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Supply-side economics dictates that too high a tax rate quashes incentives for individuals to earn more. Businesses also lose incentive to invest capital to expand their operations. The economy ceases to grow, gross domestic product is suppressed, and as a result tax revenues decline. Governments are tempted to either further raise taxes or cut spending. Either choice inflicts further economic damages. A recession - or even a full-blown depression - waits at the bottom of the spiral.

Conversely, if governments set taxes low and keep them low their economies should purr along at maximum efficiency. That, at least, is supply-side theory. Incentive to earn more is maximized for both individuals and businesses. People work harder. Output rises. Businesses create more jobs for eager workers. More money is earned, so tax revenues may rise despite the lower tax rates. An upward spiral is created when governments find they can cut taxes even further.

It sounds too good to be true, but is it?

The historical record in the United States is decidedly mixed. World War I pushed up the income tax rate to a maximum of 77% and slashed tax-exempt income so that more people had to pay taxes. The top capital gains rate also increased to 77%. After the war, these tax rates remained until 1924 when they began to be reduced, and in 1926 the top rate was slashed to 25%, the rate for the lowest tax bracket was reduced from 2% to 1.5%, estate taxes went from 40% to 20%, and gift taxes were eliminated. In 1929, while these lowered rates were in effect, the stock market crashed and the Great Depression began.

Supply-side economists will protest that this example does not apply because during this period the vast number of individuals - about 95% - paid no income taxes at all. Therefore those tax rate levels had a diminished impact on the overall economy. But for the largest businesses, the tax incentives should apply. The overall health of the economy was decidedly worsening during this period, so there is some relevance.

The next significant drop in income taxes occurred in 1964. By this time hardly anyone escaped the taxman's bite, and the top rate was a staggering 91%. World War II had jacked it up to this level, where it remained for nineteen years. Instead of dragging the economy down, the United States' economy prospered during this period.

The top tax rate was cut in 1964 to 77%, followed by a cut to 70% the next year. In all, this amounted to a hefty 23% reduction. The cut was first

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