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.