Overview
This lecture focused on the effects of Calvin Coolidge's 1920s tax cuts, especially the Revenue Acts of 1924 and 1926, and how tax changes impacted government revenue.
Coolidge's Presidency and Tax Policy
- Calvin Coolidge became president after Harding's death and served from 1923 to 1929.
- Coolidge was known for a quiet demeanor and significant tax reforms.
- The Revenue Act of 1924 reduced income tax rates for both the poor/middle class and the rich.
- The Revenue Act of 1926 reduced only the top income tax rates for the rich, with no change for lower income groups.
Effects of Tax Cuts on Revenue
- The 1924 tax cut led to an increase in government income tax revenue after accounting for baseline economic growth.
- Tax revenue increased in 1924 because lower rates were applied broadly, especially impacting poor and middle-class workers.
- The 1926 tax cut, which benefited only the rich, resulted in a decrease in government tax revenue.
- Harding's Revenue Act of 1921 also cut taxes for the rich only and led to decreased revenue.
- Cuts limited to the wealthy consistently resulted in reduced tax revenues.
Economic Analysis and the Laffer Curve
- The Laffer Curve illustrates the relationship between tax rates and government revenue.
- For most lower-income individuals, cutting tax rates increases employment and tax revenue due to greater labor incentives.
- For the ultra-wealthy, tax cuts do not significantly change behavior, so revenue falls when their rates are cut.
- The 1924 bottom rate cut from 4% to 2% benefited about 80% of the population and spurred economic activity.
- Supply-side effects (increased work and economic growth) are strongest when tax cuts target lower and middle incomes.
Policy Implications
- Tax cuts targeting the wealthy usually lower total tax revenue because the rich are less sensitive to tax changes.
- Broad tax cuts for the lower and middle classes can increase both economic activity and government revenue.
- Since 1924, similar supply-side increases in revenue from tax cuts have not been observed due to lack of cuts for lower incomes.
Key Terms & Definitions
- Revenue Act — a law that changes government tax rates.
- Marginal Tax Rate — the rate paid on the next dollar of income.
- Laffer Curve — a graph showing the relationship between tax rates and total tax revenue.
- Supply-side effect — economic growth resulting from increased incentives to work or invest due to lower taxes.
- Deadweight Loss — lost economic efficiency from taxation or market distortions.
Action Items / Next Steps
- Review the details and years of the 1921, 1924, and 1926 Revenue Acts.
- Know the effects of tax cuts on different income groups and the resulting changes in government revenue.
- Study the Laffer Curve and understand its implications for tax policy.