Myth: Tax cuts increase tax collections.

Fact: Tax cuts decrease tax collections.


There is no evidence whatsoever that tax cuts increase tax collections. Almost always, tax cuts have seen tax collections fall in the following years; tax hikes have seen tax collections rise in the following years. Which is about what you would expect!


Before reviewing the statistics revealing the relationship between tax cuts and tax collections, we should review a few important concepts.

First, the economy grows in the long run, as both our population expands and productive technology improves. Our tax base, of course, grows along with the economy, so if the tax rate remains the same -- say, 18 percent -- then absolute tax collections grow as the economy grows.

Second, when comparing tax collections across the years, it is important to distinguish between current and constant dollars. Comparing tax collections in current dollars is deceptive, because inflation gives a false picture of tax growth. Economists use constant dollars instead, which account for inflation.

Third, tax collections generally fall during a recession, and rise during a recovery. That is because during a recession, there are more unemployed people who do not pay taxes. During a recovery, tax collections increase as more people go to work. Since World War II, we've had only seven years in which the economy shrank, so growth is the norm for both our economy and our tax base.

However, there is an opposite effect at work here also. During a recession, the government spends more because of the greater need for unemployment and welfare benefits, as well as counter-cyclical Keynesian spending. During a recovery, the government doesn't need to spend as much on these things, and as a result it can afford to lower its tax rates.

With these things in mind, we can now review the historical evidence.

Tax cuts in recent history

Since World War II, federal tax receipts have fluctuated within a few points of 18 percent of the Gross Domestic Product. Because they have been so stable, tax collections have regularly grown with the economy. Almost always, the only drops in tax collections have been during recession years; otherwise, tax collections have expanded in the years that the rest of the economy expanded.

There are a few notable exceptions to the above rule: those periods following large tax cuts. After Reagan's income tax cuts took effect in 1982, real income tax collections took a long fall, despite the fact our economy continued to grow. For the moment, let's ignore the fact that tax collections could have been expected to grow after 1981. Let's simply use 1981 as a baseline, multiplying it 8 times, and compare that to what was really collected over the next 8 years.

Individual Income Tax Collections (millions) (1)

Year     Current    Constant (87 dollars)
1981    $285,917    $367,692

1982     297,744     356,366
1983     288,938     332,033
1984     298,415     328,470
1985     334,531     354,677
1986     348,959     359,307
1987     392,557     392,557
1988     401,181     387,128
1989     445,690     411,533
82-89 total:       2,922,691
1981 (times 8)    -2,941,536
Net 8-year loss      -18,845

Corporate Income Taxes (millions)

Year      Current    Constant (87 dollars)
1981     $61,137     $78,623

1982      49,207     58,991
1983      37,022     42,544
1984      56,893     62,623
1985      61,331     65,024
1986      63,143     65,015
1987      83,926     83,926
1988      94,508     91,224
1989     103,291     98,092
82-89 total:        567,439
1981 (times 8)     -628,984
Net 8-year loss     -69,545

Combined individual and corporate income tax loss: $88 billion.

Keep in mind that this does not count the lost revenues that could be expected from a growing economy.

Also remember that, because the economy grows in the long run, tax collections will inevitably start rising again sooner or later as the tax base continues to grow. Therefore, supply-siders do not have the argument that there was a delay in increased tax collections, or that we can't expect tax policy to have immediate effects. The simple fact is that there was a 5 year drop in tax collections, which was extremely uncharacteristic of a growing economy. And during that time we incurred a trillion and a half dollars in debt, so the alleged value of such a tax policy is refuted outright.

