Tax Cuts Don't Boost Revenues
By Justin Fox Thursday, Dec. 06, 2007


If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money. "You cut taxes, and the tax revenues increase," President Bush said in a speech last year. Keeping taxes low, Vice President Dick Cheney explained in a recent interview, "does produce more revenue for the Federal Government." Presidential candidate John McCain declared in March that "tax cuts ... as we all know, increase revenues." His rival Rudy Giuliani couldn't agree more. "I know that reducing taxes produces more revenues," he intones in a new TV ad.

If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.
The yawning chasm between Republican rhetoric on taxes and even informed conservative opinion is maddening to those of wonkish bent. Pointing it out has become an opinion-column staple. But none of these screeds seem to have altered the political debate. So rather than write yet another, I decided to find out what Arthur Laffer thought.

Laffer is a bona fide economist with a doctorate from Stanford. He's also largely responsible for the Republican belief that tax cuts pay for themselves. Now 67, Laffer runs economic-consulting and money-management firms in Nashville. About the best I could get out of him on the question of whether the Bush tax cuts have paid for themselves was "I don't know." But that's only part of the story.
It's a saga that began in a bar near the White House on a December afternoon in 1974. Huddled at a meeting arranged by Wall Street Journal editorial writer Jude Wanniski were Cheney, then the deputy chief of staff to Republican President Gerald Ford, and Laffer, who was teaching at the University of Chicago's business school after a stint in the Nixon White House. In trying to explain to Cheney why a tax hike mooted by the President might not be such a great idea, Laffer drew a chart on a napkin that showed government revenues increasing as the tax rate moved up from 0% but then turning around and heading back toward zero as it neared 100%.

The idea that high tax rates brought diminishing returns was not controversial or even new--Laffer traces it to 14th century Muslim philosopher Ibn Khaldun. But few economists in the 1970s even considered that real-world tax rates could be on the wrong side of the Laffer Curve. Laffer thought they might be, and Wanniski argued on the Journal's editorial page and elsewhere that they almost certainly were. The claim became a key plank of Ronald Reagan's successful 1980 campaign for President.

And how did things work out? Laffer is convinced that the reduction of the top tax rate from 70% to 28% during the Reagan years paid for itself--in part by encouraging the rich to stop finagling--and the evidence mostly backs him up. "You find these enormous responses in the upper brackets," Laffer says. "These guys fire their lawyers and accountants and actually pay their taxes. Yay! Isn't that what we want them to do?"

But Reagan's tax cuts for the nonrich were big money losers, and it took the fiscal discipline of Bill Clinton to mop up the resulting red ink. Laffer gushes with praise for Clinton, but he's also a fan of Clinton's successor. "What Clinton did was, he gave Bush the fiscal flexibility to do what was right," Laffer says. In the face of the recession and terrorist attacks of 2001, Bush "needed to stimulate the economy and spend for defense, and Clinton gave him the ability to do that."

In other words, the Bush tax cuts were meant to create big deficits. But Laffer's O.K. with that. "The Laffer Curve should not be the reason you raise or lower taxes," he says. Perhaps not, but it does make for great campaign promises.


http://www.time.com/time/...z1TWfF7Xf1

What's also important, but not evident, on this chart is that Obama's major expenses were temporary - the stimulus is over now - while Bush's were, effectively, recurring. The Bush tax cuts didn't just lower revenue for 10 years. It's clear now that they lowered it indefinitely, which means this chart is understating their true cost. Similarly, the Medicare drug benefit is costing money on perpetuity, not just for two or three years. And Boehner, Ryan and others voted for these laws and, in some cases, helped to craft and pass them.

To relate this specifically to the debt-ceiling debate, we're not raising the debt ceiling because of the new policies passed in the past two years. We're raising the debt ceiling because of the accumulated effect of policies passed in recent decades, many of them under Republicans. It's convenient for whichever side isn't in power, or wasn't recently in power, to blame the debt ceiling on the other party. But it isn't true.
http://www.washingtonpost..._blog.html

False...

Check out these websites.

If you have 100 people paying taxes and you receive x amt of taxes and you put 100 more people to work and they start paying taxes, have you not increased revenues with no increase in tax rates ?

