New York Times columnist David Leonhardt claims, “G.D.P. growth has been stronger after recent tax increases on the wealthy.” To prove it he writes, “The economy has performed better under Democratic Presidents during the last half century.”
This might make sense if Eisenhower and Nixon had cut tax rates for the wealthy and JFK and LBJ raised them. But the opposite happened. It might also make sense if Clinton had raised the capital gains tax rate in 1997 rather than cutting it from 28% (under Reagan-Bush) to 20%.
President Eisenhower put the highest tax rate up to 92% in 1953-54 and the lowest rate to 22%. By contrast, President Kennedy’s 1963 plan for “getting America moving again” proposed to cut income tax rates to 14-65%. As enacted by LBJ after Kennedy’s assassination, the top tax rate was reduced to 70% and the lowest to 15%. These rate cuts came quickly, unlike Reagan’s – which were was unwisely postponed until 1983-84.
Economic growth was indeed twice as fast (5.2%) under the Kennedy-Johnson’s top tax rate of 70% than it was under Eisenhower’s top tax rates of 91-92% (2.5%). That may suggest “Kennedy Republicans” (like Jack Kemp) are wiser than pro-tax Eisenhower Democrats, as I put it in The Wall Street Journal (“Avoiding the Eisenhower Legacy” Nov 17, 1992). My 1992 analysis may have inspired a famous President Clinton outburst to his staff: “’I hope you’re all aware we’re all Eisenhower Republicans,’ …his voice dripping with sarcasm. ‘We’re all Eisenhower Republicans here…”
President Carter did try to raise tax rates on the wealthy, mostly by raising the tax on capital gains to nearly 40% by 1977. As with FDR in 1938, Democrats in Congress rebelled. On July 3, 1978, an alarmed Washington Post editorial said, “THE WILD POPULARITY of the Steiger amendment among the Democrats in Congress is a remarkable Phenomenon. The Steiger amendment, you will recall, cuts capital-gains taxes for a small number of citizens, most of whom roost comfortably on the top rung of the income ladder… Mr. Carter says that he will veto the bill.” But he didn’t.
The capital gains tax was again slashed from 28% to 20% in August 5, 1997, with the support of President Clinton and over 80% of the Democrats in the House and Senate.
If higher tax rates on the wealthy produce stronger GDP growth, why was that not also true from 1932 to 1936? Growth was certainly not stronger after June 6, 1932, when President Hoover raised the top tax rate from 25 percent to 63 percent, doubled the estate tax and raised corporate taxes. And growth was not stronger after the Revenue Act of June 22, 1936, which briefly raised tax rates on capital gains and profits until a Democrat Congress (fearful of being blamed for the deep 1937-38 recession) repealed it.
Those who misunderstand the nonpartisan history of tax policy successes and blunders are doomed to repeat the blunders.