-part series (here, here, and here), there will be very little change in incentives for productive activity if the government gives you a tax credit because you have kids.

But if the government reduces the top tax rate or lowers the tax bias against saving and investment, the incentive for additional productive behavior will be significant.

And this helps to explain why the country enjoyed such positive results from the supply-side changes to tax policy in the 1920s, 1960s, and 1980s.

Let’s close with some good news (at least relatively speaking) for American readers. Compared to other industrialized countries, top marginal tax rates in the United States are not overly punitive.

Admittedly, this is damning with faint praise. Our tax system is very unfriendly if you compare it to Monaco, Hong Kong, or Bermuda.

But at least we’re not France, where there’s a strong argument to be made that the national sport is taxation rather than soccer.

P.S. I’m not saying tax preferences for kids are wrong. But I am saying they’re not pro-growth.

P.P.S. I mentioned above that Cam Newton – based on his personal finances – lost the Super Bowl even before the opening kickoff. Well, there’s scholarly evidence that teams in high-tax states actually win fewer games.

P.P.P.S. Today’s analysis focuses on the individual income tax, but this analysis also applies to corporate taxation. A company with clever lawyers and accountants may have the ability to lower its average tax rate, but the marginal tax rate is what drives the incentive to earn more income. Which is why reducing the federal corporate rate from 35 percent to 21 percent was the best part of last year’s tax bill.

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One of the core principles of economics is that prices are determined by supply and demand. That includes the price of labor – i.e., the wages received by workers.

Another core principle is that taxes create distortions by reducing demand and supply. Which is why it’s not a good idea to impose high tax rates on behaviors that contribute to prosperity, such as work, saving, investment, and entrepreneurship.

That’s the theory. Now let’s consider some real-world implications of taxes on work.

Here are some excerpts from new research by the European Central Bank.

Several reforms can be enacted to reduce the unemployment rate in the euro area. Among them is a permanent reduction in the labour tax. Typically, a decrease in labour taxes reduces labour costs to employers and increases the net take-home pay of employees, positively impacting both labour demand and labour supply. Reducing taxes on labour can contribute to increase employment and activity rates in the EA, by increasing incentives to hire, to look for, and take up, work. …In this paper we contribute to the debate on those issues by evaluating the macroeconomic effects of a fiscal reform in the EA countries.

The study look at what happens with employment-related taxes are lowered at either the employer level or the employee level.

Permanently reducing labour tax rates paid by Home firms would have stimulating effects on economic activity and employment, and would permanently reduce the unemployment rate. The same is true when tax rates paid by Home households are reduced.

Here are some of the specific estimates of the positive impact of lower labor taxes at the firm level.

The tax rate is reduced by almost 2 p.p. (trough level). The reduction of labour taxes paid by firms reduces the gross wage bill of firms and hence increases the value of having a worker. Workers are able to obtain part of the increase in firms’ surplus in the bargaining process, which results in a real wage increase. Nevertheless, the wage increase is not sufficient to undo the increase in the value of having a worker for firms, which leads to an increase in labour demand through vacancy posting. The number of matches increases as well and, consistently, the probability of finding a job and that of filling a vacancy increases and decreases, respectively. Employment increases (and unemployment rate decreases) by roughly 0.3 p.p. after two years and 0.4 p.p. in the medium and in the long run, respectively. …Home GDP increases by 0.5% after two years. Both consumption and investment increase. Consumption increases because of households’ larger permanent income, associated with the increase in employment, hours and production. Investment increases because firms augment physical capital to accompany the rising employment.

I’ve combined some of the key results from Figures 3 and 4, all of which show the benefits over time of lower tax rates on work (the horizontal axis is quarters, so 20 quarters equals five years).

And here are the specific estimates of the good outcomes when labor tax are reduced at the household level.

Qualitatively, results are similarly expansionary as those obtained when reducing labour taxes paid by firms. Hours worked, employment, matches, and the probability of finding a job increase, while the probability of filling a vacancy decreases. …hours worked now increase by 0.4% (0.3% in the previous simulation), employment by almost 0.5% (0.35% in the previous simulation), while the unemployment rate falls by almost 0.5 p.p. (0.4 p.p. in the previous simulation). …Home GDP increases by around 0.7% after two years.

Once again, let’s look at some charts showing the benefits over time of lower tax rates on workers.

Interestingly, it appears that there are slightly better outcomes if labor taxes are reduced for workers rather than employers, but the wage numbers are better if the tax cuts take place at the business level.

I’ll take either approach, for what it’s worth.

