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One Democrat's Advice: Raising Taxes Doesn't Add Revenue

Friday, 15 Jul 2011 | 2:07 PM ET

Figuring out how to reduce the budget deficit without raising taxes is indeed a tricky feat, since it seems to defy basic economic principles and is doomed to failure.

U.S. President John F. Kennedy
Arnold Sachs | Archive Photos | Getty Images
U.S. President John F. Kennedy

The futility of being able to get Washington’s house in order without additional tax contributions from wealthier Americans was expressed in plain terms by President Obama during his Friday news conference.

“I have not seen a credible plan, having gone through the numbers, that would allow you to get $2.4 trillion (in proposed spending cuts) without really hurting ordinary folks,” he said. “The notion that we would be doing that and not asking anything from the wealthiest among us or from closing corporate loopholes, that doesn’t seem like a serious plan to me.”

So what would be a serious plan? There clearly are two competing interests.

Hedge fund manager and “Gartman Letter” author Dennis Gartman described the clash Friday as between “that of an expansive, quasi-European-style socialism that the President and the majority of Democrats prefer or that of smaller, leaner, less-expansive government preferred by the Republicans.”

But that may be too simplistic. Many years ago, a popular president was asked how to cut spending without over-burdening wealth producers and throwing Grandma out into the street.

His advice:

“Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other,” this Democrat said. “It is increasingly clear that...an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits.”

He went on.

“In short," he said, "it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”

And that’s exactly what John F. Kennedy did.

The 35th president of the United States, who delivered those remarks at a Dec. 14, 1962, speech to the Economic Club of New York, made good on his pledge.

As a result, federal tax revenues went from $94 billion in 1961 to $153 billion in 1968 as Kennedy slashed the capital gains tax and cut the top marginal tax rate from 90 percent to 70 percent.

Annual gross domestic product during those years ranged from a high of 6.5 percent to a low of 2.3 percent. And, no, old ladies and orphans were not sent begging into the streets looking for scraps of bread from cruel rich folks.

But this was hardly the first time such a maneuver has been attempted and generated similar results.

President Obama speach on debt negotiations.
CNBC
President Obama speach on debt negotiations.

Calvin Coolidge and Warren Harding cut taxes through the 1920s only to see federal revenues rise from $719 million in 1921 to $1.164 billion as top marginal tax rates fell from 70 percent to below 25 percent.

During the Reagan years, the man they called Dutch cut taxes but doubled revenue, decreased unemployment from 7 percent to 5.4 percent and inflation from 13.5 percent to 4.1 percent, while median income grew by $4,000.

Yes, but what about those rich tax-avoiders. Didn’t they get the lion’s share of the benefit?

During the 1920s, the rich (then making more than $50,000) went from shouldering 44 percent of the tax burden in 1921 to 78.4 percent in 1928. In the Kennedy years, the rich saw their share of the tax burden gain by 57 percent while the poor shouldered 11 percent more. And in the Reagan years, the top 1 percent of earners paid 57.2 percent of taxes, up from 48 percent.

Much of the preceding research comes from my book (co-authored with Peter J. Tanous), "Debt, Deficits and the Demise of the American Economy" (Wiley), and is derived from a study by Daniel Mitchell of the Heritage Foundation conservative think tank.

So what to make of all this, as Congress fights a seemingly interminable stalemate over how to close the debt and deficit gap ?

In closing, a quote from our book:

“JFK’s words could have been spoken today just as easily as they were 50 years ago,” I wrote in Chapter 8, page 102. “Economic history teaches us that when confronted with weakness the proper remedy is to grow, not suffocate the economy.”

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