Power & Market

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 16^th 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.

The Bureau of Democracy, Human Rights and Labor (a branch within the US State Department) releases annual ‘Human Rights Reports’ on 194 different countries around the globe. Their 2021 report for Ukraine was released in April of this year. Despite its relevance to whether US intervention in the RU-UA war is merited, the report received zero media coverage.

The report highlights “serious abuses” in the Donbas region citing multiple sources: “International organizations and NGOs, including Amnesty International, Human Rights Watch, and the HRMMU, issued periodic reports documenting abuses committed in the Donbas region on both sides of the line of contact.”

Notable examples of ‘significant human rights issues’ listed by the bureau include “extrajudicial killings by the government or its agents,” “violence against journalists,” “serious acts of government corruption,” and “violence motivated by anti-Semitism.”

Corroborating the State Department’s classifications is the Heritage Foundation, a pro-interventionist conservative think tank founded in 1973. For nearly three decades, the foundation has maintained its Index of Economic Freedom which defines economic freedom as the “fundamental right of every human to control his or her own labor and property”. For the 2021 index, not only does Ukraine rank 35 spaces below Russia at #127 on the leaderboard, it’s in another category. Russia’s economy is deemed to be “moderately free”, a category shared by first world nations like Italy, France, and Spain, while Ukraine’s economy falls within the “mostly unfree” bracket.

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I encourage readers to read the full list at the end of page 1 of the report and compare it to the State Department’s report on Russia. The assessments are nearly identical. It’s worth asking, if our own State Department classifies these two nations as equally abysmal defenders of basic human rights, why on Earth should we care about who governs their disputed territories? 

The only material differences between the two reports are related to Russia’s unfair elections, an issue the department does not attribute to Ukraine despite the Obama Administration’s interventions into their elections in 2014. That said, there is no question that Russian elections are less-than-legitimate. Despite Putin’s popular support (which has been cited in numerous western outlets), he certainly shapes the system to his advantage - whether it’s extending his legal term limit, imprisoning opponents, or outlawing online speech that demonstrates “disrespect” towards “state authorities”. 

However, even granting that Ukrainian elections are likely freer and fairer than those in Russia, if our goal is to defend democracy, why have we refused for almost a decade to recognize the secession of Crimea? 

Months after the widely disputed Crimean referendum to join Russia which passed in early 2014, Gallup, one of the oldest and most respected polling institutions in the US, in partnership with the Broadcasting Board of Governors, a US federal agency whose stated mission is to “promote freedom and democracy and to enhance understanding by broadcasting accurate, objective, and balanced news and information”, polled Crimean residents on whether the referendum reflected their views. Not only did 82.8% of the population confirm that it was, but 68.4% of ethnic Ukrainians did as well.

The following year, GfK, a German-based data and analytics behemoth, conducted a follow-up poll asking Crimean residents “Do you endorse Russia’s annexation of Crimea?” to which 82% responded “yes, definitely” with only 2% answering with a definitive “no”. One cannot claim to be defending democracy while aiding and abetting the Ukrainian government’s ongoing incursions into Crimea. David Sacks sums it up best:’

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Ok, so if not protecting democracy or improving the quality of life, what are we doing? Can we simply not tolerate an infringement on sovereign borders?

If that were the case, why then does the US not only allow but actively support the United Arab Emirates and Saudi-backed invasion of Yemen that began in 2018 and continues today? Regardless of the origins behind this war, it was not sanctioned by the Yemeni government and thus an infringement on their sovereignty. It’s the Middle East so it doesn’t matter?

The real reason we are involved in Ukraine is not to help their civilians. It is not to preserve democracy. It is not to preserve national sovereignty. It is what US officials like Defense Secretary Lloyd Austin and Congressman Dan Crenshaw have both admitted. The true purpose is to ‘weaken Russia’. A goal in direct contradiction to “Standing with Ukraine”. This goal uses their home as our playground. It uses civilian lives as our propaganda. It does nothing for the ordinary Ukrainian whose life would experience no material difference if Russia were to govern Crimea (as it has done for nearly a decade with the approval of its inhabitants) or the Donbas (which has been mired in civil war for years with atrocities on “both sides”). 

Oh yeah… and this goal also runs the risk of annihilating humanity. 

