Power & Market

Review of Taxes Have Consequences: An Income Tax History of the United States

Taxes Have Consequences: An Income Tax History of the United States, 

By Arthur B. Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield

Post Hill Press, 2022; 440 pp.


Calls to raise taxes on the rich are constant among today’s progressive activists. Progressives argue that increased tax rates would only impact those in the top one percent, without hurting the economy. In Taxes Have Consequences, economists Laffer, Sinquefield & historian Domitrovic partner to destroy this progressive myth with facts and logic. The book provides an in-depth historical account of the United States tax system and its impact on economic performance over the years.

The book is laid out in chronological order. The first three chapters lay out the theory behind the relationship between tax rates and tax revenues. The authors discuss the various means by which those with high incomes can shelter their earnings from taxation. This includes methods such as paying executives with deductible non-cash compensation like luxurious offices and expensive, fancy lunches, as well as tax-free interest income on municipal bonds. A whole chapter is also devoted to defending the Laffer curve - the concept that as the government raises tax rates from zero, revenue will rise, however, at a point, tax revenue will fall because the incentive to earn has been reduced sufficiently enough that it outweighs the increased percentage of earnings taxed. The rest of the book reads like a historical account covering the time period from the ratification of the 16th Amendment in 1913 to the Trump tax cuts of 2017. The chapters are broken up into periods of either tax cuts and growth, and periods of tax hikes and stagnation. The income tax era has seen five periods of tax cuts and economic growth and four periods of high taxes and economic stagnation.

The first of these were the tax cuts of the 1920’s following the end of World War I and the winding down of massive military spending. The top income tax rate was cut by more than half, resulting in high rates of economic growth as well as an increase in tax revenues collected from those who are subject to the tax rate. This period was followed immediately by the Great Depression. Laffer et al lay the Great Depression at the feet of bad tax policy. They claim that the initial decline in GDP was triggered by tax increases, starting with the passage of the Smoot-Hawley Tariff in 1930—the largest peace-time tariff in American history. Adding insult to the economic injury brought by the high tariffs, Presidents Hoover and Roosevelt both presided over significant hikes in income tax rates, ultimately bringing the top income tax rate above 70 percent, a level not seen since World War I.

Following American entry into World War II Congress hiked tax rates again, this time pushing top marginal rates to 94 percent. However, after the war, tax rates were lowered below their pre-war level due to changes in the tax code that allowed for married couples to file jointly. This effectively reduced most high earners rates by as much as 30 percent in 1948. However, tax rates began to creep back up, with the top marginal tax rate reaching again into the 90 percent range by the late 1950s. These high tax rates contributed to a turbulent business cycle, causing frequent recessions. President Kennedy ended this cycle when he moved to cut the top income tax rate down to the 70 percent range. While this tax cut was not enacted until after his death, Kennedy’s tax cut package, which also included tariff reductions and enhanced investment incentives, led to the booming economy of the 1960’s.

A similar series of events occurred in the 1980’s with the Reagan tax cuts. Throughout the 1970’s the economy remained in a constant state of stagflation. With the economy in such a poor state, supply-side economists, including Laffer, started to push for lower taxes as part of a pro-growth agenda. In the 1980’s, President Reagan signed into law a series of tax cuts that resulted in rapid economic growth. In strikingly bipartisan fashion, Congress cut tax rates throughout the decade, finally reaching what Laffer identifies as “nearly a flat tax” in the late 1980s, with just two income tax brackets: 15 percent and 28 percent. In addition, tax brackets were indexed for inflation and capital gains and estate tax rates were significantly cut as well. The result was a long economic boom that persisted with minimal interruption until the Great Recession of 2008-2009.

For a history book, yet alone an economic history book, Taxes Have Consequences is surprisingly readable. Each chapter is broken down into segments, each with their own subheading. This makes for a much easier reading experience. The authors avoid jargon and technical terms so the average layman can easily follow and understand the text.

While the authors are effective at making their case that good tax policy is fundamental to economic success, they overstate their case. Yes, taxes matter; but they are not the only thing that matters. While a book about taxes cannot be expected to also cover all the various factors of growth, there is almost no homage to the idea that anything else might influence growth. For example, Laffer lays the economic stagflation of the 1970’s firmly on the high tax rates of that period, without mentioning the regulatory and monetary factors that surely played a part. During the 1970’s, the United States saw the creation of no fewer than 20 new regulatory agencies, such as OSHA and the EPA. Furthermore, the Federal Reserve’s excessive money creation was inarguably culpable for the sky-high rates of inflation that plagued the US through the early 1980s. The bad regulatory and monetary policy environment surely bears some responsibility for the stagflation. On the flipside, the strong economy of the 1980s was rooted in more than just low tax rates. As Federal Reserve chairman, Paul Volcker quashed double-digit inflation with painful interest rates hikes through 1982.Congress had started to make bold moves to deregulate trucking, airlines, and telecommunications before Reagan was sworn in as president. Lower taxes helped spur growth in the 80s, but so did sound monetary and regulatory reform. Laffer’s focus on taxes can come off as monomaniacal and provides insufficient recognition of other important aspects of the overall policy mix.

This oversight notwithstanding, I would highly recommend Taxes Have Consequences. For such a dry subject as taxes, it is very digestible. While taxes are not the only relevant factor in a nation’s prosperity—as the authors sometimes seem to suggest—the book provides an excellent case that tax rates (even those solely on the rich) have major ramifications. Raising taxes on those with the highest incomes will not lead to a better standard of living for the middle class. Laffer et al don’t make the case that there should be no taxes on the wealthy, but that attempting to extract large sums of money from them through high taxes is misguided and economically destructive.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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