Tax cuts don't raise revenue, here's why
Now that tax time has passed, I would like to take this opportunity to weigh in on a timeless debate. For over two decades, the right has claimed that it is vital to cut personal income taxes to stimulate economic growth. Basically, the argument goes like this:
1. Income taxes get cut. People are paying less in taxes, so they increase their consumption.
2. The increased consumption causes increased revenue for businesses.
3. The increased revenue for businesses increases the amount of taxes that those businesses pay to the IRS by an amount that is more than the IRS lost from the reduction in personal income taxes.
This is an important debate because millions of "average joes" have bought into this line of thinking. This argument, however, is demonstrably false, as I will show.
The main problems with this theory:
1. The architects of this meme have admitted that it doesn't work and was just a ploy to reduce taxes for the wealthy
2. Statistics show that total revenues have always been lower after the tax cuts have been implemented in the past
3. Arguments that the right uses to support this meme ignore evidence that undercuts their claims
First, some history. The Economic Recovery Tax Act of 1981 is one of the biggest sources of contention in this debate. This act lowered taxes by 25% over 3 years. From 1980 to 1990, tax receipts did nearly double ($517B to $1032B). Many advocates of the Laffer curve took this as evidence that the Reagan tax cuts worked. Closer analysis shows this to not be the case. Historical Data shows that tax receipts have doubled or more during nearly every decade since the depression. In fact, receipts from income taxes only went up 91%. At the same time, reciepts from Social Security taxes went up 141%. This was due to the FICA Tax increase from 6.13% to 7.65%. Another fact that proponents of the Laffer curve like to ignore is that Reagan actually RAISED taxes six additional times between '82 and '87.
Now, with all of this debate about "Supply Side" or "Trickle Down" economics, let's examine what some in the Reagan Administration had to say about it. One of the key players in spreading this meme was Reagans budget director, David Stockman. However, in an Atlantic Monthly article in 1981, he admits that the tax cut in '81 "was always a Trojan horse to bring down the top [tax] rate" for the wealthy. Additionally, in his book "The Triumph of Politics: Why the Reagan Revolution Failed", he admits to "cooking the numbers" in the computer simulations.Even conservative Bruce Bartlett says "U.S. taxes have never been so high, in 1981 or any other time, that an across-the-board rate cut would lead to such an outpouring of economic output, and such a diminution of tax evasion and avoidance, that there would be no loss of revenue". In case you can't comprehend, that means that lower taxes does not provide enough of a stimulus to outweigh the loss in revenue. Additionally, N. Gregory Mankiw, former chairman of President Bush's Council of Economic Advisors and a Harvard economics professor, said that there is "no credible evidence" that "tax revenues ... rise in the face of lower tax rates."
Looking at the Bush tax cuts, you get the impression that history is repeating itself. These cuts were sold by appealing to voters self interest, and there was a lot of talk about how these cuts would stimulate the economy, which was in bad shape during the recession and after 9/11.
Now, according to the Congressional Budget Office, total tax revenues fell after the tax cuts, mirroring what happened during the Reagan years.
Look under Table 3, the first column, Income tax revenues (in Billions of $):
2001 994.3
2002 858.3
2003 793.7
2004 809.0
2005 927.2
The income tax cuts led to LESS personal income tax revenue, as you would expect. Now look under Table 1, Total Tax Revenues:
2000 2025.5
2001 1991.4
2002 1853.4
2003 1782.5
2004 1880.3
2005 2153.9
It's even more clear when you look at revenues as a percentage of GDP:
2000 20.9
2001 19.8
2002 17.9
2003 16.5
2004 16.3
2005 17.5
As these data show, total tax revenue fell along with personal income tax revenue. Now, supporters of these tax cuts claimed that the decrease in personal income tax revenue wouldn't be a problem, because the corporate tax revenue would pick up the slack, and then some. Did that happen? Let's look at corporate tax revenue in relation to the GDP:
2000 2.1
2001 1.5
2002 1.4
2003 1.2
2004 1.6
2005 2.3
If consumers were spending all of those tax savings and stimulating the economy, why did it take 4 years for corporate tax revenues to rebound to the same levels as in 2000, when we were starting a recession?
The Congressional Budget Office commissioned a study to determine the effects of a income tax cut on the economy. In fact, the exhaustive study shows that, at best, only 28 percent of lost tax revenue is recouped over a 10-year period.
I don't pretend to be an expert, and I am making these arguments in the spirit of open minded inquiry. Please let me know your thoughts.
posted by Realism @ 2:35 PM
6 Comments:
Just a thought, but why is it bad that tax revenues are a lesser percentage of GDP? First off, that would mean the GDP -- hence, the economy -- is growing. Tax revenues being a lesser percentage of GDP is a good thing. As Jenna made the point in the original posting on her blog, "It's the spending, ...." In the spirit of this being my first post at your blog, I'll refrain from using the word, "stupid" at the end of that quote even though I'm sure you would have figured out it wouldn't have been aimed at you.
I'd like taxes to be a lesser percentage in every way, shape or form.
Anyway, Phil (can I call you Phil?), here's my line of thinking that pretty much represents all of my thinking toward government, taxes, the whole sha-bang: Government really doesn't do many things well or efficiently; thus, the less it does, the better.
spending and tax revenue are separate issues. I agree (as would any reasonable person) that spending is out of control.
Regarding tax levels, I think that
1. I think that the whole argument for supply side or trickle down is a ruse to lower taxes for the wealthy.
2. There's no reason that government can't handle many of the tasks that you would leave in the hands of private companies. Private companies have their profits as the #1 priority. Governments (would ideally) have the welfare of their citizens as their #1 priority.
