Shameless Hustles and Tax Cuts

Old hustles never die. Fred Thompson writes in the Wall Street Journal [emphasis added]:

President John F. Kennedy was an astute proponent of tax cuts and the proposition that lower tax rates produce economic growth. Calvin Coolidge and Ronald Reagan also understood the power of lower tax rates and managed to put through cuts that grew the U.S. economy like Kansas corn. Sadly, we just don’t seem able to keep that lesson learned.

One of the triumphs of the Coolidge Administration was the passage of his tax program in 1926; the photograph shows him signing it. The Coolidge program “repealed the gift tax, halved estate taxes, substantially cut surtaxes on great wealth, and reduced income taxes for all,” it says here. The photo is dated February 26, 1926. Assuming that is accurate, We Now Know that the Stock Market Crash of 1929 was only slightly over three years and seven months away. The Great Depression followed soon after.

Calvin Coolidge’s tax program is the bad example that won’t die. I remember just after George W. Bush was “elected” in 2000 some eager young folk of the Right wrote giddy tributes to tax cuts that cited the Wisdom of Silent Cal. But mention of Coolidge vanished rather quickly, and I assume there was some frantic back-channel communication explaining that, um, maybe Calvin Coolidge’s economic policies are not something we want to emphasize. I guess Lawnorder Fred didn’t get the memo.

I’m not saying that the Coolidge tax cuts were the direct cause of the Great Depression. But that decade wasn’t called the “Roaring Twenties” for nothin’. Coolidge paid for his tax cuts by being a scrooge on domestic spending, including vetoes of flood control and agricultural programs for which many folks had dire need. What happened next is right out of the history textbooks [emphasis added]:

Even before 1929, signs of economic trouble had become evident. Southern California and Florida experienced frenzied real-estate speculation and then spectacular busts, with banks failing, land remaining undeveloped, and mortgages foreclosed. The highly unequal distribution of income and the prolonged depression in farm regions reduced American purchasing power. Sales of new autos and household consumer goods stagnated after 1926. [Eric Foner, Give Me Liberty: An American History (Norton, 2005), p. 800]

If the Coolidge tax cuts of 1926 “grew the U.S. economy like Kansas corn,” as Fred suggests, one wonders why sales of new autos and household consumer goods stagnated after 1926.

The stock market did indeed go up a lot during the Coolidge Administration, but much of that was from overheated speculation. It was a bubble, in other words. And when the bubble burst, it burst big.

Fred writes glowingly of the soaring tax revenues and the shrinking budget deficit given us by Dear Leader’s glorious tax cuts. If you want to see what a crock that is, just look at this chart via Ezra Klein.

The other myth cited by Fred Thompson is, of course, the myth of the Reagan tax cuts. The fact is that in 1982, when he realized his tax cuts weren’t growing revenue as promised, Reagan raised some taxes considerably to make up for the shortfall. He also raised taxes in 1983, 1984, 1985, 1986, and 1987. Bruce Bartlett patiently explained this in a National Review article written in 2003. In this article the hapless Bartlett wrote that prudent management of the economy required some tax increases. Like anyone on the Right would listen to that.

A few days ago Bartlett wrote an op ed in the New York Times complaining that most of the people pushing “supply-side economics” these days have no clue what it actually is.

AS one who was present at the creation of ”supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy.

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.

The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate.

But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, ”You cut taxes and the tax revenues increase.” Senator John McCain told National Review magazine last month that ”tax cuts, starting with Kennedy, as we all know, increase revenues.” Last week, Steve Forbes endorsed Rudolph Giuliani for the White House, saying, ”He’s seen the results of supply-side economics firsthand — higher revenues from lower taxes.”

Those of you who want a meatier discussion of this issue can find it at Economist’s View (Bruce Bartlett joined in). My only quibble with what he wrote is that, as I remember, the Reagan-era supply siders were not the sober and cautious crew that Bartlett describes.

Naturally, a number of rightie bloggers are linking to the Fred Thompson article with warm approval. I guess anyone dumb enough to think Larry Kudlow is an economist is dumb enough to admire Calvin Coolidge’s tax policy. Sadly, we just don’t seem able to keep that lesson learned.

Update: For an explanation of why JFK was not a supply sider, see David Greenberg, “Tax Cuts in Camelot?” (Slate, January 16, 2004). For sharp commentary on Fred Thompson, see Taylor Marsh, “Desperate After Dubya?”

