EXCERPTS:
"The Reagan tax cuts reduced rates for all income classes, even though it was well understood that cutting the lower rates would result in substantial revenue losses. Low tax rates (below 20%) do not cause much of a disincentive for working, saving or investing, and hence there is little supply-side effect. We did argue, however, that reducing the high marginal rates (up to 70% on high-income earners) would cause little, if any, revenue loss, because of the large, positive supply-side effects. Were we right?
Since most of the Reagan tax cuts applied to lower- and middle-income earners, there was close to a dollar lost in tax revenue for each "dollar" of tax cut for these groups. Still, CBO figures show that total tax revenue only fell from 19.2% of gross domestic product (GDP) in 1982, before most of Reagan's tax-rate reductions were put in place, to 18.4% of GDP in 1989, the year he left office. This happened because the U.S. economy grew by more than one-third in real terms (34.3%), much faster than the 24.3% rate expected even by economists within the Reagan administration. Thus, by the time President Reagan left office, the economy was generating more tax revenue at a maximum 28% rate than many on the left forecast it to generate at a maximum 70% rate.
The Reagan tax-rate reductions did, in fact, pay for themselves—but it took about seven years.
The Obama administration wants to extend the Bush tax cuts only for those making less than $200,000 a year. This will significantly reduce federal revenues. But the rate cuts it does not want to extend would be more likely to increase tax revenues.
The reason is simple: Those who earn more than $200,000 annually are among the ones who create most of the new jobs and fund new investment—the engines of economic growth. Without these jobs and new investment, the economy will be smaller and throw off less tax revenue.
