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History shows tax cuts help economy grow

10/03/2013

Growing up in a poor, rural south, Dr. William T. Fielding has personally seen the effects that a bad economy has on the nation. Through his experiences, he remembers what worked and what didn’t work.

“I was born in 1942 and I grew up [in the] post-war (WWII) period in Alabama,” said Dr. Fielding.

“In rural Alabama, the great depression didn’t end in the 40s. It kept on going. We came out of it a little bit in WWII and then we went right back into to it. Most of the south was this way and a lot of the nation. We really didn’t get out of the great depression until the Kennedy/Johnson tax cuts helped stimulate the economy... People were much better off all over the country.”

Fielding, Dean of the College of Commerce and Business Administration at Jacksonville State University, has studied economics for over fifty years. The September-October 2013 issue of Jacksonville State University Economic Update featured an article written and researched by Fielding. The article, “Treasury Income Tax Collections and Tax Burden, JFK Through George W. Bush,” reviews economic policies over the last 50 years.

“We’re at a turning point.We’ve got to do something to get our economy moving,” says Fielding. “If history is any guide, cutting the rates would probably give us more revenue, because the economy would start growing.”

The majority of his article reviews the tax cuts made by Presidents Kennedy (after his assassination through President Johnson), Carter, Reagan, Clinton, and George W. Bush, and shows how each tax cut increased tax revenue and grew the economy by growing the GDP or Gross Domestic Product, the value of products and services within the United States.

Fielding’s Research shows a correlation between tax cuts and the growth of the economy. “The historical record shows that reducing federal marginal income tax rates has been associated with rapid increases in GDP resulting in rapid growth in tax revenues,” he writes.

Between 1960 and 2003, five presidents have passed tax cuts that reduced the top marginal income tax rates. Since 1960, the top marginal tax rate has changed from 91% in 1960 to 35% in 2009. The revenue from personal taxes rose from $41.8 billion in 1960, to $852.7 billion in 2009, and the GDP grew from $526.4 billion in 1960 to $14,119 billion in 2003.

“It’s counter-intuitive. The intuitive thing [would be to] raise the tax rate and get more [money from taxes] back,” says Fielding. “The counter-intuitive [thing would be to] lower the tax rate, grow the economy and get more taxes. It’s not a one-step thing, it’s a two-step thing...The intuitive thing is not right here.”

Fielding also addresses how deregulation has effected the growth of GDP and tax revenue. “[The] Carter deregulation reduced the burden of the government and spurred innovation in banking, transportation, and communications,” he writes.

Lowering capital gains tax rates, a tax on profits gained by selling a product for more than it cost to purchase, has also been shown to boost economic growth. “IRS data shows that reductions in the capital gains tax rates in 1978 [by President Carter], 1997 [by President Clinton] and 2003 [by President Bush] all produced increased revenues,” Fielding says.

Federal spending was brought down from 22% of the GDP in 1993 to 18% of the GDP in 2000 by President Clinton.

Fielding adds, “Taxation in it’s broadest sense is not how much the tax rate is. What it is is what the government spends. It’s how much the tax [revenue] brought in and what [the government] bought. That’s the total of spending. And if spending goes down from 22% of the GDP to 18%, the burden on the economy is very dramatically reduced.”

His study also shows a shift in the tax burden with the top 1% of the nation paying more than 40% of taxes in 2007, rather than paying less than 20% of the taxes in 1980. “Since the enactment of the Kennedy, Reagan, and Bush Tax Cuts... 2007 IRS data show that the tax burden of the top 1% now exceeds that of the bottom 95%,” writes Fielding.

“The whole thing I’m showing you is what has worked in our economy,” he explains. “You see I’m 71 now. I’ve been around for a long time. I’ve watched all this play out.”

The purpose of Fielding’s research is to look to the past for solutions for the future. He hopes to see a change in the U.S. economy and believes citizens need to see it soon.

“We need the economy to be at 4%. Want to know who else we’re hurting right now because of the economy being so weak?” asked Fielding. “What if you were 80 years old and saving a little money for retirement, you got your social security and a small pension, but you expected to get five or six percent on your investments and bank accounts, and now you’re getting one or less. We’re robbing the old people. That’s really one of the most, in my opinion, terrible things that we’re doing right now, because they can’t make it back and that’s why we need a growing economy. Once the economy starts growing, the interest rates come back up and [it] would help [the elderly be able to] live off their savings.”

Both Democratic and Republican presidents have favored the economic approach of cutting top marginal tax rates in order to see growth in tax revenue and GDP.

Fielding hopes that both parties will look back on that progress.

“I think both Republicans and Democrats need to look back and see what has worked in the past and they need to get together and work on it,” says Fielding. “When John Kennedy proposed this, not just Republicans opposed this, but Democrats opposed it. Same way with Ronald Reagan. The top leading economists in the country, a lot of them opposed it, but they were all wrong. I’m just hoping that we can together.”

For more information, see Dr. Fielding’s article in the JSU Economic Update by visiting www.jsu.edu/ced.

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