Revenue Plunge Is Nothing New
By INVESTOR'S BUSINESS DAILY
Tuesday, August 04, 2009 4:20 PM PT
Fiscal Policy: Federal tax revenues have shrunk by the largest amount since the Great Depression, according to new data. This should come as no surprise, since we've been running a Depression-era economic policy.
The Associated Press is to be credited with doing the basic math on the federal government's current revenues. It isn't pretty. All told, individual tax receipts are down 22% from last year, while corporate taxes have plunged 57%. Social Security taxes, we're told, fell for only the second time since 1940, while Medicare taxes are off for the third time.
"The last time the government's revenues were this bleak," the AP report notes, "the year was 1932 in the midst of the Depression." Ah, yes. 1932. The true start of the Depression. And also the year of the now-infamous Revenue Act.
At the time, it seemed reasonable. Faced with a downturn in the economy and shriveling revenues, President Hoover worried about a growing budget deficit. He signed tax hikes into law, and FDR, who entered office in 1933, kept them in place.
The bill ravaged the economy by raising the top tax rate on the "rich" from 25% to 63%, doubling the estate tax and boosting corporate taxes by nearly 15%. It also raised sales taxes on all sorts of things that average (read: "nonrich") Americans bought, including gum, soft drinks, gasoline, tires, trucks and jewelry.
Meanwhile, Roosevelt began a series of massive spending projects to "stimulate" the economy — following Hoover's tragic lead. The result? A serious recession turned into the Great Depression, an epic downturn lasting a decade into the early 1940s, when the entire economy was put on a war footing.
Contrast that with what happened just 11 years before. The U.S. had entered a serious recession in 1919, with real GDP (in 2000 dollars) dropping 3.2% and per-person income down 6.4% by 1921. To some, it looked like the start of a depression.
Instead, it lasted just two years. Why? Then-Treasury Secretary Andrew Mellon engineered a series of tax cuts in 1921, 1924, 1926 and 1928.
In response, the economy boomed, with one of the largest increases in both economic activity and entrepreneurship in our nation's history. From 1921 to 1929, real GDP rocketed 45%, while personal incomes climbed 29%. It's not for nothing that the 1920s were called the "Roaring Twenties."
As we've noted repeatedly, this wasn't an isolated instance. Tax cuts in the 1960s, 1980s and even 2000s led to rising economic output. Usually, they led to higher tax revenues. By contrast, tax hikes almost always bring the opposite — lower output, or even recession, and slowing tax receipts.
It's shocking that today's policymakers, searching desperately for revenues to fund a $10 trillion expansion in federal government, seem willfully ignorant of such clear lessons in our history.
As Mellon put it, "It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates." And yet, that's the truth.
We mention this because it seems that we're now heading down the same well-trodden path to fiscal and economic ruin. As Phil Kerpen, policy director of Americans for Prosperity, noted a few months back:
"The composition of the tax hikes in the 2010 budget is frighteningly similar to the Revenue Act of 1932, the much-maligned Hoover tax hikes that put the 'Great' in Great Depression by putting an enormous tax burden on millions of Americans, largely through excise taxes."
And as in the 1930s, more spending and higher taxes won't help. The U.S. deficit this year is expected to reach $1.8 trillion, up from about $400 billion last year. This is equal to a remarkable 10% of GDP in stimulus — and still the economy isn't growing. Nor will it, if Congress and the White House plunge forward with their planned tax hikes in the midst of a brutal economic downturn.
There's only one way out of this: growth.
Today, planned tax hikes on the "rich" and possible trillion-dollar tax hikes to fund health care and an utterly wasteful cap-and-trade system to reduce greenhouse gases risk pushing our economy back into recession just as it's struggling to get back on its feet.
Instead of raising taxes on entrepreneurs and the middle class to pay for an ever-wider array of failed "stimulus" packages, bailouts, TARPs and government takeovers of key U.S. industries, Congress and the White House should be cutting both spending and taxes.
If they did, they'd see deficits shrink, growth pick up and America get back to the business of America.
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