Stocks reacted positively to the jobs report released Friday morning before selling off sharply that afternoon on geopolitical fears. The report, which showed non-farm payrolls increased by 315,000 for the month of August, was largely in line with the expectations of market watchers, with major surveys held in the run-up to the release of the report yielding predictions of roughly 300,000.

Of itself, the rally was somewhat unexpected since the report seemed to back the hawkish stance reiterated by Federal Reserve Chair Jerome Powell at Jackson Hole last week. At the meeting he restated the Fed’s commitment to further tightening. The implied probability of Fed futures data has shifted accordingly, with oddsmakers having raised the possibility of a further .75 point hike to 75 percent.

With various indicators suggesting inflation might be peaking or slowing, many over the summer had come to hope such data would convince the Fed to signal a readiness to ease up on tightening credit conditions. After all, the economy was slowing. For example, while the figures reported on Friday were in line with estimates, they were still well short of July’s half a million. At the same time, unemployment increased from 3.5 to 3.7 percent. 

And, frankly, there are reasons to look askance at these numbers. For one thing, they are likely to be revised, with like reports over the past two decades seeing an eventual average adjustment of plus or minus 55,000. If the report was “just right,” not too hot to stoke inflation, not too cold to stall the economy, such a regular adjustment would be problematic. In addition, there are large discrepancies between federally withheld taxes and purported hiring, and between the Labor Department’s household survey and the Census Bureau’s employer survey used in headline unemployment numbers – both of which suggest the labor market is actually much weaker than the headline numbers make out.

For example, the Census Bureau’s unemployment figure does not include those who after becoming unemployed eventually give up looking for work and drop out of the labor market.

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As the above figure illustrates, the Great Financial Crisis and pandemic-era have led to serious declines in overall labor force participation rates. Millions of workers never returned following the shuttering of the economy in response to COVID, amplifying what was already predestined to be a period of demographically induced labor market tightness. As the legions of America’s baby boomers retired, economists had predicted much of the current labor market predicament decades ago.

A shortage of workers, continuing supply chain disruptions, and epic monetary mismanagement having coincided, it is little wonder retail sales and housing are slowing; critical commodities, such as copper and oil, are trading down; and consumer confidence is just up from its lowest level in 70 years of measurement.

With signs pointing increasingly negative, talk of a “soft landing” is going the way of “transitory” inflation. Seemingly determined not to back down, to regain price stability, a “growth recession” is now the target. Far from backing off rate-hikes for fear of impending recession, as it did in 1974, Fed officials now openly admit that tightening may continue into 2023, with rates being held at that level for some time after.

With the chances of a decrease in the size of September’s rate hike, from .75 bps to .50 bps, getting smaller, and stocks still expensive by historical standards, as measured by the price to earnings ratio, a sell-off on the jobs report Friday would have seemed more in line with the broader macroeconomic conditions.

But whereas job numbers can be massaged or spun, the response of markets to word that gas supplies to Germany from Russia were going to be suspended for an indefinite period just hours after the G7 announced their price capping strategy, was a reminder that some news is just unambiguously bad.

As the war in Ukraine grinds on and the global economy weakens, we can expect more such news.

When the term “evangelical” is tossed into the modern public square, it usually is accompanied by words like “Trump,” “January 6,” “right-wing,” “Christian nationalist,” “racist,” and the like. Like others who have spent their entire lives in the American evangelical subculture, I cannot say I have welcomed this step into the political arena in which arguments that should be nuanced suddenly are labeled black and white, and that all too often, we are told that the entire fate of Christendom depends upon the election of Candidate X.

This situation was not part of the American scene for most of the nation’s existence. In my formative years, no evangelical (or even fundamentalist) pastor would have openly endorsed a candidate from the pulpit (although some Protestant pastors did wonder aloud what would happen if the Roman Catholic candidate John F. Kennedy were to be elected).

All of that changed in 1972 when the Democrats nominated George McGovern for president. McGovern campaigned far to the left not only in his anti-war views (which many libertarians, including Murray Rothbard, gladly endorsed) but also in his opinions about economics or, to be more specific, the role of the state in a nation’s economy. While evangelical pastors and laypersons certainly had opinions about both men, preaching a gospel of Nixon or McGovern would not have been popular in the congregations.