The above figures are for income tax collections. However, general tax revenues also took a drop in the 80s:

Total Federal Tax Collections (billions) (2)

Year    Nominal   Constant (87 dollars)
1980    $517.1    $728.1
1981     599.3     766.6 < tax cut passed
1982     617.8     738.2 < drop
1983     600.6     684.3 < drop
1984     666.6     730.4
1985     734.1     776.6 < 81 level recovered
1986     769.1     790.0
1987     854.1     854.1
1988     909.0     877.3
1989     990.7     916.2
1990    1031.3     914.1
1991    1054.3     894.7
1992    1090.5     895.1

The Kennedy tax cuts are another favorite supply-side myth; many claim that once the tax cuts went into effect in 1964, income tax collections grew. But as you can see from the chart below, growth in income tax collections sharply dropped off:

Federal Income Tax Collections (Constant dollars, CPI-U) (3)

Year  Receipts  Percent change from previous year
1961  $138,069     ---
1962   150,567   + 9.0%
1963   155,375   + 3.2 
1964   156,804   + 0.9 < tax cut takes effect
1965   154,475   - 1.5

In 1965, the economy was in the fifth year of a nine-year expansion, and for income tax collections to see negative growth was, again, most uncharacteristic. Income tax collections did rise in 1966, but by this time President Johnson was accelerating the economy with Keynesian deficit spending on the Vietnam War. (These deficits he hid by unifying the federal budget with Social Security.) The greater economic activity resulted in more tax collections, and to disentangle any alleged supply-side benefits from the Keynesian benefits is all but impossible.

Another era of tax cuts was the Roaring Twenties. At first glance, supply-side theory seems to have worked here: taxes were cut, and revenues climbed. But that's because only the very richest Americans paid taxes in the 1920s, a decade which saw their incomes skyrocket. The vast majority of Americans saw their incomes decline -- but because they paid no taxes, this did not hurt tax collections. Of course, ordinary Americans had no reason to celebrate increased revenues under these deteriorating conditions. Indeed, they had every reason to oppose a tax policy that worsened income inequality.

Specifically, between 1920 and 1925, the top rate was reduced from 73 to 25 percent. But even during the high taxes of World War I, 95 percent of all Americans paid no income taxes. (4) By the end of the 1920s, about 80 percent of all Americans were still off the tax rolls. (5) Only the wealthiest were taxed, but their numbers grew as inequality grew over the decade. In fact, their ranks grew at a phenomenal pace only once equaled this century (the Reagan years). The following chart shows by how much:

Growth in ranks of rich, 1920-1928 (6)

                        Number,   Number,
Income                  1920      1928     Percent growth
Over $1 million           33       511      1,448%
$100,000 - 1 million   3,616    15,466        328

To put this in perspective, the number of people making over $100,000 in 1928 still represented only 0.01 percent of the American population. Their expanding numbers hardly helped out the middle class. But between 1923 and 1929, the lower 93 percent of the nonfarm population actually experienced a 4 percent drop in real disposable per capita income. (7) Farmers suffered an even worse decline. In one year alone -- 1927 -- the number of Americans making a middle class income (between $2,000 and $5,000) declined from 2.17 million to 2.09 million -- almost all of the loss to the lower class. (8)

Against this backdrop, you can understand why a rich-only tax saw increasing tax collections, and why the rich paid a higher share of those taxes. Between 1921 and 1928, total tax collections grew from $719 million to $1,160 million, in a period of virtually no inflation. The share of the total tax burden paid by the rich (those making over $50,000) rose from 44.2 percent to 78.4 percent.

But what would have happened if the poor had been paying taxes as well? Obviously, with declining incomes, they would have paid less than before. Because the middle class is larger than the rich, this probably would have resulted in an overall drop in tax collections. And indeed, this is precisely what we saw happen during the Reagan years.

Tax Hikes

By contrast, almost all tax hikes have seen dramatic and indisputable growth in tax collections. During World War I, only the richest 5 percent of the income earners paid taxes, and the top tax rate was hiked from 15 to 73 percent. Increases in revenues were so extraordinary that they funded an entire war. (The war did incur a debt, but this was paid off by continuing high taxes for a few years after the war.)

