It's the Tax Cuts Stupid!

Since the 1980's the evidence is overwhelming that tax cuts lead to an increase in federal tax collections every time and tax increases have the opposite affect. While there may be a lot of elaborate economic theories to explain what is going on, the explanation is pretty simple. The Government does not create wealth, it can only redistribute it.

Therefore, when the government raises taxes, it is simply sucking resources out of our economy which slows it down and eventually puts us into a stagnant environment much like we are seeing in tax-oppressive countries like France and Germany.

When you cut taxes, you free up resources which, in a capitalist environment creates wealth. The additional wealth is then taxed, leading to greater revenues.

Imagine if we had a simplified system such as Hong Kong's 15% top rate.....

From Investors Business Daily:
Supply-Side Boom
Posted 12/9/2005

Fiscal Policy: A picture is worth a thousand words, and nowhere is that truer than in the debate over supply-side claims that tax cuts lead to higher revenues.

We were struck by a chart that Treasury Secretary John Snow used last week when he presented the administration's case for making the 2003 tax cuts permanent.

For Democrats opposed to the cuts, no argument has been more potent than that tax cuts somehow "cost" the government money — and thus make deficits worse. Snow's chart, shown below, puts the lie to that argument.



In fact, the supply-siders are right: Revenues rise after tax rates are reduced. Federal revenues bottomed at $1.8 trillion just as Bush signed his bill; since then, they've risen 19.4% to $2.15 trillion, an all-time high.

A big reason is that tax avoidance recedes along with rates. When top personal rates are high, the rich find ways to pay less. That's why our tax code is 55,000 pages thick. When rates are lower and flatter, such behavior disappears.

This also explains why the richest Americans' share of all income taxes paid has soared to 34.27% from 19.05% in 1980 even though their average income-tax rate has fallen by roughly a third — from 34.47% to 24.31% in 2003.

More important, however, is the impact tax cuts have on the economy. Since May 2003, when Bush's major plan of tax cuts on both capital and income took effect, the economy has been on a tear. It's virtually impossible to argue the two aren't linked.

In the nine quarters before the tax cuts, GDP grew at an average rate of 1.1%. In the nine quarters since, it's averaged 4.5% — even in the face of punishingly higher interest rates and oil prices.

We also hear how all the tax cuts are going to the "rich." Again, not true. A surge in entrepreneurship, jobs, income and wealth has made all of us richer and more secure.

As Snow noted in his speech Thursday, 57 million Americans now own stocks — or about half of all households. Yet, the median income for shareholders is a very un-Rockefeller-like $65,000.

Many of those investors are retired, and have seen their incomes go up along with dividends. This year, shareholders will deposit or reinvest $201 billion in payouts — up 36% from 2002, the year dividend tax cuts went into effect.

Entrepreneurs are doing well, too. Fed data out Friday showed Americans' net worth is now $51 trillion — about 4.6 times real GDP. What's most impressive is that includes $6.6 trillion of equity in "noncorporate" — or small, entrepreneurial — businesses, up 32% since the start of 2003.

The House passed legislation last week that will trim growth in federal spending by $50 billion but keep most of the 2003 tax cuts intact. The Senate has identified $36 billion in spending cuts but wants to let the tax cuts expire.

The House version must prevail. The economy is surging, and the budget deficit is now shrinking as a share of GDP. Getting rid of the tax cuts that made all this possible would be the height of folly.