Concerns about an economic slowdown and recession are increasing. Wall Street CEOs and analysts are warning that the 2023 outlook for the U.S. economy is grim.
The Biden administration, however, thinks that the economy is in great shape and that its policies of high taxes and more spending are the best way forward.
But increasing taxes and spending is a failed economic theory that leads to long-term poor economic results. In fact, our real-world economic history shows that an economic strategy of lower tax rates and spending is the best way to achieve strong economic growth.
In the early 1920s, coming off the First World War and a major pandemic, with spending high and tax rates up to 77%, economic growth had fallen three years in a row. Presidents Harding and Coolidge adopted an economic policy of spending and tax cuts, reducing the top tax rate to 25% and setting off an economic boom. From 1922 to 1929, the economy grew at an average annual rate of 4.7% and unemployment dropped to 3.2%.
In the 1960s, after a series of recessions and slow growth under a tax system with wartime rates as high as 91%, John F. Kennedy was elected on a promise to get the country moving again. Kennedy said that the best way to increase economic growth was to take the “tax brake” off the economy. He proposed across-the-board cuts in personal and corporate rates. Enacted in 1964, the tax cuts set off a decadeslong economic expansion, with real GDP averaging 5% a year and unemployment falling to 3.4% by 1968.
In 1981, after soaring inflation had pushed taxes to record-high levels and the economy into a recession, President Ronald Reagan proposed spending and tax cuts modeled after the Kennedy tax cuts, reducing tax rates for all individuals and businesses. Once again, the economy roared back, with real growth averaging nearly 5% a year from 1983 to 1989, inflation dropping from double-digit rates to 4%, and unemployment falling in half.
Most recently, the 2017 tax cuts for individuals and businesses produced an economic recovery in 2018 and 2019 after years of sluggish growth. Real wages increased the most in U.S. history and the unemployment rate fell to 3.5%, the lowest rate in 50 years, before the pandemic lockdowns disrupted the economy.
The evidence is clear. An economic strategy of low tax rates and less spending is the best way to expand economic growth and increase economic prosperity for all.
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Bruce Thompson was a U.S. Senate aide, assistant secretary of Treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
