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Tax Rate Reductions Spurthe Economy--An EnduringRepublican Party Myth
James A. Cunningham, Ph.D.
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Tax Rate Reductions Spur the Economy--An EnduringRepublican Party Myth
James A. Cunningham*
ABSTRACT: Since the late 1970s, many Republican Party politicians haveembraced the vote enriching policy of lower taxes. This position is often justified bythe theory that upon implementation, both taxpayers and the economy will benefit.Frequently cited for support is the well-known Laffer curve, which in one regime predicts increasing tax revenues upon tax rate reduction. Yet several lines of evidencereveal that for average tax rates the U.S. economy has never been in this regime.Some derivations of the Laffer curve include the assumption that the tax basedeclines with increasing tax rates. Depending on the modeling of compliance vs. taxrates, the expectations for revenues in the lower tax rate regime are stronglyinfluenced. Several variations are presented. Historical marginal tax rate changes below about 50% generally show only arithmetic effects on tax revenues and noconfirmable effects on GDP. Thus, advocates of the Laffer curve may overstate thevarious economic benefits they expect upon tax rate reductions. Misinterpretation of the Laffer curve has probably contributed to the recent public deficits, the largest inhistory
.*Silicon Valley California resident, Dr. James A. Cunningham, now retired, enjoyed a longcareer as a corporate executive and inventor in the semiconductor industry. Among severalother interests and many publications, the author published a book in 2006 on economicissues entitled
The Hollowing of America
. He created 46 U.S. Patents in the field of semiconductor devices. He may be reached at jimcsname@comcast.net.
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I
Introduction
Most Republicans favor lower taxes. The origin of this position traces back to a coldDecember night in 1974, and a portentous discussion held in a Washington DC restaurant.Three well-connected Republican gentlemen are deliberating the sorry mess of the economythen under President Gerald Ford. A recession is underway and each successive quarter findsthe Gross Domestic Product (GDP) sliding further into oblivion. Inflation rages at 11%.Prime interest rates shoved past 9% and unemployment drifts over 7% and rising still.Discouraged, the discussion rambles, leading nowhere.But then one of the three men presents a concept seemingly from political nirvana.Our enlivened diners are suddenly enlightened with a new and great wisdom. Perhaps a trueepiphany comes to pass. And a new economic era is born --- the heart of Reaganomics --- avote wrenching supply-side strategy of the first magnitude now revealed by a simple yet profound sketch on a napkin. Essentially a doodle, but a doodle to beat all doodles.The new wisdom spreads quickly, and soon many Republican Party leaders aretransformed into master politicians, master economists. Born again, recharged, invincible.Indeed, since this auspicious meeting in 1974, the Republicans controlled the administrative branch for 26 of the past 34 years. (On November 4, 2008 something new happened, of course. But that is a story better addressed at another writing).The new plan is elegant and simple -- campaign on a platform of lower tax rates.Could there be any red blooded tax-paying American who would actually vote
against 
such a policy? But what about those pesky deficits? Wouldn't they get worse? Indeed not! Our newtheory reveals they should improve, probably even go away. But even if they don't, "Reagan proved deficits don't
 
matter," as Dick Cheney so famously reminded George W. Bush and hiscabinet in 2002.Actually, Cheney was correct. Reagan did demonstrate two great political truths: (1)campaign for lower taxes and you will likely win, or at least garner a great many additionalvotes, and (2) when deficits arise, as they inevitably did, most of the electorate doesn't reallycare.3
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