For over 100 years, since the inception of the federal income tax in 1913, fluctuations in tax rates, state as well as federal, have profoundly affected our economy in ways far beyond their impact on corresponding tax revenues. So argue the authors of Taxes Have Consequences – An Income Tax History of the United States. One of the authors, Arthur B. Laffer, is the noted economist and creator of the “Laffer Curve”.
Laffer and like-minded economists, commonly referred to as “Supply Siders”, put forward a seemingly counter intuitive proposition as illustrated in a bell curve: there is a tipping point as regards tax rates on the super wealthy at which tax revenues begin to fall as rates rise. Conversely, when rates fall, revenues increase. America’s income tax system, the authors assert, has resided beyond the tipping point since its inception. Why? Because as tax rates rise, super wealthy taxpayers shift more of their money into tax shelters, which from the beginning of the federal income tax to the present time have existed in abundance.
But the main thesis of the book is not that higher tax rates reduce tax revenues and conversely, that lower tax rates increase tax revenues. Rather, it’s that reallocation of resources by the super wealthy from productive uses to tax shelters stifles economic growth, thereby adversely affecting the quality of life for most Americans. Conversely, lower tax rates motivate the rich to expand investment and innovation, thereby creating more jobs and greater wealth for all Americans. As President John F. Kennedy observed when promoting his 1962 tax cut legislation, a rising tide raises all boats.
The authors analyze in depth 13 different tax regimes, commencing with 1913-1923 and ending with 2001-2020. They describe myriads of tax loopholes, beginning with the exemption from taxable income of the interest payments on state and local government debt instruments (a loophole which existed from the inception of the income tax in 1913) to the exclusions and deductions set forth in the 2016 Tax Cuts and Jobs Act. Findings are illustrated with voluminous statistics and illustrated with many charts and graphs. Interestingly, comparisons are made with contradictory economic models, most notably those of the Keynesians and the Monetarists.
This book is an interesting if not easy read for anyone who seeks to analyze the relationship of various tax policies over the past 100 years to economic growth or stagnation over the corresponding period. More importantly, it presents a well-thought-out model to evaluate how quality of life in our society, going forward, will likely be affected by evolving tax policy.
Contact the law attorneys at Vasiliadis Pappas Associates to learn more about the impact of tax policies on economic growth and how they may affect your financial future.
