U.S. taxes are admittedly very complex. There are federal, state, and municipal taxes. There are income, corporate, sales, and property taxes. There are numerous deductions for different individuals and entities, and similar investments are often taxed at different rates. This complexity somewhat explains the lack of agreement regarding the benefits of tax cuts.
Of course, controversy over taxes is not a recent phenomenon; it goes all the way back to the Founding years. Indeed, during the decades preceding the Revolutionary War, British imposition of taxes such as the Molasses Act and the Stamp Act solidified American dislike for taxation and ultimately led to the country’s fight for independence. The War for Independence, however, was not just fought over the seemingly small “trifle” of a tax hike on tea; rather, it was, as Alexander Hamilton explained, directly related to the principle of freedom which precluded the “right to tax us in all cases whatsoever.”
The decades following the Revolutionary War saw rigorous debates over taxation, but the implementation of the income tax via the 16th Amendment in 1913 began much of the modern debate over tax increases and cuts.
The first major tax cut legislation was implemented in the 1920s during the Harding/Coolidge administration. Skillfully managed by treasury secretary Andrew Mellon, the tax cuts counteracted a recession and produced the “Roaring Twenties.” Several decades later, the Kennedy/Johnson administrations implemented a second major piece of tax cut legislation. Their actions notably increased the United States’ revenue and GDP levels while simultaneously decreasing the nation’s unemployment levels. The Reagan years produced similar results after the passage of the Economic Recovery Tax Act in 1981. The most recent tax cuts in 2001 were extended under President Obama nine years later.
Those who support tax cuts often point to the aforementioned historical instances as proof that permanently lowering taxes across the board, but particularly for business and the wealthy, and cutting the budget in tandem are the best policies to reinvigorate an ailing economy. Being allowed to keep more of their earnings, people have greater incentive to work hard and create investments into new and existing businesses, thereby fueling productivity and job growth. They are also less disposed to circumvent paying taxes. All this generates more government revenue--a phenomenon described by the Laffer Curve.
Those opposing tax cuts commonly argue that reducing taxes favoring the rich is unjust to the poor and middle classes, and fiscally irresponsible. Indeed, given our ballooning national debt, opponents consider tax cuts simply unaffordable and tax increases necessary to pay for multitudes of necessary government programs such as Social Security, Medicare, public education, and so forth.
In order to get us out of an economic slump, they instead advocate, often based on Keynesian economic principles, that we focus on short-term increases in government spending as a more powerful way to stimulate the economy given the fact that the government has vastly more resources at its disposal. Tax cuts should be given to the poor and middle classes who have a preference for spending over savings and who will thus increase consumer demand.
While this might sound plausible on the surface, the short-lived nature of these measures reduces individuals' and businesses' ability to act for the long-term because they cannot predict how the government's policies will affect their bottom line. It also produces misallocation of resources since the government cannot possibly possess the knowledge of all the actors in an economy to determine what actions will truly produce economic growth and prosperity.
Moreover, the issue of tax cuts ultimately comes down to a moral problem, namely who should spend the people's money. Milton Friedman made this point:
"I favor [tax cuts] on economic grounds because it enables the ultimate consumer—the ultimate individual, you and me—to decide how the money should be used. You know, it makes no sense for me to send my money to Washington to have somebody in Washington decide how to use it. I'd rather decide how to use it myself—whether for charity or for welfare or for other purposes. So that's the first and most important argument. But the political argument for it is that it's the only way to keep Congress from spending it."
It turns out the Beatles had similar sentiments when they moved Apple Corps. out of the United Kingdom because of taxes:
"'As far as I can tell, the idea behind Apple was a tax dodge,' music journalist Douglas Wolk says. 'The top tax rate in England at that time was enormous. And John Lennon said something to the effect of, "We talked to our accountants. We realized we could either give the money to the government or we could put it into a business."'"
This library section traces the historical background of tax cuts; presents a variety of research on their various types, pros and cons; and places them in context with larger philosophical issues concerning the question of what drives economic growth and prosperity.