Columns » Ernest Dumas

Spending vs. tax cuts

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Nothing dies harder than a cherished idea proved wrong. After 90 years and a score of failures, the Republicans in Washington last week raised the standard of tax cuts one more time. A giant tax cut, they said, would turn the sinking economy around, create jobs and rebuild individual wealth while President Obama's stimulus plan would simply raise the public debt to an intolerable level.

“Generational theft,” Sen. John McCain called the president's spending program because future generations would have to pay off the mortgage. Never mind that the tax cut that he and all the other Republicans backed as the alternative to the stimulus would load a far greater burden onto our children than the plan that the president signed into law this week.

You would think that the lessons of the past eight years, when four rounds of tax cuts produced the feeblest economic performance since the 1930s, were not lost on men and women whose political careers had to be grounded in empirical law. If something never works, don't you try something else?

But maybe George W. Bush's all-around incompetence denied the theory a fair test. Let's overlay the history of the American business cycle with the record of tax reductions and see what it shows. Let it be said that the cause and effect of tax cuts and economic performance is not absolute. Economists never agree on the precise events and factors that cause a business downturn or a recovery, but I think you can detect a pattern.

Let's start with Calvin Coolidge and Herbert Hoover, whose joint record compares dismayingly to that of George W. Bush.

Coolidge and a solidly Republican Congress cut taxes three times in the Roaring Twenties, in the election years of 1924, 1926 and 1928. Right after the second tax cut, the country fell into a long recession and recovered in time for the 1928 election of Herbert Hoover and another overwhelmingly Republican Congress. Coolidge's sharp 1928 cut in corporate and personal taxes proved so effective at the polls that Hoover and his Treasury secretary, Andrew Mellon, repeated it in 1929. A tax cut would reflect confidence in the economy, which happened to be collapsing while the bill was wending its way to the president's desk. You know how that worked out.

Franklin Roosevelt did not reduce taxes and, in fact, raised them seven times from 1940 through 1944 to pay for the war, increasing federal receipts from $8.7 billion to $45.2 billion in four years, but still the economy expanded and unemployment sank to 1.2 percent.

Congress cut taxes at the end of war demobilization in November 1945 and again in 1948, both times over the objections of President Truman, who disagreed with the scope and shape of the reductions. The second one reduced total federal receipts by 13 percent. Six months later the country slumped into a yearlong recession.

Truman raised the income tax back to a top rate of 91 percent in 1951 to pay for the Korean War, and unemployment dropped by 50 percent.

President Dwight Eisenhower generally resisted his party's calls for tax cuts, but he relented and signed a tax cut after the country emerged from a 10-month recession that coincided with the Korean armistice and demobilization in 1954. That might be tax cuts' single success story. It would be nearly three years before the economy collapsed again.

President Nixon proposed a tax cut in the spring of 1971 and the Democratic Congress made it bigger than he wanted. He signed it anyway in the late fall. A yearlong slump followed. Another tax cut followed in November 1971 and the president on his own changed depreciation schedules to cut business taxes. Two years later, the economy plunged into the longest postwar recession.

A rebellious Democratic Congress forced a $19 billion tax cut — big for that day — on President Jimmy Carter in October 1978. The country struggled through a mild recession the next year and into 1980.

 Within 108 days of taking office in 1981, Ronald Reagan had signed his supply-side tax cuts, which phased in large income tax cuts over three years. The country slid into recession and by the end of 1982 unemployment had reached a post-Depression record of 10.8 percent. But in the midst of recession in 1982 and early 1983 Reagan and Congress raised income, payroll, cigarette and gasoline taxes, all of them quite sharply. Economic activity picked up for his last six years, producing an annual economic growth rate for his two terms that was only slightly lower than the average of post-World War II presidents.

Six months into a nine-month recession in 1990, President George H. W. Bush signed a bill raising the tax rate for high incomes to 31 percent, and two and a half years later Bill Clinton raised it to 34 percent. The longest and most robust peacetime economic expansion on record followed.

Then there was George W. Bush: four rounds of tax cuts in four years, two recessions, the worst jobs record since Hoover (1.9 million added in eight years, 20 million fewer than tax hiker Clinton) and a final calamity the bounds of which no one dares imagine.

So here is the Republican predicament: Count on the Obama program failing and the public buying the idea that Coolidge, Hoover and George W. Bush, given one more chance in 2009, would have taken us to the promised land.

 

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