Tax Cuts & Economic Growth

The paramount economic lesson of the past several decades is that tax cuts stimulate growth and increased government spending chokes it off.

DIDN’T PENNSYLVANIA TRY THE TAX-CUT APPROACH IN THE 1990s?

Although Pennsylvania cut some business taxes during the 1990s, other states have been far more aggressive in reducing their tax burdens on job creators.

• Recent example: Democrat Gov. Bill Richardson has, in just over two years, cut New Mexico’s top income tax rate from 8.2% to 4.9% and has proposed cuts in its capital gains and sales taxes.

Pennsylvania’s primary business tax rates, the Corporate Net Income Tax and the Capital Stock and Franchise Tax, remain 3rd and 2nd highest in the nation, respectively, despite reductions in in the 1990s.

Pennsylvania’s real per-capita spending was 5th-highest in the nation between 1991 and 2002. As a result, Pennsylvania’s tax reductions during the 1990s were offset by dramatic increases in government spending.

STATES EVIDENCE

Pennsylvania was mired at the bottom of the national chart in terms of employment growth (49th among the 50 states from 1970 to July 2006), population growth (47th among the 50 states between 1970 and 2005), and personal income growth (45th among the 50 states from the first quarter of 1970 to the first quarter of 2006).

When the performance of Pennsylvania and the other 9 states with the largest increases in their state and local tax burdens is contrasted with that of the 10 states with the largest decreases between 1970 and 2006, the economic case for fiscal restraint is clear:

Job Growth (1970 – July 2006)

• The 10 states with the largest increases in their state-local tax burdens had a cumulative job growth rate of 53.7%.
• The 10 states with the largest decreases in their state-local tax burdens had a cumulative job growth rate of 193%.

Population Growth (1970 – 2005)

• The 10 states with the largest state-local tax burden increases had a cumulative population growth rate of 18.3%.
• The corresponding growth rate in the 10 states with the largest state-local tax burden decreases was 88.8%.

Personal Income Growth (1st Q 1970 – 1st Q 2006)

• The 10 states with the largest state-local tax burden increases had a cumulative personal income growth rate of 978.3%.
• The 10 states with the largest state-local tax burden decreases had a cumulative personal income growth rate of 1,589.9%.

NATIONAL EVIDENCE

President Kennedy’s tax cuts of the 1960s, President Reagan’s tax cuts of the 1980s, and President Bush’s tax cuts of 2003 stimulated both substantial and sustained national economic growth.

President Kennedy’s 1962-63 tax cuts were dramatically positive for both the national economy and the federal treasury.

• Inflation-adjusted economic growth rose 42%—more than 5% annually—between 1961 and 1968.
• Inflation-adjusted tax revenues increased by one-third.

President Reagan’s 1981-83 tax cuts stimulated a 17-year economic expansion, interrupted only by an eight-month downturn in 1990-91.

• The national economy grew at an average annual rate of 3.6%—more than double the 1.6% annual growth rate of the preceding ten years—and created 35 million new jobs.
• Federal tax revenues more than doubled following the 1981-83 Reagan tax cuts, increasing from $517 billion in 1980 to more than $1 trillion in 1990.
• Federal spending rose even faster from $591 billion in 1980 to more than $1.25 trillion in 1990. Overspending—not a lack of tax revenues—caused the deficits of the 1980s.

Since President Bush’s mid-2003 tax cuts on capital gains and dividends, real annual Gross Domestic Product growth has averaged 4.3%—compared to 2.4% for the preceding 2 years.

• As of April 2005, tax receipts from these sources increased 29% over the level one year prior.

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