Why Tax Rate Cuts Work

Hillary Clinton took another sniper shot at Donald Trump’s tax reform plan last week by calling it “a tax cut for billionaires” like him. She even argued that Mr. Trump “spends” trillions of dollars on the tax cuts. Question: How do you spend money on a tax cut?

As Ronald Reagan would say: “well, there they go again.” Tax cuts for the rich is the boilerplate attack line against tax rate reductions. We’ve heard this every time a tax cut has been floated for the last 30 years.

But this criticism isn’t even close to historically accurate. Many times tax rate cuts — including in the 1960s under John F. Kennedy and in the 1980s under Mr. Reagan — have raised tax revenues from the wealthiest tax filers because lower rates reduce incentives for tax avoidance and recharge the batteries of the economy and grow taxable incomes.

In both the 1960s and 1980s supply side tax cuts were followed by increased revenues. As Larry Kudlow puts it in his soon to be released book on the JFK tax cuts: “We had six percent growth and the tax payments by the wealthiest filers nearly doubled. We had quarters of six percent growth back then.” After the Reagan cuts, the share of taxes paid by the top 1 percent rose from 19 percent in 1980 to above 25 percent in 1988, according to IRS tax return data. In other words, tax cuts are like performance enhancing drugs — and these are legal.

The heart of the Trump tax plan is to cut our business tax from the highest in the world down to 15 percent, making our rate one of the lowest. This will reverse the stampede of businesses fleeing out of America — great companies like Burger King and Medtronics. When the businesses come back, so will good paying middle class jobs.