Surprising that this article falls for it. Reagan's tax cuts were passed in 1981 and the economy, then in recession, STAYED in recession until Paul Volcker began cutting the Fed Funds rate in late 1982. And there isn't a shred of evidence that the recovery would have happened if Volcker hadn't.

There is a myth that rich people make business decisions based upon the income tax rate. This plays only with those who think Andrew Carnegie got rich by carefully saving his salary. Seriously rich people make their money by owning capital stock in successful business enterprises. A guy like Henry Ford or Bill Gates builds a corporation, hanging onto as large a share of it as he can while giving some of it away to raise needed capital. If he's successful, he now owns a big chunk of Ford or Microsoft stock that makes him a multi-million- or billionaire. And, at some point, he begins to sell off that stock to live the life that most major industrialists want to live -- private jet, many homes, etc.

When that stock is sold off, it is NEVER taxed as income, because it's not. It's a capital gain. And capital gains have NEVER been taxed at over 35% (and even that rate was only in wartime), generally have been taxed around 25%, and are currently at 15% (since, after all, hard-working industrialists should only pay half the rate of their secretaries, right, Mr. Bush?)

So when you hear that income tax cuts encourage the rich to invest, stop listening -- whoever said that doesn't know what the hell he/she is talking about.

Slasher:

I agree with you on Reagan's tax cuts.

The actual actions to save the economy were taken by Carter's appointment of Voelker, replacing Miller, to the Fed in 1979. His actions of raising the Fed Rate to as high as 15 to 20% certainly put the claims on inflation. The Fed Rate followed a see-saw patterrn during tse years and never was lower than 8.5% in 1982. This would be extraordinarily high if one considers that Greenspin's 6.5% plunged us into a recession in 2001, the begining of which was in 2000.

The rates started to fall the beginning of 1982 from 12% to 8.5% and then went up again in 1983 and 1984. Real Fed Rate Relief came in 1985. The same as the Bush cuts, the Reagan tax cuts benefited the high incomes with little trickle down. Some thing for you I recently read. Another Bush first. He managed to do something Hoover was incapable of doing. In 1929, everyone suffered from the Crash and the depression. From 2002 to 2006, Bush manage to skew tax so as the upper 5% of the taxpaying population's income actuallt remained the same or increased (upper 1%) while the other 95% of the taxpayers lost income.

Anyhoo, just a few thoughs and a link: <link> Historical Changes

Of course, all the profits that justified the stock price were taxed at ~35%, but you fail to count this entire layer of taxation.

If Bill Gates owns 20% of Microsoft, and Microsoft pays $5 billion in taxes this year, there is no reason on earth to deny that Bill Gates was responsible for $1 billion in tax payments.

Personally, I would get rid of the corporate tax and just treat all income the same, and tax it once. But in the absence of that, it is false to only count one layer of tax and ignore the other, as you did. As long as people are paying both layers, both should be counted. If they are NOT paying both, there is a loophole that needs to be closed (hedge funds!).

Here's a radical concept:

Tax at a rate sufficient to meet the need of the national budget -- not at rates that people want to pay.

There's nothing easier -- or more cowardly -- than for politicians to run on a platform of tax cuts, as we've seen for a generation now with predictably disastrous results..

Everybody claims to be a patriot, but that patriotism seldom extends to the "sacrifice" of paying taxes.

I agree. We have a persistent deficit of about 20% of total government spending. For years I have advocated splitting the difference between the two parties and raising ALL taxes by 10% and cutting ALL spending by 10% to balance the budget. From there, just require all changes be revenue-neutral.

Everyone would hate the plan equally. That's when you know you got it right.

Arbitrarily cutting spending by 10% is not the answer. There may be 10% that can be cut (government golf courses, bridges to nowhere, etc.), but I suspect that cuts of that magnitude could reduce already-strained vital government services.

A tax policy that achieves a balanced budget must be done the old-fashioned way: taxing wealth, large inheritances, capital gains, corporate profits, etc.

Nope. You are being partisan. I am proposing to cut EVERYTHING 10%. Raise ALL TAXES 10%.

Grandma's Social Security check? Cut.

Spending on defense? Cut.

Spending on bridges to anywhere or nowhere? Cut.

Income taxes? Every bracket raised 10% (ie, 15% goes to 16.5%, etc).

FICA tax? Up 10%

Corporate taxes? Up 10%

Just as a question to you: What percentage of their income should a rich person pay, and why? Can you justify this from principle, and make a coherent argument as to why just 1% more would be too much and therefore unfair? If you cannot, you are just pulling your answer out of your butt, which indicates that we should just ignore your ill-thought-out opinion on the matter. Under Obama's plan, for example, a rich person will be paying marginal rates near 60%. Is that too much, too little or just right? Defend your answer if you can.

As another fun little point: 95% of Americans have a serious conflict of interest in this matter. We are literally dicussing how much of someone else's money we should vote ourselves. Shouldn't our opinions and our votes be taken with a massive grain of salt?