Well, Phil (I'm hoping you think it's OK for me to call you Phil, since you didn't address that part of my post), maybe we're not that far apart on things then. Spending is clearly out of control.
The thing is, liberals such as yourself always seem to think that conservatives such as myself are always among the incredibly rich. Trust me, I'm not.
It's a principle kind of thing, though, for us conservatives. I'm not rich, and I am not looking for huge breaks for the rich. But my belief in what role government should play takes priority over a lot of things, including any role government should play in the welfare of citizens. It's a freedom thing. If government is responsible for the welfare of citizens, we're really not a free society.
I had this realization in US History class as a junior in high school (29 years ago for me now). My teacher was one of the toughest in the school, but he was interesting and he challenged you to do your best.
Anyway, as we talked about American society and the welfare system, I noted that while we were against socialism and communism, our system of welfare and such actually was socialistic. He agreed, and left me to figure out the rest on my own. While I've been pretty ticked off at things our government is doing and has done since then, I've recognized that liberalism as it's developed in the US is not much different than the socialism we've fought so hard to eliminate in other societies over the years.
Anyway, that's where I come from. Whether or not tax cuts benefit the "wealthy" or not, it's the best way to get to a truly free society. And as to your second point, yes, in a perfect world, government "could" handle so many of the tasks. But in the real world, it doesn't. Private citizens and companies do it better, period.
Gosh, I guess they call it the "faith based" community for a reason.
First, learn your history
Second, listen to the experts (i.e. someone besides cato and heritage)
With so much evidence against your theory, don't you think that you might want to look for some alternate causality as to what might be stimulating the economy?
and to mike: Why don't you provide some evidence instead of just insulting people? All of you *** have just been making assertions without evidence to back them up except for, oh nevermind. Is this what passes for debate in your circles? A circle-jerk to a heritage foundation article? What a joke. I've been quoting your own ideological leaders and publications to disprove your arguments, for God's sake!
Your theory is wrong, and I'll explain why (if you can follow along). You say that reducing taxes puts more cash into the economy and stimulates it (to put it simply). As if the government doesn't put that money back into the economy. Almost all of the money that the government collects in taxes goes back into the economy. The government pays for healthcare, construction, services, payrolls, and gives money to poor people among other things. How does government spending stimulate the economy less than consumer spending?
To summarize:
I've quoted Reagans budget director admitting that this idea was a ruse to reduce taxes for the wealthy. http://www.theatlantic.com/politics/budget/budget.htm ALSO http://query.nytimes.com/gst/fullpage.html?res=9B06EEDC1F39F936A25752C1A967948260
I've quoted the former chairman of Bush's Council of Economic Advisor admitting that there is no credible evidence that tax revenues rise in the face of lower tax rates http://www.nationalreview.com/moore/moore022803b.asp
I've given you an exhaustive study from the Congressional Budget Office that demonstrates that you can only recoup 28% of lost revenues (at best) from a 10% income tax cut http://www.cbo.gov/ftpdocs/69xx/doc6908/12-01-10PercentTaxCut.pdf
And I've shown you who was actually responsible for the economic stimulus (it was the Board of the Federal Reserve Banks in case you already forgot or were too lazy to click the links)
I've demonstrated the flaws in your "evidence" (like the huge tax increases passed by Reagan that account for the increased revenue during his term)
Your OWN CATO INSTITUTE SAID:"Supply-siders predicted their tax cuts would pay for themselves. This was nonsense from day one, because the credible evidence overwhelmingly indicates that revenue feedbacks from tax cuts is 35 cents per dollar, at most. Are we really gullible enough to accept a free dinner while still suffering the indigestion from our "free" lunch? The Reagan administration never assumed that the tax cuts would pay for themselves. "
BUT YOU STILL REFUSE TO EVEN ADMIT THE POSSIBILITY THAT YOU ARE WRONG.
That is evidence of intellectual dishonesty. I mean, most Liberals were willing to give Bush the benefit of the doubt when Bush was claiming that Saddam had WMD's, I'm not certain yet that he didn't. I can admit that because I'm not an ideologue. Unlike you.
Let's be scientific. First a hypothesis:
If what you say is true, we would expect revenues to increase by a bigger percentage after tax cuts were enacted than during periods when there were no tax cuts.
Now let's test that hypothesis:
Using '83-'90 to illustrate the awesome growth spurred by the Reagan tax cuts (revenue went from 600.6 to 1032.1, or 71.8% growth). Let's look at some other 8 year periods when there weren't tax cuts in order to compare.
From '75 till '82 saw revenue growth from 279.1 to 617.8 for an increase of 121.4%
From '93 till '00 saw revenue growth from 1154.5 to 2025.5 for an increase of 75.4%
and for shits and giggles, let's use Bush's numbers for a four year period and double the percentage of growth to get an estimate of how he compares.
From '02 till '05 saw revenue growth from 1853.4 to 2153.9 for an increase of 16.2% which we can double to 32.4%
Since we see that revenue growth was faster during periods that there weren't tax cuts, that would lead an intellectually honest person to believe that tax cuts reduce revenue growth.
When we look at this data along with the Congressional Budget Office study that estimates as a best case scenario that only 22% of the revenue lost from a 10% tax cut is regained during the first 5 years and only 33% is regained after the second 5 years,
PLUS
The fact that numerous supporters of the tax cuts even admit that the increased revenue due to the economic stimulus of the cuts is not enough to cover the lost revenue from the cuts themselves,
PLUS
the fact that there are possible other explanations for what caused the (lower) growth in revenues during the tax cut eras,
This would lead an intellectually honest person to admit that the evidence for tax revenues being increased by tax cuts is inconclusive at best.
You should read this recent Atlantic Monthly article. I think it makes a lot of sense.
http://www.theatlantic.com/doc/prem/200606/tax-cuts
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