Today’s GOP Ignores Lessons of 1920s-Era Republican Tax Cuts, Which Were Paired With Lower Government Spending

History is on the side of those governments that tax less. But there is a downside to tax cutting. It’s often too successful. Its advocates usually promise that its successes will reduce government agencies and deficits with little or no spending cuts. But usually these are broken promises.Yet there’s no doubt that steep tax cuts — from Presidents Harding, Coolidge, Kennedy, Reagan, and Trump — were effective at improving economies. The problem with a low-tax philosophy is it’s incomplete if not accompanied by less government spending. For those who push for reckless spending programs, lower taxes can lead to what one economist calls “a closet Keynesianism.” This is the idea of cutting some taxes but continuing with big spending on everything; of pretending to be against big government but actually expanding it. This is a dishonest practice some governments follow while saying they oppose big government. Examples include President Lyndon Johnson going ahead with the Kennedy tax cut but spending far more than the projected startup costs of Medicare in the 1960s, or President George W. Bush miscalculating on what were the costs of the drug prescription program. Yes, both presidents cut taxes but outrageous costs and deficits continued.President Trump enacted deep tax cuts and, with the advice of a Reagan advisor, Arthur Laffer, made them effective immediately. I interviewed Mr. Laffer several times, and he all but conceded that overspending by governments, including conservative ones, hurt the economy. The downside to a lower taxes policy is that the success of reducing levies can lead to hubris, as lawmakers and voters come to think that spending cuts are superfluous. Indeed, the Kennedy tax cuts produced explosive growth, but the extra government receipts meant the Johnson administration could go on a spending binge. About a decade later a Republican administration in the early 1980s tried significant tax cuts.Reagan’s initial low-tax policies worked in growing GDP but did little to control spending and close government departments. His supporters argued growth would wipe out deficits.It didn’t.These Reaganites ignored economist Milton Friedman. He supported tax cuts in the 1980s. Yet he also warned that tax cuts accompanied by continued overspending lead to unexpected results. Friedman argued lower taxes must be combined with huge spending cuts or the point of tax cuts — to make the economy stronger; to provide high rates of growth and reduce the size of government — would be lost. Friedman wrote in “An Economist’s Protest: Bright Promises, Dismal Performance” that spending and tax cuts aren’t independent entities.“We know full well that Congress will spend every penny — and then some — that is yielded by taxes.” Friedman argued that a cut in taxes must include a big cut in spending.What is the model for a tax cutting strategy that also reduces government?It is the long-forgotten Harding-Coolidge-Mellon tax and spending cut policies of the early 1920s. This approach reversed a little-known depression just after World War I by dramatically cutting taxes and reducing spending.“The most important relief that government could afford to business was to reduce as much as possible government expenditure,” economist Benjamin Anderson said then. Harding, Coolidge, and Mellon then proceeded to enact numerous tax cuts through the 1920s until reckless Federal Reserve policies led to the Crash of 1929 and the resulting depression.Still, the Harding–Coolidge–Mellon tax and spending record was strong.Strong GDP growth in the 1920s combined with something else our tax cutting advocates mostly avoid — cutting government spending. In 1919, just after World War I, government debt was 29.77 percent of GDP. Ten years later — under policies recommended by Mellon and supported by Coolidge — that level had dropped to 16.34 percent.Lower taxes must be combined with less government. That’s the road to liberty and prosperity.

Today’s GOP Ignores Lessons of 1920s-Era Republican Tax Cuts, Which Were Paired With Lower Government Spending

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