Taxes Have Consequences: An Income Tax History of the United States

by Arthur B. Laffer, Brian Domitrovic, Jeanne Cairns Sinquefield

As seen on Kudlow on the FOX Business Network!

The definitive history of the effect of the income tax on the economy.

Ever since 1913, when the United States first imposed the income tax via constitutional amendment, the top rate of that tax has determined the fate of the American economy. When the top rate has been high, as in the late 1910s, the 1930s, 1940s, 1950s, and 1970s, the response of those with money and capital has been to curtail real economic activity in favor of protecting assets and income streams. Huge declines have come to the economy in these circumstances. The most brutal example was the Great Depression itself. When the top tax rate has been cut and held at reduced levels—as in the 1920s, the 1960s, in the long boom of the 1980s and 1990s, and briefly in the late 2010s—astonishing reversals have occurred. The rich have brought their money out of hiding and put it to work in the economy. The huge swings in the American economy since 1913 have had an inverse relationship to income tax rates.

Genres: Economics, History, Politics, Finance, American History, Nonfiction, Business

440 pages, Hardcover

Published September 27, 2022

Reviews

[Felipe Rioja · Rating 4 out of 5]

100% enfocado en la economía estadounidense (el título en español no hace referencia a esto, tampoco lo mencionan en la contraportada). Es interesante el análisis que se hace a lo largo de la historia de USA, y cómo cada época y cada política afectaban a la recaudación fiscal.

Creo que el análisis entregado no aplica a otras regiones del mundo. Ni la Europa post-guerra (o entreguerras), ni los países “tigres” asiáticos desde los años 60’, ni la cambiante Sudamérica en la segunda mitad del S XX se pueden comparar con la economía estadounidense del mismo periodo.

PS: Cuando sea multimillonario voy a volver a leer este libro para evadir impuestos; tiene una excelente lista de ejemplos de qué hacer, qué funcionó y qué fue cambiado por algunos pillos que lograron evadir con mucho éxito.

[Gretchen S · Rating 5 out of 5]

Fact Based & Compelling

If only the populous would read this book they would conclude prosperity is reachable by constraining the government. A flat tax would provide greater prosperity and its greatest benefit would be to take the “deal making” away from Congress.

[Ronald J. · Rating 5 out of 5]

I thoroughly enjoyed this historical romp through the tax history of the United States, beginning in 1913 all the way up to 2021. Decide for yourself, but to me the Laffer Curve is alive and well across the entire history. The book starts by pointing out that a person’s consumption, investments, gifts, wealth all come from income. Hence, all taxes are income taxes, regardless of what we call them. Income taxes function as the price of income, since People don’t work to pay taxes, but earn after-tax income. The bombshell in the book is the cause of the Great Depression. It debunks the myth that WWII ended the Great Depression, for two reasons:

1. Tax rate cuts in 1945, especially at the very top, taking the top rate of 94% to the low 80s% (which Eisenhower restored in 1950s back to 82%-91%, due to the Korean War)
2. The epic decline in govt spending

Also, obviously, GDP grows with military spending, but people only get to consume what’s left over (you can’t eat a tank). Some highlights from the following time periods:

1913-1919: Even President Wilson, and his Treasury Secretary, Carter Glass, admitted high rates passed due to WWI had exceeded the point of productivity.

1920s: The story of Andrew Mellon and his important book, Taxation: The People’s Business, published in 1924.

1930s: The Smoot-Hawley Tariff, Revenue Act 1932, excise taxes, social security taxes, and state and local levies ballooned in this decade, which the book proves was the chief cause of the Great Depression. When I was young and naïve, I believed in the monetary cause posited by Milton Friedman: A 1/3 decrease in the money supply from 1929-1933. But tax effects was much bigger.