16 thoughts on “Shameless Hustles and Tax Cuts

  1. Most folks don’t know or blithly ignore that Reagan raised taxes a whole bunc of times as you so correctly noted. And most folks don’t understand “marginal” tax cut. Too sophisticated concept for sheeple to grasp.

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  3. Righties will believe anything and can rationalize anything they want to.

    I remember when Bush came in, pushing his tax cuts. The reasons for them shifted over time, much like the phony reasons for going into Iraq. Tax cuts were first needed 1) to keep the economy strong, and then 2) to prevent it from going into recession, and then 3) to revive the economy. The goal is not whatever supposedly great things tax cuts are going to do for the country, the goal is the tax cuts themselves. These people could care less about governing, and as we’ve seen, they’ll push any BS they think they can get away with on the public.

    Just as All-War-All-The-Time is the only tool in their foreign policy toolbox, so are Tax-Cuts the cure all for each and every domestic ill. Hurricane Katrina? We need more tax cuts. Health care? Gotta have those tax cuts.

    In essence, the right wing position can be simply expressed as loot and plunder. Tax cuts and endless War. They don’t give a damn about people, only about their own well being. As a famous rightie from long ago put it, “the public be damned”.

  4. If I understand supply-side theory correctly, it seems as if a tax cut that creates an “unlocking effect” would mostly be a one-time thing to stimulate the economy: if I lower your taxes on capital gains in year one, you presumably cash in certain items in your portfolio that you’ve wanted to cash in for a while anyway, but the tax cut influences your timing. You don’t necessarily have anything else you want to cash in the following year.

    It’s a little like your grandparents cashing bonds for you when you turn 18 or 21 that they bought for you many years ago. If you somehow create more birthday milestones that merit more bonds being cashed in, your grandparents aren’t suddenly going to go back in time and have more bonds that have been sitting around for a while just because you insist that 22 and 23 and 24 are bond-cashing milestones. (But they might get a little irritated with you…)

  5. actually, come to think of it, when you pay for tax cuts with fiscal belt-tightening, you are depressing the economic activity that’s stimulated by the government spending that you’re cutting back on, and presumably Coolidge did that too when he cut flood control and ag spending.

  6. Ken melvin, That’s what I thought also, but being from the east coast I just couldn’t be sure. I had a screen saver of the Corn Palace once and I know it wasn’t in Kansas.

    I remember getting a $500.00 tax rebate when Bush first came into office. I sensed we were going to hell in a hand basket then because it wasn’t earned money..It felt more like a bribe or an inducement to support Bush and his policies..

  7. But he could be elected, since he plays a very Presidential role on television, and that is how dumbed down this country is: since Reagan the movie star was elected, we now have progressed to where a television character could be elected President. You can’t really beat him – you’d have to defeat his character on television?!

  8. I remember getting the tax windfall that Swami speaks about. I also remember making the decision to put it away for my children after realizing that they would have to pay it back tenfold (at least). Turns out – I was right.

  9. A most welcome debunk. Bartlett offers a little sanity, but I agree with you – the Reagan crew were not sober and cautious – except perhaps in comparison to the Bush crew.

    Zeus, that Boston Globe article is quite good, thanks!

  10. The prosperity of the 20s really peaked in 1927; urban areas, New York in particular, hung in there, but the Depression hit people in rural areas long before the stock market crashed. So much for money growing on cornstalks or whatever.

  11. Oh, I’d better include the pertinent part of pfox’s post that I was addressing. Pfox was addressing Nichole Bell as the author of the material, but she was quoting Barbara. Still, I think his criticism stands for both.

    I believe that your assertion that because Calvin Coolidge cut taxes, that lead to “Black Thursday” and subsequently the depression is a logical fallacy, specifically “Because B happened after A, then A is the cause of B”.

    [marcos — I did not say the tax cuts caused the stock market crash. Learn to read. Actually the cuts in domestic spending to pay for the tax cuts were a bigger factor, plus the lack of regulation of securities, no protection for bank deposits, etc. I am deleting the remainder of your comments. If you would like to try again without the cheap insults, next time I might allow them to be posted. — maha]

  12. Well, I’m not going to bother defending myself here, if you’re going to censor criticism, and call it cheap insults. It’s obvious that you aren’t interested in debate.

    [Actually, I’m interested in not being insulted. I enjoy debate, especially about history. If you had written the same criticism without the insults I would have left your posts alone and debated you. Please read comment policy before commenting in the future. Or better yet, just stay away. — maha]

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