Let’s close with one additional excerpt. The study incorporated the impact of government employment, which can have a very distorting effect on private employment given the excessive size of the bureaucracy and above-market compensation for bureaucrats.

…we allow for public sector employment and for the possibility of directed search between the private and public sector labour market… In fact, a proper assessment of the impact of the labour market reforms on private-sector employment should take into account that a common characteristic of the EA labour market is the important share of the public employment in total employment, which is, according to OECD (2015), around 20% in France, 15% in Spain, Italy and Portugal, and 13% in Germany. Thus, this component is important to understand the labour market dynamics in the EA, given also that, during a crisis period, public and private labour markets tend to be more inter-related (when the unemployment rate is high, the number of applicants to the public sector is larger).

P.S. I’m periodically asked whether I’m exaggerating when I assert that something (such as taxes distorting the supply and demand for labor) is a “core principle” in economics. But I don’t think left-leaning economists (and there are plenty) would disagree about taxes impacting supply and demand. But they presumably would quibble about the “elasticity” of supply and demand curves (in other words, how sensitive are people to changes in tax rates). Moreover, they surely would claim in some instances that any “deadweight loss” would be offset by supposed economic benefits of government spending (and pro-market people acknowledge that’s possible, at least when government is small). And, when push comes to shove, some folks on the left would openly argue that it’s okay to have less prosperity if there’s more equality.

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I’ve written dozens of columns about the Laffer Curve and its implications.

My favorite may be the one that pointed out why it generally is misguided to raise tax rates even if the government would collect more revenue (i.e., don’t give politicians $1 if it means reducing the private economy by $5).

And I’m always reminding people that the goal is to maximize growth rather than revenue.

I’ve even written about how the Laffer Curve relates to issues as diverse as sex and ISIS.

But I haven’t paid much attention to the history of the issue. Now, thanks to some great research from Nima Sanandaji, we can investigate that topic.

…the Laffer Curve has been used by supporters of low taxes around the world to reinforce their ideas. …it has helped to inspire a downward shift in taxation. Ronald Reagan’s administration introduced massive changes, which dropped the marginal tax rate to 28 percent. …even the proponents of high tax policy are aware of Laffer’s warnings: there is a limit to how high taxes can be raised.

All that’s true.

Reagan’s lower tax rates did produce a windfall of tax revenue from the rich.

And even folks on the left admit that the revenue-maximizing tax rate is below 100 percent, so they acknowledge the Laffer Curve is real.

But what many people don’t know is that the concept of the Laffer Curve existed long before Art drew his famous curve on a napkin.

Nima points to the example of Ibn Khaldun.

…Laffer’s theory was far from new. …Laffer has himself explained that he didn’t invent the curve, but took it from Ibn Khaldun, a 14th-century Muslim, North African philosopher. …Born in 14th-century Tunisia, Khaldun was a prominent scholar and one of the founders of economics and social sciences. Khaldun believed that a just government should only, in accordance with Islamic law, impose low taxes. …However, rulers tend to increase the tax to benefit themselves. High taxes hurt commerce and trade. When tax rates are raised to pay for a bloated government, it will finally cause the tax base to shrink so much that the government cannot meet its obligations. …at this point the state would often implode under its own weight, leading to a period of chaos and the rise of a new state.

Here’s Khaldun’s most famous statement on tax rates and tax revenue.

By the way, there were plenty of people between Khaldun and Laffer who understood why punitive tax rates are foolish, including Alexander Hamilton and John Maynard Keynes(!).

P.S. Perhaps because they’re exposed to the real-world impact, America’s CPAs also understand the Laffer Curve is very real.

P.P.S. Nima has just written a fascinating new book, The Birthplace of Capitalism – The Middle East, which can be ordered here.

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Last November, I wrote about the lessons we should learn from tax policy in the 1950s and concluded that very high tax rates impose a very high price.

About six months before that, I shared lessons about tax policy in the 1980s and pointed out that Reaganomics was a recipe for prosperity.

Now let’s take a look at another decade.

Amity Shlaes, writing for the City Journal, discusses the battle between advocates of growth and the equality-über-alles crowd.

…progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. The late Simon Kuznets, who posited that societies that grow economically eventually become more equal, was right: growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight.

Amity analyzes four important decades in the 20th century, including the 1930s, 1960s, and 1970s.

Her entire article is worth reading, but I want to focus on what she wrote about the 1920s. Especially the part about tax policy.

She starts with a description of the grim situation that President Harding and Vice President Coolidge inherited.