Further, state and local govt spending permanently rose. In 1920 is equated to 5.1% of GDP, and in 1933 it was 14.2%. The authors call this growth in state spending the “Unindicted coconspirators” in the causes of Great Depression.” The state and local taxes were piled on top of this, increasing state/local tax burdens from 4.7% of GDP in 1929 to 7.6% in 1932. Between 1930-39, 26 of 48 states adopted a sales tax; from 1928-1939, from 12 states to 33 adopted a personal income tax. In the 1930s, 21 states increased tax rates (1 decreased them). In 1928, there were 12 states that had a corporate income tax, by 1939 it was 34, and during the 1930s there were 19 increases in those corp tax rates, and only 2 decreases. Property tax revolts in the 1930s make Prop 13 in CA look like child’s play, another ignored fact in the history of the Great Depression. With high top tax rates, taxable reported income declines. Highest income earners have the most flexibility to earn income or not. To avoid high tax rates, they can have:

*Unrealized cap gains, charity/death (stepped-up basis)
*Tax free bonds, deferred compensation, retirement plans, stock options (cap gains vs. earned income)
*Non-taxable perks at work (art, 3-martini lunches, benefits, vacation homes, corp jets (7x the number of airliners), cars, country clubs, barter, Yachts, horse ranches, sports teams, etc.)

The richest 1% income did not decrease due to income redistribution from rich to poor! It was because income was never reported but disguised through loopholes. This blows up Thomas Piketty’s arguments in Capital in the 21st Century. No matter how high the rates got (from 7% to 91%) the fabled top 1% paid the same proportion of total income in taxes: About 20%. The authors tell the little known income- splitting tax law change (joint tax returns or married filing separately), which also helped the rich not pay top rates, passed in late 1947, over Truman’s veto.

The term Supply-side economics was meant as a term of derision, coined by Herbert Stein (Ben Stein’s dad, “Bueller, Bueller”). Yet the left seems to understand how tax affect behavior, since they are massive proponents of sin taxes, (alcohol, cigarettes, etc.), carbon taxes, etc. When you tax something you get less of it; when you subsidize something, you get more of it. A country cannot tax its way to prosperity.

This is tax wonk’s book, but it also is a great history. Brian Domitrovic also wrote, with Larry Kudlow, JFK and the Reagan Revolution: A Secret History of American Prosperity, published in 2016. We were honored to interview Brian on The Soul of Enterprise on the book Taxes Have Consequences. You can listen to that show here:

https://www.thesoulofenterprise.com/t...

Notable
The Times asked William F. Buckley:
Q.: Have you ever cheated on your taxes?
A.: I suppose so. It’s impossible not to cheat on your taxes.
Q.: How much should one pay in taxes?
A.: As much, but not more, than your neighbors pay.

[Vance Ginn · Rating 5 out of 5]

The authors provide an excellent case study analysis of different periods and tax changes and the economic situation during them. There is much to learn about the incentive effects to save, work, and invest from changes in taxes. I highly recommend reading this book to learn more.

[Lindy Han · Rating 4 out of 5]

It's really much more than a boring recount of "An Income Tax History of the United States" that the title gives it credit for. TLDR: economic growth and government tax revenues are both indirectly proportional to tax rates. Unlike a typical finance textbook, this is written with easy to follow language that keeps readers engaged with its wit and humour. Nevertheless, it doesn't compromise on quality and depth. There are tables and charts with interpretations, constructed using real data, supporting the thesis. The core message is that when governments raise taxes, hoping to collect more money from rich citizens, it always backfires, because the rich always have both the motivation and means to end up only paying the amount they are happy to pay - which is, of course, minimum. Anecdotal details expounding on this make for a really entertaining read. Conversely, low tax rates make it not worth the effort to "manage", thus it follows that overall, the nation ends up able to collect a larger amount. There's a lot of repetition of key theories throughout. That makes readers constantly refresh and be reminded of them, making it for highly effective stickiness. Thumbs up to this one.

[Laurence Giliotti · Rating 4 out of 5]

The authors track the entire history of Federal tax rates from 1913 to the present with particular focus on the upper tax rates levied on the highest earners, and the impact of those rates on the national economy.
This book, or a full summary of it, should be required reading for anyone seeking public office.
It would also be of value to the decision-making process of voters supporting the ever-present refrains of "Tax the rich!" and "Corporations and the wealthiest Americans need to pay their fair share."
Historical data does not support these policies as achieving their intended results.
Counterintuitive, interesting and indisputable.

