Tighten Your Belt, Times are Not Going to Get Easier Soon
Posted by Heather Edwards on November 11, 2010
Obama insists that tax increases are necessary to reduce the deficit. But even in the best of economic times, tax hikes have not historically raised significant revenues. Peter Farrara makes the point that every time the capital gains tax rate has increased over the past 20 years, capital gains revenues have declined. The same is true in reverse: when capital gains rates have been cut, revenue has increased.
For example: $40.6 billion in year-2000 revenues were raised in 1968 with a 25% capital gains tax rate. In 1975, after the rate increased to 35%, revenues only totaled $19.6 billion; and, three years later, the same rate generated only $29.9 billion. However, when rates were lowered over a period of four years down to 20%, 1986 revenues totaled $92.9 billion, about three times the 1978 rate! When the rate was raised to 28% the next year, revenues again fell, to $56.2 billion, continuing to an even lower $34.6 billion in revenues for 1991. Predictably, when Congress again cut capital gains rates back down to 20% in 1997, revenues rose, from $62 billion in 1996 to $109 billion in 1999. Between 2003 and 2005, after Congress had further cut the rate, revenues doubled.
Doing away with tax hikes are only the first, but necessary step to restoring growth and prosperity. Art Laffer ominously predicts that if taxes are increased on January 1st, “…the train’s coming to come off the tracks…” “The tax boundary that will occur on January 1, 2011 tells me that GDP growth in 2010 will be some 6% to 8% higher than GDP growth in 2011. A year on year decline from trend of some 6% to 8% in GDP growth would represent a larger collapse than occurred in 2008 and early 2009.”
Will Obama finally abandon his outmoded Keynesian Economics plan? Tighten your belts, for if he doesn’t, the economy is certainly not going to get better anytime soon.
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