by Gary Alexander
April 16, 2024
Last week, I wrote about why tax increases don’t usually raise tax receipts. This week, I’ll show how tax rate cuts always raise tax receipts, especially from the rich. This is based on the work of Art Laffer, whom I first met when I worked at USC in the late 1970s, where he was a Professor of Economics, developing the Laffer Curve and leading the fight against soaring property taxes via California’s Proposition 13.
Later, when I edited Wealth Magazine (1983-86), Laffer was working in the Reagan administration to devise a low-rate flat tax (described here last week), so I contacted him in early 1985 to write an article for us using his historical insights. In “A New Model for Growth, ” Art shared his now-obvious truths – which most politicians ignore – that “People don’t work just because jobs are available. They work to be paid, and paid after tax at that.” He said the new bi-partisan tax bill “led by Democrats such as Sen. Bill Bradley has produced a veritable ground swell for a flatter tax. The Reagan Administration and the 1980s will be seen in retrospect as a turning point for the U.S. economy when the new model comes to fruition.”
In retrospect, he was right. The two Reagan tax cuts delivered the biggest economic and stock market boom of the century, and in the Reagan years (1981 to 1988), tax revenues collected from the richest 1% grew in real terms by a massive 146%. The economic expansion of 1982-2000 delivered real GDP growth of 3.8% per year, supercharged with 14% GDP growth in the first two combined boom years, 1983-84.
There was only one brief, shallow recession in 18 years, and the Dow rose from 776 to 11,723 (15-fold in 17.5 years), with inflation averaging 2% for nearly 40 years and balanced budgets, 1998-2001, following a decade of near-zero real growth due to stagflation (inflation and recession) with bracket-creep in taxes.
However, that wasn’t the only multi-year miracle boom of the last century. In the interest of creating a new Roaring 20s, let me focus on a decade of 500% stock gains, rising GDP and 10 balanced budgets.
In the First Roaring 20s, Cal Coolidge and Andrew Mellon Created Economic Nirvana
In the 1920s, the federal budget ran a surplus for 11 years, even as the government faced its largest debt-service obligations in 50 years, due to World War I. Even as the top tax rate declined sharply, from 73% to 25%, taxes paid by the rich soared, as did stocks and the GDP. Like these 20s, the decade began with a pandemic and a short recession. Unlike this decade, it was deflationary, and politicians cut spending.
From this table, notice these key trends for creating a model for growth for the second half of the 20s:
- The top tax rate declined from 73% at the start of the decade to just 25% in the second half of the 20s.
- The top 1% of taxpayers were responsible for paying more revenues each year, up to two-thirds in 1929.
- *Federal spending (in billions of 2018 dollars) declined each year until the start of the Hoover era.
- **GDP (measured in billions of 2018 dollars) grew each year in the 20s, after the flash 1920-21 recession.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
None of these policies were responsible for the Great Depression, as numerous books can prove*. It was Herbert Hoover, not FDR, who passed the sky-high Smoot-Hawley tariffs in 1930 and raised taxes to sky-high levels in 1932. In fact, the top tax rate was never below 63% for 48 years, from 1932 to 1980.
*See “A Monetary History of the United States” by Milton Friedman and Anna Schwartz, “America’s Great Depression” by Murray Rothbard, and “Taxes Have Consequences,” by Art Laffer, et al)
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This master plan for prosperity (mostly credited to Treasury Secretary Andrew Mellon) was repeated by the Democrats in the 1960s, when President Kennedy said, in December 1962, that he was about to send a comprehensive tax cut package to Congress. Speaking before the Economic Club of New York, he said,
“An economy hampered by restrictive tax rates will never produce enough revenue to balance our budget, just as it will never produce enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions.”
Sure enough, the 1950s were a time of frequent recessions, but there were no recessions from 1961 to 1970 after JFK and LBJ cut the top tax rate from a punitive 91% down to 70%. This action more than tripled the “take home pay” of the rich (30% vs. 9%). This same pattern yin-yang repeated in the next 20 years when staglationary-recessions in the 1970s were followed by an 18-year period of only one mild recession following the Reagan-era tax cuts of the 1980s, which cut the top tax rate from 70% to 28%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Bringing this story up to the present, America had a slow growth 16-year malaise to start this century, and we never enjoyed a standard recovery from the 2008 Great Recession. Art Laffer writes, “As of 2017, the United States had failed to achieve a year of 3% economic growth for each of the previous dozen years. This was the first time this had ever happened in American history. Moreover, in 2016 and 2017, the eurozone rate of growth was faster than that of the United States. In 2016, while notoriously sclerotic Europe grew at about 2%, America grew at 1.75%.” Then, Donald Trump beat Hillary Clinton and passed the Tax Cuts and Jobs Act (TCJA) in December of 2017 by a handful of votes (12 in the House, two in the Senate), and in 2018 we had our first 3% GDP growth year since 2005 – the year after the Bush tax cuts.
This Master Plan for Growth worked in the 1920s, 1960s, 1980s and recently. It can work again by allowing the 2017 tax cuts to stand after 2025, and even lowering them further, if we dare follow history.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Global Implications of Rising Energy Prices
Income Mail by Bryan Perry
Factoring In the New War Realities
Growth Mail by Gary Alexander
How to Create a Roaring (2nd Half of the) Twenties
Global Mail by Ivan Martchev
Possible Rising Recriminations Face the Stock Market
Sector Spotlight by Jason Bodner
Is a Market Cataclysm Coming Soon?
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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