History of Tax Rates

Pity today’s students. The old math is out. The new math is in.

Under the old math, higher tax rates meant more tax collections.

Under the new math, lower tax rates mean more tax collections.

A hundred years ago, the old math worked. The first income tax in 1913 had a top tax rate of 7 percent, but that was quickly increased to 73 percent to pay for World War I — we paid for wars back then — and tax collections rose dramatically.

During the Roaring Twenties, tax rates were cut to 25 percent (hmm, Romney’s proposed rate). Government revenues declined 70 percent. The nerve of those times.

When revenues dropped by half in the Great Depression, Republican President Herbert Hoover raised the top rate to 63 percent. Revenues doubled over the next four years. After spending massively on stimulus efforts that cut unemployment 23 percent to 17 percent, President Roosevelt, a very wealthy man himself, increased the top rate to 79 percent in 1936, an election year. He still won by a landslide. In 1937, tax collections rose almost 40 percent, but unemployment also inched up to 19 percent.

World War II led to 94 percent rates — remember, we paid for wars back then. Revenues grew more than six-fold from $7 billion to $45 billion. The old math worked. Over the next 40 years, government raised and lowered rates depending on national needs. Even in the 1970s, we increased taxes to pay for the Vietnam War.

President Reagan embraced the new math and said that lowering taxes would increase government revenues. Voters like lower taxes, so they voted for him. He also convinced us that the government is the enemy, but that’s another story.

Reagan cut tax rates and revenues went up. Here’s a dirty little secret: Reagan increased taxes more than a dozen times and doubled the tax on capital gains. Tax collections remained 18 percent of GDP, the same as the Kennedy-Johnson-Nixon-Ford years. Reagan’s deficits – 4.3 percent of GDP – were the highest in US history except World War II.

Reagan deficits crossed $100 billion for the first time ever, then passed $200 billion, and almost reached $300 billion. President George H.W. Bush called the new math “voodoo economics” and courageously lost his presidency with a tax increase he believed necessary to reduce the deficits he inherited from Reagan.

President Clinton raised taxes to 19 percent of GDP, generated the nation’s only four-year streak of surpluses . . . and created 23 million new jobs.

President Bush, the W, cut taxes, increased spending, and didn’t pay for wars. The Great Recession and tax cuts reduced revenues to 15 percent of GDP. Deficits exploded to $450 billion and eventually hit $1.4 trillion in his last year, the highest ever. Bush W’s tax cuts generated one (yes, One!) million new jobs in eight years. That’s the new math.

The Great Recession unemployment rate is half the Great Depression unemployment rate. The Great Depression took 12 years to recover. Today we expect the economy to recover in one year.

Obama believes in the old math. Romney believes in the new math.

I wonder which math will count the votes.

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