[Ell, Ess Jaeva · Rating 1 out of 5]

dnf 25%... maybe it gets better

even in this short portion what's reiterated is cut taxes for rich will increase tax revenue... why, well 1) the tax code is full of loopholes that the rich will exploit 2) via those loopholes, their elite well paid tax lawyers will trounce "good enough for gubment" staff 3) tax enforcement sux...

so instead of eliminating loopholes then bolstering staff pay and enforcement tactics, consider it trying to get blood from a turnip...

what's missing is the possibility that increased tax revenues are due to increased enforcement on those who cant hire fancy attorneys

[Christopher L Brandt · Rating 5 out of 5]

Proves what we thought all along

Hard to believe, when laid out, how every boom and bust of the US economy was related to taxation. It's so obvious. Explained well, and Laffer really builds each case on its individual historical merits.
I'm at the age where I lived through the hardships of the 70s and recovery of the 80s. Looking back on my personal experiences, much of what I lived was guided by the tax structure I didn't understand at the time. Fascinating read.

[Rebecca Garon · Rating 4 out of 5]

I have learned a ton reading this! The fluctuations in our tax rates throughout history and the subsequent effects are unknown to most Americans but it is so important to understanding the basics of economics and politics!!

[Sangam Agarwal · Rating 3 out of 5]

great book on usa tax history
great book because writer challenged thomas piketty and explain cause of great depression based on tax (tariff) policy.
you will learn a lot about tax system after reading it

[Rob Alexander · Rating 3 out of 5]

Chocked full of data and oft-repeated points but still a good read. Glad I read this one - it's eye-opening.

[Richard Kaskel · Rating 4 out of 5]

Bias confirmation would prevent Liberals from understanding the underlying historical facts of this book. History proves that lower rates lead to higher tax collections.

[Steven Beningo · Rating 5 out of 5]

An excellent book, which shows the clear link between taxation and the health of the American economy!

[Tobias Dahlberg · Rating 5 out of 5]

Who could have guessed!

[Drtaxsacto · Rating 5 out of 5]

The book is a concise history of the income tax in the US. It makes several points which are worth repeating. First, tax rates do matter - bring them too high and recipes will plummet. The author's data on the effects of key tax cuts (Kennedy, Reagan, Trump) is clear and concise. Second, the book argues that the Great Depression was a consequence of Gold (Bernanke's claim) or confiscatory monetary policy (Friedman's argument) but on tax rates. Beginning with the Hoover tax increases in the early 30s and Smoot Hawley - which was in effect a tax because of the way the bill was written - tax policy was a major factor in constraining growth. From my perspective, I think that downturn was a consequence of a series of lousy economic decisions including tax policy.

The authors also explain why the growth coming out of the 2006-2008 recession was so horrible. Obama's supporters have been diligent in trying to explain away the terrible performance in growth and jobs after that recession. This book puts it clearly on tax policies.

Laffer and his co-authors also make a case against stimulus payments. The evidence from the 2006-08 recession and from the pandemic reinforce that set of conclusions.

If you want some good data on the effects of various tax regimes or if you want a vigorous defense of supply side theory - this is the book for you. If you continue to believe in Keynesian theory - then this book won't be of much assistance.

I read this again while waiting for a surgery. IT was worth the repeated. The book makes three points which I did not focus upon.. First, he thinks that taxes (including the revenue act of 1931 under Hoover and SMOOT HAWLEY) were major factors to encourage an uncertain economy into its terrible state. I have always thought that absurd monetary policy (like the explanation of Milton Friedman) was a major cause. After rereading LAFFER I think a series of idiotic policies combined to bring us down. Second, he argues that just because you raise rates on high income taxpayers doesn’t mean that more revenue will accrue. The top quintiles in income have a lot of discretion on when and how to take income. In spite of tons of evidence to the contrary, some tax theorists think that this time raising rates will produce tons of revenue even though one hundred years of data supports the point. Finally the book has a raft of data on foolish taxes and on Piketty and Sáez contentions on distribution of income, Tax laws which have sunsets are less likely to produce dynamic effects.

[Luis · Rating 4 out of 5]

The thesis of this book is that increasing taxes on the wealthy does not work because wealthy people find ways to evade them and the result is less investment and therefore less economic growth and overall dynamism. I agree wholeheartedly.