No one is talking about a tax cut, just not raising them.

Just maybe if we cut discressionary spending, reform medicare/medicaid, cut foreign aid and get out of 3 wars and cut the waste out of social security and close the loopholes that allow big business not to pay taxes, there wouldn't be a so called need to raise taxes.

Taxes cut... revenue grew. How can it be?

In 1981, Congress substantially lowered marginal income-tax rates on the well off. In 1990 and 1993, by contrast, Congress raised marginal income-tax rates on the well off. When the 1981 tax cuts were being debated, some supporters contended the tax cuts would more than pay for themselves. Similarly, opponents of the 1990 and 1993 tax increases claimed they would damage the economy and cause tax receipts to grow more slowly in the 1990s than in the 1980s.

In fact, the economy grew at about the same rate in the 1990s as in the 1980s, while tax revenues grew about twice as fast in the 1990s as in the 1980s: 3.5 percent (after adjustment for inflation and the increase in the size of the population), compared to 1.7 percent in the 1980s.

After adjusting for inflation and population growth, this year and last year's strong growth in revenues have barely made up for the deep revenue losses in 2001, 2002, and 2003. Measured since the current business cycle began in March 2001, total per-capita revenue growth, adjusted for inflation, has been near zero. Based on OMB's latest revenue estimates, real per-capita revenues in 2006 will be only 0.2 percent above the level they attained more than five years ago at the start of the business cycle. In other words, the current revenue "surge" is merely restoring revenues to where they were half a decade ago.

By contrast, five and a half years after the peak of previous post-World War II business cycles, real per-capita revenues had increased by an average of 10 percent. And at this point in the 1990s business cycle, real per-capita revenues were 11 percent higher than their level at the end of the previous business cycle.6

Furthermore, the performance of the economy during the current business cycle has been slightly weaker overall than the economy's average performance over the comparable period of other business cycles since the end of World War II. Investment growth during the current business cycle has been below the historical average, even though some of the Bush administration's tax cuts have been specifically targeted at investment. Employment and wage and salary growth have been especiallyweakduringthecurrentbusinesscycle.7

If tax cuts are crucial to economic growth, then the current business cycle - with its large tax cuts - should strongly outperform previous business cycles. Instead, it has performed more poorly than average.

"A recent CBO study of the economic effects of tax cuts found that how tax cuts are financed significantly impacts how they affect the economy. In the short run, deficit-financed tax cuts may help stimulate an economy in recession and thus temporarily improve growth (although the 2001 and 2003 tax cuts were poorly structured as stimulus). But in the long run, the deficits that result from unpaid-for tax cuts constitute a drag on the economy because they lower national savings.16

For this reason, deficit-financed tax cuts may actually weaken long-run economic growth. A study and literature review by Brookings Institution economists William Gale and Peter Orszag, for instance, concluded that the 2001 and 2003 tax cuts were "likely to reduce, not increase, national income in the long term" because of their effect in swelling the deficit.17 Studies by economists at the Congressional Budget Office and the Joint Committee on Taxation have found that, even in models that predict that deficit-financed tax cuts can have a positive economic impact over the ten- year budget window, their longer-run impact is negative.18

If deficit-financed tax cuts weaken economic growth, their long-run cost could be greater than conventional revenue estimates suggest, because they will reduce revenues not only directly (by lowering people's tax bills) but also indirectly (by slowing the economy). A recent CBO study of the economic effects of a hypothetical 10 percent across-the-board cut in income tax rates found that under certain assumptions, the increased deficits resulting from the tax cut would be enough of a drag on the economy that the tax cut actually would lose more revenue than if one assumed it had no effect on the economy. In other words, deficit-financed tax cuts could be even more expensive than officially "scored," rather than less expensive or costless.

In the final analysis, the idea that tax cuts can spur sufficient economic growth to pay for themselves sounds too good to be true because it is too good to be true. In tax policy, as in other aspects of policymaking, there is no "free lunch".

The plain fact of the matter is that spending is our problem, not revenue.

The screaming in Washington about more revenue is really only about feeding a spending addiction.

We need to get real about our expenditures.