Data And Politics

Do Tax Cuts Help The Economy? Let’s Look At The Data

Republicans one unifying issue seems to be tax cuts.  Republicans don’t argue whether tax cuts are warranted, rather how large they should be.  They say that lower taxes will set the economy on fire, creating jobs, raising wages and eliminating any deficit.  Republicans love tax cuts.  They believe tax cuts help the economy

Democrats, on the other hand, will never agree that taxes should be cut.  They never work, they say. Democrats argue that any tax cuts Republicans propose only benefit the rich.  Wealth never trickles down they’ll argue.  Democrats hate tax cuts.

The 2018 election and 2020 election could see tax policy as a major issue.  What are we to think?

Tax Cuts Help The Economy? What the data says

So who’s right? How do tax reductions affect the economy?  I thought I’d take a look at 3 of the most recent, largest tax cuts in The United States and see what happened afterwards.

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%.  Lower income earner’s rates were cut from 14 to 11%.

  • 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
  • The year Reagan Signed the cuts, the Dow average was $2687. In January of 1985, the average was  $4773.  That’s a little more than modest 5.5% a year- Source
  • Wage growth from 1981  was about 10% a year.  When Reagan left office in 1989 the growth rate was between 5-6% – Source

Bush’s 2001 Tax Cuts

Newly inaugurated President George W. Bush signed The Economic Growth and Tax Relief Reconciliation Act of 2001, when  the 39.6% tax bracket was be lowered to 35% ,  The law was signed in June 2001

  • In 2001 the Federal debt was $5.8 Trillion, and in 2009 it was 11.9
  • In June 2001, the unemployment rate was 4.5%.  In  June 2009, the rate was 7.8% – Source
  • From 2001-2004, there were 11 bank failures.
  • In June 2001, the Dow average was $15351. When Bush left office in January 2009, the average was $9353.
  • Wage growth in 2001  was around 5% a year.  When Bush left office in 20099 the growth rate was between -5-6% (that’s negative wage growth)

The Kennedy Tax Cuts

The so-called Kennedy Tax cuts was the Revenue act of 1964 that was 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 Trillion, 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.
  • In mid-1964 the Dow average was $6620.  When Johnson left office in January of 1969, it was $6568
  • Wage growth rose from around 8% to 10% from 1964 to inauguration day 1969.  In 1974, 10 years after the cut, wage growth was 9%.  I used the chart below as  a source


source: tradingeconomics.com

Based on the data laid out above, it appears evident that the best argument that tax cuts help the economy the most is the Revenue act of 1964, the so-called Kennedy Tax Cuts.  Unemployment fell, wage growth was high, and the debt only ticked up .08% during the next decade.

Lets Compare How Tax Cuts Affect The Economy To Increased Rates

Now that we’re neck deep in the tax data, I thought we should compare the affects of tax increases to the results found for tax cuts above.

Clinton Tax Increase

Clinton’s Omnibus Budget Reconciliation Act of 1993 created several new brackets at the top of the income scale, and increased income taxes on anyone making more than $115,000 a year.

  • In 1993 the Federal debt was $4.4 Trillion, and in 2000 it was 5.67 Source
  • Unemployment in 1993 was 7.3% and in 2001 it was 4.2% – Source
  • In 1993 the Dow average was $5814.  In 2001, it was $15,531
  • Wage growth rose from around 4% from 1993 to inauguration day 2001.  In 2001 wage growth was 6%

Obama Tax Increases

In 2015, President Obama signed the American Taxpayer Relief Act of 2012, which reinstated the Bush tax cuts after a 6 month repeal.  Obama did manage to raise taxes however, on a broad range of items.  – Here’s a list – Source

  • In 2009 the Federal debt was $11.9 Trillion, and in 2017 it was 19 Source
  • Unemployment in 2009 was 7.8% and in 2017 it was 4.8% – Source
  • In 2009 the Dow average was $9353.  In 2017, it was $20,181
  • Wage growth was around -4% in 2009  In 2017 wage growth was 1%

Top Tax Cut vs Top Tax Increase: Which affected the economy more positively?

Lets compare the best performing tax cut, the 1964 cut to the Clinton era tax increases starting in 1993.

Federal Debt Unemployment Wage Growth
“Kennedy” Tax Cuts +.08 Billion 3.8 9%
Clinton Tax Increases +1.27 4.2 6%

In the scheme of things, this battle is a wash.  You could give a slight advantage to Tax cuts, but these numbers are very evenly matched.

Now, lets compare the worst tax changes, the Obama increase and the Bush Tax Cuts.

Federal Debt Unemployment Wage Growth
Bush Tax Cuts +6.1 Trillion 7.8 -5%
Obama Tax Increases +7.1 Trillion 4.8 1%

So this one’s a little clearer.  Debt soared under both, however Obama’s unemployment and wage growth numbers are significantly better.  Not that 1% is a barn burner, but considering his term started with negative 4% wage growth, it increased 5% during his 2 terms.

So what conclusions can we make from this data?  I’ll offer my hypothesis and you can feel free to comment yours below.

I believe that neither tax cuts or increases significantly impact the overall economy. In my opinion, it’s more about spending.  The “Kennedy” cuts for example went into effect right before Johnson’s Great Society program, which increased government spending on services for working class people.  Medicare, Medicaid, welfare were established, high-speed trains were built and investments made in art and education were made.  The Bush era, in comparison saw virtually no domestic spending increases, save the failed medicare reform.

Whatever you believe about taxes, this intricate look at data likely won’t change your mind.  Many people feel its a moral, ethical and social issue that’s based more on opinion and instinct rather than data.

And data doesn’t lie.

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