Deficits and Tax Cuts

But the tax cut strategy has been tried. A Republican Congress cut taxes in 1948. A Democratic government cut taxes in 1963. Before 1963, the maximum income tax rate had been 91%, although because of "tax loopholes" hardly anyone paid that high a rate; the "Kennedy-Johnson" tax cut reduced rates as a "Keynesian" measure to stimulate aggregate demand. And, of course, the Reagan administration cut taxes in 1981 and again in 1986.

So -- how did it work? Here is a diagram of the government deficit for 1960-96:

Figure 9: The Federal Deficit, 1960-1996

We see that the deficit surged in the 1980's following the Reagan tax cuts. In the 1960's, the scale is smaller, but the economy moved from a government surplus to a deficit following the tax cut. (That was the intent of the Kennedy-Johnson cut, which was understood as a "Keynesian" stimulus). This doesn't seem to offer much hope that a tax cut will pay for itself by means of an elasticity of response of one or more.

Investment