Proponents argue that lower tax rates will spur economic growth by reducing the penalty on working, saving, and investing. Opponents disagree, claiming that the economy is doing fine and that tax rate reductions, if enacted, will help the rich disproportionately while widening the deficit. Fortunately, there is a way to judge the desirability of lower tax rates. By looking at how the economy performed during these periods, and by examining what happened to the deficit and the degree to which different income classes were affected, it is possible to gain useful evidence about the desirability of tax rate reductions today. The evidence provides strong support for those who believe the economy is performing below its potential and favor reductions in tax rates.
Recent history is especially compelling.
This means a 50 percent increase in the tax burden on work, saving, investment, and entrepreneurship when compared with the 28 percent rate in effect when Ronald Reagan left office. Assuming there is no change in policy, the Congressional Budget Office estimates that economic growth for the next ten years will average less than 2.1 percent annually. This is well below the post-World War II average of 3.2 percent. The economy's sub-standard performance in recent years should come as no surprise. As seen below, major changes in tax policy inevitably affect growth.