What America's economic history tells us about tax cut reversal plans like Build Back Better

President Joe Biden meets virtually with governors, mayors, county officials and tribal leaders to discuss infrastructure, Wednesday, August 11, 2021, in the South Court Auditorium in the Eisenhower Executive Office Building at the White House.
President Joe Biden meets virtually with governors, mayors, county officials and tribal leaders to discuss infrastructure, Wednesday, August 11, 2021, in the South Court Auditorium in the Eisenhower Executive Office Building at the White House. | White House/ Adam Schultz

While the economic situations of 1920 and 1946 illustrate the economic prowess of the Great Experiment, those are certainly not the only two instances which encapsulate American Exceptionalism. The exceptionalism illustrated throughout the history of the United States has been interwoven with issues yet to overcome. Yet, that is the very essence for America’s reference as the Great Experiment! Experiments are by definition ongoing, continually learning, the art of mixing old lessons with new ones – hypothesizing, trying, checking the results and analyzing and repeating. Ever learning, ever changing but always maintaining clear principles. Such economic experimentation shows a respect for Providence. Human knowledge is limited and human plans are subject to failure. Being willing to learn from history is an act of Christian humility.

In fact, two of the most prosperous periods – periods of rapid growth – in the history of the United States were 1820 to 1850, the opening era of the Industrial Revolution, and 1865 to 1900, the prime of the Industrial Revolution, when the dollar approximately doubled in purchasing power.

Throughout American history the Great Experiment certainly had its economic ups and downs, the Panics of: 1783, 1792, 1796-7, 1819, 1837, 1857, 1873, 1893, 1901, 1907, 1929, 1937 and up through the more recent decades. But a pattern emerges when the behavior by the federal government is to back away from the economic crisis and allow it to naturally adjust. Even better, to retract its efforts – spending and taxes – has been shown to significantly enhance and benefit the adjustment and return to prosperity, as discussed above in 1920 and 1946. “The record shows consistently that the leaders who cut government to revive the economy succeeded far more quickly and painlessly than the New Deal [of the 1930s].” In fact, economist Murray Rothbard explains:

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"Laissez-faire was roughly, the traditional policy in American depressions before 1929.  The laissez-faire precedent was set in America’s first great depression, 1819, when the federal government’s only act was to ease terms of payments for its own land debtors.  President Van Buren also set a staunch laissez-faire course, in the Panic of 1837.  Subsequently federal governments followed a similar path, the chief sinners being state governments which periodically permitted insolvent banks to continue in operation without paying their obligations.  In the 1920-1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced.  And this depression was over in one year – in what Dr. Benjamin M. Anderson has called 'our last natural recovery to full employment.'”

Therefore, economic history definitively illustrates income tax rate reductions boost the economy, and tax cuts combined with spending reduction enhance the economy even more so. Certainly all tax cuts are not equal, but targeting income tax rate reductions has benefited America. Whether it was under a Democratic or Republican President, it did not matter; it was about the economic math and human behavior. Any administration that understands this, and partners with Congress to achieve this state, benefits Americans.

In recent years, Presidents Kennedy (Democrat), Reagan (Republican), Clinton (Democrat), and George W. Bush (Republican) all cut individual income tax rates which helped boost the economy and increased revenue significantly at the same time. Ultimately, “the largest [tax cuts] were the 1948 tax cut, the Kennedy-Johnson tax cut in the mid-1960s, the Reagan tax cut in the early 1980s, and the two Bush tax cuts in the early 2000s.” These proved to have a dramatically positive effect on the economy.

Many studies have shown that tax cuts – or in more colloquial terms, starving the beast – do not result in long term benefits, but economists David and Christina Romer's significant research actually reveals that the issue is not that these tax cuts do not work. Rather, they improve the economy and continue reasonable revenue into the federal government, but “that roughly three-quarters of a long-run tax cut is typically undone by legislated tax increases of various sorts within five years.” Essentially, “the fact that policymakers have been able to largely reverse tax cuts helps to explain why the cuts have not reduced spending.” This is a pathetic and unfortunate reality of our legislature. Fallen human nature is greedy, and history shows that big government which uses the threat of force to extract wealth from producers is especially subject to greed. The constitution, our national covenant, was intended to make America exceptional by placing exceptional limits on national government.

Jim Huntzinger is the President and Founder of Lean Frontiers, Inc., which develops knowledge and learning communities on the Lean Enterprise for business and industry. With a background and experience in manufacturing and operations, he has also extensively researched the history and development of American manufacturing and also published several books on the lean business model, manufacturing history, and economics.

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