Monday, September 8, 2014

Tax Cuts Ended Depression-Created Decade Long Expansion

This extract from Wikipedia on the economic policy under the Harding administration, in respect of the stimulus effects of tax cuts, speaks for itself. There were brief recessions within the subsequent boom period but all that means is the business cycle is an inherent aspect of capitalism. 

That tax cuts are better than deficit spending seems beyond discussion. Even if deficit spending does eventually stimulate the economy, and look how much deficit spending has been done under Obama with limited effect so far, the end result is inflation and debt. Tax cuts increase government revenue over time,cut unemployment and any inflationary effects are easily managed through traditional mechanisms.

On March 4, President Harding assumed office while the nation was in the midst of a postwar economic decline, known as the Depression of 1920–21. By summer of his first year in office, an economic recovery began.
President Harding convened the Conference of Unemployment in 1921, headed by Secretary of Commerce Herbert Hoover, that proactively advocated stimulating the economy with local public work projects and encouraged businesses to apply shared work programs.[118]
Harding's Treasury Secretary, Andrew Mellon, ordered a study that claimed to demonstrate that as income tax rates were increased, money was driven underground or abroad. Mellon concluded that lower rates would increase tax revenues. Based on this advice, Harding cut taxes, starting in 1922. The top marginal rate was reduced annually in four stages from 73% in 1921 to 25% in 1925. Taxes were cut for lower incomes starting in 1923.[119]
Revenues to the treasury increased substantially. Unemployment also continued to fall. Libertarianhistorian Thomas Woods contends that the tax cuts ended the Depression of 1920–21—even though economic growth had begun before the cuts—and were responsible for creating a decade-long expansion.[120] Historians Schweikart and Allen attribute these changes to the tax cuts.[121]Schweikart and Allen also argue that Harding's tax and economic policies in part "...produced the most vibrant eight year burst of manufacturing and innovation in the nation's history."[122] The combined declines in unemployment and inflation (later known as the Misery Index) were among the sharpest in U.S. history. Wages, profits, and productivity all made substantial gains during the 1920s.
Daniel Kuehn attributes the improvement to the earlier monetary policy of the Federal Reserve, and notes that the changes in marginal tax rates were accompanied by an expansion in the tax base that could account for the increase in revenue.[123] However:
Robert Gordon, a Keynesian, admits, “government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. … Despite the absence of a stimulative government policy, however, recovery was not long delayed.” Kenneth Weiher, an economic historian, notes, “despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” He then briskly concedes that “the economy rebounded quickly from the 1920-1921 depression and entered a period of quite vigorous growth.”[115]

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