Critiquing Cato’s Alan Reynolds Views on Tax Rates and Growth

I recently critiqued Larry Kudlow. One thing I didn’t really make much of a note about was his citing Alan Reynolds of Cato. Reynolds has since responded – his letter is posted here. But the post Reynolds wrote covers other ground as well and I was interested in a few things he wrote.

Here’s one thing where I (and it seems to me the facts) would disagree with Reynolds

The economy was in recession almost as often as not in those days – in 1953-54, 1957-58 and 1960. John F. Kennedy, Bower rightly noted, campaigned on slashing [Republican] tax rates to get the economy moving again. When tax rates were finally cut in 1964, it worked (as always).

A recent post (to which I’ve since linked several times) shows the real GDP per capita growth rates and change in the rate of taxes as a percent of personal income for presidents beginning with Ike. JFK’s administration (from 1960 to 1963) produced the second fastest growth rate since the end of WW2. (Truman isn’t shown in that graph, but Truman didn’t exactly produce growth.) Faster than Clinton (#2) or Reagan (very close #3), and some distance behind LBJ. Now, perhaps one can argue that LBJ produced faster growth than JFK because of the cuts in marginal rates in 1964, but then why was growth so fast under JFK? Bear in mind, the top individual marginal rate was 91% at the time.

Another place I’m not sure Reynolds has the facts right is here:

The two parties switched sides recently, with Republicans adopting JFK’s approach by cutting the most destructive tax rates in 1981-86, and Democrats sounding and acting more like Ike since 1993.

The recent post of mine I referenced above has two graphs. One shows economic growth, and but the second one, which is worth a look at this point, shows the share of income that gets paid in taxes. As I keep stating, there are two ways to raise (or lower) taxes. One is to raise (or lower) tax rates. The other is to increase (or decrease) enforcement and how stringently the IRS interprets tax law. Every single one of the Dem administrations in the sample raised the share of people’s income paid in taxes (LBJ included), and every single one of the Rep administrations in the sample (Ike included) reduced it.

Finally, I would note this paragraph by Reynolds as well:

The Eisenhower-Nixon years defined the phrase “fiscal conservative.” If Democrats spent too much, a “fiscal conservative” would regard it as his duty to do the honorable thing and raise tax rates as much and as often as required, if only to protect the military budget.

I would think, and perhaps I’m wrong but I suspect Ike and Nixon were defined as fiscal conservatives because they paid down debt, something no Republican president has done since Ford was in office, and something every Dem president has done since Truman took office.

I also note… does it make sense for one side to criticize the other for spending too much if the other side is paying down debt and producing faster economic growth rates? The only way I can see that being OK is if one either doesn’t know the facts about economic growth and debt, or one doesn’t like the other things that were a part of the platform (and perhaps which helped achieve the results), such as the focus on the little guy.

Also, Nixon may have raised capital gains rates, but he lowered the top marginal rate on individuals. (LBJ left him with a 77% rate in 1969… by 1971 it was down to 70%.) I also note… Ike didn’t touch cap gains rates, but he lowered individual income tax rates. Not much, but he lowered them. When he took office, the bottom marginal rate was 22.2% and the top marginal rate was 92%; a year later these rates were 20% and 91%, respectively.

Frankly, I think the Cato blog is one of the better ones on the right side of the blogosphere, and it will be on our new blogroll when we’ve gotten it up. (Poor Dan has had all the work dumped on him.) As an organization, Cato is often quite willing to accept what the data says, even if it shows that a formerly admired character has stepped off the reservation. Now and then they (Cato) even dust off a few of the more obvious failings by St. Ronald the Reagan. But it seems to me that they aren’t willing to accept that the data simply doesn’t show what they so badly want it show about tax rates and economic growth rates. And its a pity… because there is some truth to what they say about tax rates. But that truth, just like the one adhered to by the far left, seems to be a boundary condition. They could do a lot of good if they noticed what happens, what really happens in the vast middle.

Update… minor changes for clarity made to the last paragraph.