Economic Growth Increases Federal Revenues, not Tax Increases

Increasing tax revenues is but one approach to decrease the federal deficit. As with most public policy issues, though, the left and right have diametric approaches to increasing revenues. The
left proposes tax increases, which, although seemingly contradictory, does not boost revenues in the long-term. Stabilizing or lowering tax rates has an inverse effect on revenues boosting them in the long run. Consider the words of one of the left's idols:

During a news conference on November 20, 1962, President Kennedy said, "It is a paradoxical
truth that tax rates are too high and tax revenues are too low and the soundest way to raise the
revenues in the long run is to cut the rates now...Cutting taxes now is not to incur a budget
deficit, but to achieve the more prosperous, expanding economy which can bring a budget
surplus."

In a September 18, 1963 address to the nation, Kennedy stated that, "A tax cut means higher
family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues."

Kennedy's quotes addressed fundamental aspects about taxation and revenues of which
contemporary liberals are either ignore or ignore. Although a tax increase may increase revenues in the very short-term, they quickly inhibit economic growth and adversely impact revenues in the long-term.

Democrats focus on the arithmetic effect of the Laffer Curve rather than considering the
economic effect as well. The arithmetic effect observes that as tax rates increase, revenues
should increase by the amount of the rate increase. The economic effect recognizes that as tax
rates increase the incentive to work and expand business activity and job creation decreases.

The Laffer Curve illustrates the importance of fiscal policy to strengthen a weak economy
and decrease federal deficits. Sound fiscal policy promotes economic growth which, in turn,
increases revenues to the federal government.

Thus, when dealing with the current deficit crisis and anemic economic growth, political leaders
must consider both effects of the Laffer Curve. Substantive economic growth occurs in a stable,
low tax environment. Business is apprehensive to expand because of the looming tax increase
threat that liberal political leaders pose to the private sector, on which government relies for
revenues.

According to the Congressional Budget Office, the sources of revenues in fiscal year 2010
were individual taxes (41.6 percent), payroll taxes (40.0 percent), corporate taxes (8.9 percent),
customs duties and miscellaneous taxes (5.6 percent), excise taxes (3.1 percent), and estate and
gift taxes (0.9 percent).

The revenue sources above will contribute more revenues to the federal government as the
private sector economy expands. The Cato Institute reported that federal government revenues
have been around 18.0 percent of GDP for the past four decades regardless of the tax rate. The
primary focus of fiscal policy, therefore, should be on economic expansion. Liberal antagonism
toward so called wealthy individuals, who generate jobs, and the business community leads to
ineffective fiscal policy that restrains economic growth.

How has successful fiscal policy effected economic growth?

All major tax cuts during the 20th Century boosted revenues. According to the Heritage
Foundation, the tax cuts of the 1920s, 1960s and 1980s produced dramatic revenue increases.
During the 1920s tax rates were cut from 70 percent to 25 percent and personal income revenues increased 61 percent from 1920 to 1928. The 1960s tax cuts slashed the top marginal rate from 90 percent to 70 percent and revenues increased 33 percent from 1961 to 1968. The Reagan tax cuts of the 1980s rocketed revenues 99.4 percent during the decade and created an environment during which there was unprecedented economic growth for two decades.

Further, the Washington Times summarized the effect that the 2003 Bush tax cuts had on
revenues by stating that, "But the real jolt for tax-cutting opponents was that the 03 Bush tax
cuts also generated a massive increase in federal tax receipts. From 2004 to 2007, federal
tax revenues increased by $785 billion, the largest four-year increase in American history.
According to the Treasury Department, individual and corporate income tax receipts were up 40 percent in the three years following the Bush tax cuts."

On the other hand, a Wall Street Journal editorial illustrated that President Obama's policies
have stagnated economic recovery thereby maintaining inadequate revenues at a meager 14.8
percent of GDP. Obama's 2010 tax cuts were far too short sighted to have any measurable effect on the economy. "[T]he 'temporary, targeted and timely' tax cuts favored by Keynesians and the White House don't do much for growth because they don't permanently change incentives to save and invest," wrote the Wall Street Journal. Under Obama, revenues have been extremely low and projections continue to be far lower as a percent of GDP than the forty-year average.

The solution to the current economic and debt crisis is a combination of decreasing federal
spending and expanding the economy to increase revenues. The stimulus package and two
rounds of quantitative easing have not helped. Political leaders should stabilize fiscal policy
by either extending the Bush tax cuts for the foreseeable future, or make them permanent,
enabling the private sector to function in a stable fiscal policy environment. Negative liberal
attitudes toward business and the job creating wealthy will accomplish nothing more than inhibit economic growth and, therefore, continue to have an adverse effect on revenues and the job market for the 20 million unemployed.