However, a professor at an evangelical college Ronald Sider, who passed away recently, formed a group called Evangelicals for McGovern in which he claimed that McGovern’s platform could be considered Biblical in its social outlook. Christianity Today, in an obituary for Sider, noted:

Sider also became more politically active. He campaigned for George McGovern, founding Evangelicals for McGovern to rally support for the anti-war senator from South Dakota who was maligned by his many opponents as the candidate for acid, amnesty, and abortion.

According to historian David Swartz, Evangelicals for McGovern was the first evangelical group after 1945 to support a presidential candidate. Religious Right groups such as the Moral Majority and Christian Coalition had not yet organized, and though many prominent leaders such as Billy Graham supported President Richard Nixon, evangelical politics at that moment seemed “up for grabs.” Sider, along with people like Tom Skinner, Jim Wallis, and Richard Mouw, wanted to grab it. They believed Christians who loved Jesus and hated sin should exert their political will to oppose the war in Vietnam, law-and-order politics, and economic policies that aggravated poverty.

A year later, Sider and a number of hard-left activists wrote the Chicago Declaration, which condemned private enterprise in the United States, blaming capitalism for most social ills and calling for a vast expansion of the welfare state. In Sider’s view, the only possible Biblical position that a Christian could legitimately own was one of anti-capitalism.

In 1977, Sider wrote the book for which he was most famous, Rich Christians in an Age of Hunger, which I mentioned in a previous article about Christians and economics. I wrote:

Sider’s book looked at poverty in the world at that time and concluded that the only reason that Third World countries were poor was because North America and Europe were relatively wealthy. These countries were gobbling up the world’s resources unjustly and leaving nothing for the starving masses. Capitalism was the culprit, Sider argued, and while he did not agitate for outright socialism, he did call for a central power in the world to oversee massive wealth transfers, a worldwide welfare state.

I continued:

The book fed well into the evangelical mindset of seeing the world in black-and-white terms. It also provided evangelicals, who were likely to be ridiculed by elites in academe, politics, and the media for their faith, a way to be relevant and to try to earn favor with those same elites for their newfound compassion for the poor. The book itself presented a simple, black-and-white view of wealth and poverty; people who had wealth had stolen from the poor, and there could be no other explanation.

Sider’s central message was that unless Americans, Canadians, and Europeans gave up their wealthy lifestyles and agreed to adhere to a simple life—and stop using so many resources—poverty and starvation would expand throughout the planet and rates of poverty would accelerate. He even prophesied that unless this was done immediately, it would be maybe a decade before Third World countries like India that had nuclear weapons would use them to blackmail the West into giving up their wealth.

In Sider’s world, the economy was purely zero-sum in which any gain by one person meant someone else was to be made worse off. He told a story about himself in which he excoriated his own choice of purchasing a suit for $50 because that sum of money could have kept a child in India alive for a year. Toward the end of the book (ironically, in a footnote) he called for almost total deindustrialization of the West, claiming that without large scale manufacturing and transportation, people would not have to work as many hours and would have much more time for leisure and games, and that such a move would also eliminate hunger in the developing world.

The book was wildly popular among evangelicals, including the Christian college where my father (and later I) taught. Sider had struck a chord with students, encouraging them to embrace socialism and to see that even though the political left despised Christianity, it was the left that held to the True Faith when it came to dealing with people in poverty. At that time, the publisher of the book, InterVarsity Press, was moving leftward, along with its parent organization, InterVarsity Fellowship, which had a strong presence among American college students. (I was involved in our IVF chapter at the University of Tennessee in the early 1970s.)

In the various tributes to Sider, he is universally praised for his social activism and his vision of social justice. Likewise, his political activism in nearly every U.S. presidential election was expressed in his organizing a “Evangelicals for…” with the Democratic Party candidate filling in the blank. (He did make an exception in 2000, voting for George W. Bush, who then promptly launched the nation into ruinous warfare.)

While Rich Christians was wildly popular (the best-ever sales by IVP), Sider never had to pay a price with his peers for being woefully wrong about free-market economics. In his world at Eastern University, which has long been known for its leftism, Sider was a rock star and he never had to confront the fact that his book, as the late Gary North well put it, was an attempt to make American Christians feel guilty for being alive.

By all accounts, Sider was a humble person and someone who surely would have been a good neighbor. I’ve never heard anyone speak ill of him personally. However, by openly politicizing the Christian faith, and more specifically tying the Christian faith to the outcome of upcoming elections, Sider did untold damage that will not go away in our lifetimes.