Federal Tax Revenue Growth During the 1920’s

John Tamny took some real heat for comments such as this:

Despite clear evidence that the marginal rate cuts of the 1920s, ’60s, and ’80s (not to mention the 2003 tax cuts) led to higher revenues.

In defense of Tamny, all he is doing is repeating claims from the likes of Art Laffer and his ilk:

But reductions of federal income taxes in 1924, 1926, and 1928 were each followed by an increase in federal revenues. To some, this seemed proof enough that a tax cut would or could raise the national income and thereby raise the revenue.

Many U.S. students of economics can easily rebut the free-lunch supply-side spin regarding the 1981 tax cuts by simply looking at the evidence on Federal tax revenues:

Note in particular that Social Insurance and Retirement Receipts increased by over 140% from 1980 to 1990 so all other taxes increased by only 81% in nominal terms. In real terms, tax revenues not including Social Insurance and Retirement Receipts rose by less than 18% even before adjusting for population increases. With a 10% increase in population, real tax revenues per capita excluding Social Insurance and Retirement Receipts rose by a mere 7% over the decade. Of course, one might ask with Social Insurance and Retirement Receipts rose by over 140% in nominal terms. One reason had to do with the payroll tax increase to pre-fund the Social Security benefits of the baby boom generation.

Or one could also simply compare the 3.5% per annum growth in real GDP from 1947 to 2000 (which Larry Kudlow often correctly notes) to the fact that real GDP growth was only 3.0% during the Reagan-Bush41 years. As far as the 1964 tax cut, most macroeconomic discussions note the return to full employment from an increase in aggregate demand – a Keynesian effect and not a supply-side miracle. Some macroeconomic textbooks go further to remind us that the fiscal stimulus got out of hand leading to the 1966 Credit Crunch as the Federal Reserve initially tried to offset the surge in aggregate demand. The rest of this 1960’s with its acceleration of inflation is something the supply-side crowd chooses to omit.

So I’m not surprised that the Laffer crowd goes back to the tax cuts of the 1920’s. But how would one characterize the macroeconomy of the 1920’s. If you have read “Understanding the Supply-Siders” co-authored by this fellow, you might characterize the 1920’s as being similar to the 1950’s – strong real GDP growth over the decade but plagued with a couple of recessions. Steve Kangas has also compiled Historical Economic Statistics, which provides such items as Gross Domestic Product (1929 Dollars) and Federal Receipts and Spending (Billions, 96 dollars). I have graphed the 1919 to 1929 potion of both series.

While real GDP grew by 44.4% during this ten-year period, it is interesting to note that real GDP growth was greater in the first half of this period (21.3% increase) than in the second half of the period (19.0%) – as it was the first half of this period that had the higher tax rates. As far as Federal revenues allegedly rising from the tax cuts, our graph of real tax revenues show no such effect. And yet, Kemp and Laffer claimed in their October 2000 Wall Street Journal op-ed that real revenues did increase. It would seem that the supply-side crowd continues to repeat its spin even when it is not true.