Bottom Line: All of Us Like Low Taxes

Alan Reynolds, a Cato Institute senior fellow, has the skinny
on what lower tax rates do to revenue collections.

What they say: lower tax rates mean lower revenues. "You do probably get a modest boost to GDP from tax cuts," concedes the Atlantic's Megan McCardle. "But you also get falling tax revenue. It can't be said too often—and there you are, I've said it again."

What’s the truth: Since the era of 70% tax rates, the U.S. income tax system has become far more "progressive." [F]rom 1979 to 2007 average income tax rates fell by 110% to minus 0.4% from 4.1% for the second-poorest quintile of taxpayers. Average tax rates fell by 56% for the middle quintile and 39% for the fourth, but only 8% at the top. Despite these massive tax cuts for the bottom 80%, overall federal revenues were the same 18.5% share of GDP in 2007 as they were in 1979 and individual tax revenues were nearly the same—8.7% of GDP in 1979 versus 8.4% in 2007.

In short, tax reductions under Kennedy, Reagan, Clinton and Bush 43 not only "paid for themselves," they also provided extra revenue that paid for negative income taxes for the bottom 40%, and record-low taxes at middle incomes.

The hidden truth is that existing lower tax rates for everyone mean the big government folks are out of options. People at all income levels—and this includes the near wealthy making $250,000 a year—no longer believe government is worth higher taxes. Republicans won the war against big government over the last three decades by lowering taxes on everyone, and forcing a situation where expenses need to fall to match revenue under 20% of GDP, the federal tax level people seem willing to tolerate. Taxes won’t go lower, but they won’t go higher either.