After the massive tax cuts of the 1920s, President Roosevelt raised taxes on the rich from 25 percent to 91 percent. Even the bottom rate climbed from 4 to 19 percent by the end of his presidency. (9) And tax collections under Roosevelt shot up 121 percent a year, the most of any president in U.S. history. By contrast, all subsequent presidents have seen tax collections rise in the single digits. (10)

The one exception to this correlation is George Bush's 1990 tax hikes, whose potential revenue increases were lost in the following recession. For those who would like to think a cause-and-effect relationship exists here, they should know that the recession of 1990 began in July, 1990, four months before Bush broke his "no new taxes" pledge. Bush signed his tax increases into law the following November. Many will recall that this recession was also labeled the "lingering recession" or the "jobless recovery" because it took so long for the unemployment rate to start falling afterwards. That's because businesses were automating instead of rehiring laid-off workers -- causing productivity to jump but tax collections to remain flat for 1992 as well.

However, Clinton's tax increases in 1993 occurred after the recession had passed, and the increase in tax collections is clearly visible:

Individual Income Taxes (millions) (11)

Year    Current    Constant (87 dollars)
1990   $466,884   $413,355 
1991    467,827    397,677 < recession year
1992    475,964    392,969 
1993    509,680    411,032 < Clinton tax passes
1994    543,055    429,496 < takes effect
1995    590,244    458,300 

Corporate Income Taxes (millions)

Year    Current    Constant (87 dollars)
1990    $93,507    $82,786
1991     98,086     83,378 < recession year
1992    100,270     82,786
1993    117,520     94,774 < Clinton tax passes
1994    140,385    111,029 < takes effect
1995    157,004    121,907

This is in marked contrast to the Reagan tax cuts, which saw tax collections fall, despite also occurring in a similar position in the business cycle, namely, the start of a recovery.

In sum, supply-siders have no obvious success stories to point to. Indeed, almost all the historical evidence runs against them.

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1. Original data from U.S. Office of Management and Budget, Historical Tables, Budget of the U.S. Government, FY 1996. Dollar conversions made from tables located there.

2. Internal Revenue Service.

3. Original data from U.S. Office of Management and Budget, Historical Tables, Budget of the US Government, FY 1996. Dollar conversions made from CPI-U.

4. Internal Revenue Service Figures cited in Barlett and Steele, America: Who Really Pays the Taxes (New York: Simon & Schuster, 1994) pp. 61-62.

5. Kevin Phillips, Politics of Rich and Poor (New York: Random House, 1990), pp. 76-77.

6. Barlett and Steele, pp. 66-67.

7. Charles F. Holt, "Who Benefited from the Prosperity of the Twenties?" Explorations in Economic History, 14, July 1977, pp. 277-89.

8. Geoffrey Perritt, America in the Twenties (New York: Touchstone Books, 1982), pp. 321-22.

9. Barlett and Steele, p. 68.

10. Here is the growth in tax collections for all presidents since Roosevelt:

President   Years   #  Prev yr  Last yr  Increase Inflation  Adjusted
                       Revenue  Revenue                      average
Roosevelt   34-46  13   $ 2.0   $ 39.3   1865.0%    50.8%   121.3%
Truman      47-53   7    39.3     69.6     77.1%    36.9%     3.7%
Eisenhower  54-61   8    69.6     94.4     35.6%    11.9%     2.4%
Kennedy     62-64   3    94.4    112.6     19.3%     3.7%     4.8%
L Johnson   65-69   5   112.6    186.9     66.0%    18.4%     6.9%
Nixon       70-75   6   186.9    279.1     49.3%    46.6%     0.3%
Ford        76-77   2   279.1    355.6     27.4%    12.6%     6.4%
Carter      78-81   4   355.6    599.3     68.5%    50.0%     3.0%
Reagan      82-89   8   599.3    990.7     65.3%    36.4%     2.4%
Bush        90-93   4   990.7   1153.5     16.4%    16.5%    -0.0%

U.S. Office of Management and Budget, Historical Table 2.1, Budget for FY 1997. Chart derived by Steve Casburn.

11. Original data from U.S. Office of Management and Budget, Historical Tables, Budget of the U.S. Government, FY 1996. Dollar conversions made from tables located there.