…the early 1920s experienced a significant recession. At the end of World War I, the top income-tax rate stood at 77 percent. …in autumn 1920, two years after the armistice, the top rate was still high, at 73 percent. …The high tax rates, designed to corral the resources of the rich, failed to achieve their purpose. In 1916, 206 families or individuals filed returns reporting income of $1 million or more; the next year, 1917, when Wilson’s higher rates applied, only 141 families reported income of $1 million. By 1921, just 21 families reported to the Treasury that they had earned more than a million.

Wow. Sort of the opposite of what happened in the 1980s, when lower rates resulted in more rich people and lots more taxable income.

But I’m digressing. Let’s look at what happened starting in 1921.

Against this tide, Harding and Coolidge made their choice: markets first. Harding tapped the toughest free marketeer on the public landscape, Mellon himself, to head the Treasury. …The Treasury secretary suggested…a lower rate, perhaps 25 percent, might foster more business activity, and so generate more revenue for federal coffers. …Harding and Mellon got the top rate down to 58 percent. When Harding died suddenly in 1923, Coolidge promised to “bend all my energies” to pushing taxes down further. …After winning election in his own right in 1924, Coolidge joined Mellon, and Congress, in yet another tax fight, eventually prevailing and cutting the top rate to the target 25 percent.

And how did this work?

…the tax cuts worked—the government did draw more revenue than predicted, as business, relieved, revived. The rich earned more than the rest—the Gini coefficient rose—but when it came to tax payments, something interesting happened. The Statistics of Income, the Treasury’s database, showed that the rich now paid a greater share of all taxes. Tax cuts for the rich made the rich pay taxes.

To elaborate, let’s cite one of my favorite people. Here are a couple of charts from a study I wrote for the Heritage Foundation back in 1996.

The first one shows that the rich sent more money to Washington when tax rates were reduced and also paid a larger share of the tax burden.

And here’s a look at the second chart, which illustrates how overall revenues increased (red line) as the top tax rate fell (blue).

So why did revenues climb after tax rates were reduced?

Because the private economy prospered. Here are some excerpts about economic performance in the 1920s from a very thorough 1982 report from the Joint Economic Committee.

Economic conditions rapidly improved after the act became law, lifting the United States out of the severe 1920-21 recession. Between 1921 and 1922, real GNP (measured in 1958 dollars) jumped 15.8 percent, from $127.8 billion to $148 billion, while personal savings rose from $1.59 billion to $5.40 -billion (from 2.6 percent to 8.9 percent of disposable personal income). Unemployment declined significantly, commerce and the construction industry boomed, and railroad traffic recovered. Stock prices and new issues increased, with prices up over 20 percent by year-end 1922.8 The Federal Reserve Board’s index of manufacturing production (series P-13-17) expanded 25 percent. …This trend was sustained through much of 1923, with a 12.1 percent boost in GNP to $165.9 billion. Personal savings increased to $7.7 billion (11 percent of disposable income)… Between 1924 ‘and 1925 real GNP grew 8.4 percent, from $165.5 billion to $179.4 billion. In this same period the amount of personal savings rose from an already impressive $6.77 billion to about $8.11 billion (from 9.5 percent to 11 percent of personal disposable income). The unemployment rated dropped 27.3 percents interest rates fell, and railroad traffic moved at near record levels. From June 1924 when the act became law to the end of that year the stock price index jumped almost 19 percent. This index increased another 23 percent between year-end 1924 and year-end 1925, while the amount of non-financial stock issues leapt 100 percent in the same period. …From 1925 to 1926 real GNP grew from $179.4 billion to $190 billion. The index of output per man-hour increased and the unemployment rate fell over 50 percent, from 4.0 percent to 1.9 percent. The Federal Reserve Board’s index of manufacturing production again rose, and stock prices of nonfinancial issues increased about 5 percent.

Now for some caveats.

I’ve pointed out many times that taxes are just one of many policies that impact economic performance.

It’s quite likely that some of the good news in the 1920s was the result of other factors, such as spending discipline under both Harding and Coolidge.

And it’s also possible that some of the growth was illusory since there was a bubble in the latter part of the decade. And everything went to hell in a hand basket, of course, once Hoover took over and radically expanded the size and scope of government.

But all the caveats in the world don’t change the fact that Americans – both rich and poor – immensely benefited when punitive tax rates were slashed.

P.S. Since Ms. Shlaes is Chairman of the Calvin Coolidge Presidential Foundation, I suggest you click here and here to learn more about the 20th century’s best or second-best President.

P.P.S. I assume I don’t need to identify Coolidge’s rival for the top spot.

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