Time for Tax Cuts

The economic recovery, to the extent there’s been one, has stalled. Unemployment remains stubbornly above 9 percent and may go higher. The housing crisis endures. What is President Obama’s remedy? More jobless benefits, more money for governors to pay Medicaid bills, more funds for teachers and state and local government jobs. In other words, more of the same.

What ever happened to “bold, persistent experimentation”? That was President Franklin Roosevelt’s notion of how to cope with the Depression, and Obama is a great admirer of FDR. Yet he’s barely experimented at all. Instead he’s offering more of what has been tried and failed to deliver a healthy economy.

So why not experiment with tax cuts? It would be a new approach for Obama, a real experiment in his case. It would be one with an impressive history of success in spurring economic revival going back to the era of President George Washington.

His administration, led by Treasury Secretary Alexander Hamilton, took on the Revolutionary War debts of the states. In Empire of Liberty: A History of the New Republic, 1789-1815, historian Gordon Wood says this policy allowed state taxes to fall and generated “the increasing growth of American prosperity. Hamilton’s financial program was working wonders” with the economy.

“The federal government’s assumption of the states’ war debts had indeed reduced the states’ need to tax their citizens, and the states lowered their taxes to between 50 and 90 percent of what they had been in the 1780s,” Wood writes. “By the mid-1790s the burden of taxation in the states had returned to pre-Revolution levels, which were considerably lower than those of the European nations.”

What worked then has worked since. Two Harvard economists, Alberto Alesina and Silvia Ardagna, studied efforts to stimulate economies in 30 countries between 1970 and 2007. Their discovery: tax cuts were the best stimulus.

“They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments,” according to their Harvard colleague N. Gregory Mankiw. Their conclusion is similar to that of other economists.

“There appears to be a growing body of evidence, then, suggesting that taxes may be a better tool for fiscal stimulus than conventional models have indicated,” Mankiw writes in National Affairs. He’s putting it mildly.

There’s no better evidence than the tax cuts of Presidents Kennedy and Reagan. The Kennedy cuts were enacted 1964 after JFK’s assassination. Like the Reagan tax cuts of 1981, they led to an economic boom.

All this means that if Obama went with tax cuts, he would have a safe experiment on his hands. But for reasons of ideology and inflexibility, he’s stuck on spending as the cure for economic doldrums.

To make matters worse, Obama is insisting on letting the Bush tax cuts lapse in 2011 for those making more than $200,000 annually. These are exactly the folks most likely to react to tax cuts by investing in the economy and producing jobs. Raising their taxes is likely to have the opposite effect: less investment, fewer jobs created.

This, too, is a lesson Obama could learn from FDR, his presidential idol. Roosevelt experimented a lot, but not with tax cuts. He raised taxes. The result: the Depression lingered throughout the 1930s.

Fred Barnes is executive editor of THE WEEKLY STANDARD.