How about just going back to the pre-Bush-tax-cut (i.e., Clinton) tax rates?

They seemed to work pretty well. It ain't rocket science.

though there are people who would disagree with you. Who would point out that the tax reduction act passed in August of 1981, and that economies the size of the US don't turn around on a dime. And that for most people who don't inherit their wealth, income (which was previously taxed) provided for the capital that made the capital gain. And since capital gains taxes are not adjusted for inflation, the present value of the redeemed stock is proportionately reduced by that inflation factor. But as some famous politician said once, "facts are stubborn things."

If by "doing well" you mean "a great big stock market bubble that blew up as he left office", you have a point.

The whole problem with your thought is the word "seem". Your intuition is wrong, because your sample size is far far far too small (essentially two from what I can tell). There is no statistically meaningful relationship between which party holds which office and the performance of the economy. Please get that into your head.

Sakura:

Blaming Clinton for the stock market bubble is like blaming Bush for the 2001 recession. The blame for both lies elsewhere.

The electorate seeks no statistical meaning as to who they vote for when they wish the economy to do better. It just happens to work out that way. Dems clean up after Repubs since WWII.

The tax breaks should have expired a long time ago as they are the leading cause of the budget deficit coupled with the war in Iraq, Homeland Defense, and the war in Afghanistan. Why would you cut SS payouts when it generates a yearly surplus? How about taking it and the FERA funds out of the General Funds and facing the real deficit. While not explaining it well, tne other poster has a point.

Stop-truth: the idea that taxable income provides the capital for major enterprises (as opposed to small businesses) is a fantasy -- roughly the equivalent in economic terms of believing in the tooth fairy. Major enterprises are capitalized by selling shares to investors. Bill Gates hasn't inherited anything (his father is still alive) and had worked no more than a few years when he started Microsoft. What on Earth gives you the idea that he used his income to capitalize it?

Once you understand the concept of how capital formation takes place, it becomes easy to understand the most important factor in moving the economy is to lower the price of capital. That's what Volcker did in late 1982 by cutting the prime rate, which in turn lowered all interest rates. Among other benefits, that also made it easier for investors to borrow money to invest in enterprises. Since the expected tax bite on profits thus earned would still be lower than the Reagan income tax rates, it makes perfect sense that this, and not an income tax cut over a year old, should get the credit for the recovery.

You see, big investors -- those capable of launching an Intel or a Microsoft -- understand that regardless of the eventual tax consequences of a business deal, the deal is far less likely to succeed if the cost of capitalizing it is too high. How many times have you heard business analysts complain that a certain deal won't fly because "they've taken on too much debt." What they mean is that the corporation in question has been saddled with an interest cost too high for its anticipated profits to cover it.

Finally, income taxes are indexed for inflation because the rates are expressed in terms of specific dollar amounts. I don't know what the numbers are today but the concept is that you pay 15% on the first X dollars and 20% on the next Y, etc. Obviously as inflation makes those dollars worth less, it makes sense to raise the levels to keep up with it, or else everyone eventually winds up in the top bracket.

Capital gains taxes are based solely upon the amount of the profit and are applied at a flat rate, so indexing for inflation is not relevant. Besides, inflation not only drives up the price of gasoline and Cheerios, it also drives up the price of stocks for the same reason as anything else -- more money chasing the same number of goods. So since profits are ALREADY protected from inflation, why should we "protect" investors from its tax consequences?

Facts are indeed stubborn things, and you really ought to acquaint yourself with some.

The only misconception in your argument seems to be that you believe the fed controls the cost of capital. They do not. They do control the interest rate, but that is not the same thing.

If the fed sets its interest rate below the market-driven cost of capital, it floods the market with little peices of green paper and causes inflation. We have been doing this for years, and now that the Chinese and Japanese have quit being so kind enough to soak up all our paper garbage, it is coming back to us in a hurry.

I agree. Clinton did not cause the boom and he did not cause the bust. As I have said repeatedly, the government does not control the market?

You blame the current deficit on the tax cuts. That is wrong. It is part tax cuts, part the war, part increased domestic spending (education, Rx drugs), part growth in the entitlements. Everyone gets blame for that.

The vast majority of people collecting SS now are taking out far more than they put in, as they were paying at least in part before the early eighties, when the taxes were raised significantly. They are getting more than their fair share and deserve to take a hit in order to be part of the solution. Additionally, that generation of voters is as responsible as any for our current deficit, so again they deserve to be part of the solution for once. My 10-10 plan offers no comprimises. If you want to cut SS by less than 10%, you got to cut something else even more or raise taxes more....and given SS's size, you are talking about big extra cuts or tax increases.

"Trickle Down Economics" versus "Voodoo Economics." The WSJ did major cheerleading for Reagan's tax cut mumbo jumbo. Ever since then, the GOP has perpetuated the nonsense and Democrats have been too chastened by the 1994 mid terms to say anything. Fixing this problem is beyond our political systems current status.