The truth is that tax cuts cause crashes. Tax hikes end depressions and recessions.
Those are the broad strokes. They need some parameters and qualifications.
In modern times, since the introduction of the income tax by constitutional amendment in 1913, there have been three basic types of recession.
2. Fiscal policy recessions come from cuts in government spending, as in 1937 and 1973 to balance the budget, or a hike in interest rates to tighten the money supply and control inflation, as in 1949, 1958, 1960, 1969, and 1980.
3. Finally, there is the sequence of boom, bubble and crash. The first of these was in 1929. The collapse that followed was called the Great Depression. The others were 1990, 2001, and 2007, the one we're in now, starting to be called the Great Recession. Except for 2001, these also included massive bank failures.
Economists, historians and, as we move into the present, journalists and pundits offer a mixed multitude of reasons for each of them, but now that we've had four of them (including the crash of 2001), we can see a pattern.
From 1921-25 it was cut, in steps, down to 25%.
There was a boom, particularly in the fiscal sector.
The crash came in 1929.
Reagan started cutting in 1982, down to 50%, then to 38.5% in 1987, and 28% in 1988. There was a boom in the fiscal sector. In the mid-eighties the collapse began, and over 1,600 banks failed. There was a huge bailout.
It burst in 2000, and, along with the 9/11 attacks, there was another recession.
There was huge growth in the fiscal sector, but "mysteriously," it was a jobless recovery. The boom was hollow. It was a bubble. It led to the Crash of 2007, with massive bank failures, followed by our current recession.
But for normal people the recession never ended. There were no new private sector jobs. Median income went down. Manufacturing continued to decline.
Nonetheless, if the same sequence takes place a multitude of times in different circumstances and the sequence takes place four out of five times tax cut, fiscal sector boom, bubble, crash, bank failures and recession or depression it makes a very good case for causality.
There is one significant tax cut that does not quite fit the model. In 1964 and 1965, the top marginal rate went down from 91% to 70%.
Tax cut enthusiasts always refer to them as the Kennedy tax cuts, but they took place under Lyndon Johnson. They also always cite them as a great stimulus to the economy.
The Dow Jones had an upsurge and then a crash.
Over the next twenty years, it bounced around between 600 and a 1,000, a lot of fun for speculators, but as a measure of serious economic growth over the long term it is astonishingly flat. (http://en.wikipedia.org/wiki/File:DJIA_historical_graph_to_jan09_%28log%29.svg).
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