Throughout history, economists have studied the effects of tax rates on the economy. The strong correlation between rates and economic prosperity occurs when tax rates are reduced. Growth rate, as well as living standards generally increase overtime, making tax cuts relatively popular historically. This is why we see major economic booms occur consequently with tax cuts. One prime example is the Roaring Twenties, where tax cuts were the direct cause of enormous economic growth and prosperity.
Historically, periods in which tax rates were higher produced inadequate and stagnant economic growth. Politicians and lobbyists propose that taxing the upper classes will lessen the burden on the middle and lower classes, which stimulates the economy. This is not only false, but basic critical thinking reveals that when the “rich” have more money in their pockets, they are more likely to invest or raise wages if they employ individuals. One common misconception of tax rates is that high tax rates generate more tax revenue, and lower tax rates generate less tax revenue. On paper, this would make sense. However, the truth is that in the 1920s when taxes were cut from nearly 70 percent to 25 percent, revenue increased by almost $400 million (a 61 percent increase). Why is this? Excessive taxation results in citizens not actually paying the taxes. The rich will move their money to tax exempt securities, putting the burden on the lower and middle classes.
…show more content…
This opened the door for mass production, lower prices, and more consumer spending. Unemployment stayed under 4 percent, which represents an almost fully employed economy. This perfect storm allowed the beautiful system of capitalism to sweep the nation and spread wealth and goods across the nation. By the end of the 1920s, the GDP rose nearly $300