Glenden BrownZombie Lies: Tax Cuts Increase Revenue
A long time, conservative lie, based literally on something scrawled on a cocktail napkin by Arthur Laffer, alleges reducing tax rates will increase tax revenue. It’s daffy, and sounds just crazy enough to be appealing. It also has the advantage of convincing people that lower taxes are actually a good thing - iow, it appeals to our self interest. The actual argument runs something like this: taxes are inherently burdensome and reduce incentives for entrepreneurial innovation and thus harm the economy, if you reduce tax rates and hence the burden on businesses, they will grow faster and the economy will grow faster and more and the government will actually receive more tax revenue even though tax rates are lower.
It’s an appealingly daffy theory. It’s one of those things that sounds so crazy it just might work. There’s also the advantage that disproving it is really boring and involves lots of numbers. So looking at this zombie lie takes lots of time and by the time you dig through it, the average person has gotten bored and moved on. So please bear with me.
The Bush administration pushed two, large tax cuts - 2001 and 2003 that had the net effect of starving the US government of $1.7 trillion dollars in taxes between 2002 and 2007. How did I arrive at that figure? Easy. I took the percent of GDP paid in taxes in 2001 (19.8%), pretended it did not change and multiplied it by the GDP for 2002 to 2007. Over the course of Bush’s two maladministrations, the US government has experienced a traumatic loss in tax revenue while at the same time increasing spending each year. The net effect has been trillions of dollars in additional debt.
The conservative arguments rests on the claim that reducing taxes leads to better economic growth. Economists have endlessly refuted this claim and the Bush era proves the claim is false. The Reagan era, as well, actually posted lower growth than the Clinton era. Even the supposedly anemic Carter years had better economic growth than either Republican Bush administration produced.
The problem is incredibly simple - after cutting taxes, the economy simply cannot and will not grow so quickly as to replace the lost revenue. In 2001, in inflation adjusted dollars, the GDP was $9.9 trillion. The Bush tax cut reduced tax revenue by $138 billion. In 2002, the GDP was 10.5 trillion (or a growth of $600 billion). The Bush tax cut reduced the tax rate to 17.9. To generate the same revenue in 2002 as 2001 ($1991.4 trillion), at the Bush tax rate, the GDP woudl have needed to be $11.1 trillion in 2002 - an unheard of 12.48% growth rate in one year.
The broader point of course is that tax cuts don’t pay for themselves.
Tax revenue by year (nominal dollars):
2000 2,025.5
2001 1,991.4
2002 1,853.4
2003 1,782.5
2004 1,880.3
2005 2,153.9
GDP (in nominal dollars):
2000 9,817
2001 10,128
2002 10,469
2003 10,960
2004 11,685
2005 12,433
GDP in inflation adjusted dollars:
2000 9,817.0
2001 9,890.7
2002 10,048.8
2003 10,301.0
2004 10,675.8
2005 11,003.4
What you see is that takes 5 years of economic growth to reach the point at which tax cuts, theoretically, have paid for themselves. However, in that time, the government ran vast deficits, effectively negatiing any positive effects of economic growth on government revenues. The net effect of the massive 2001 and 2003 tax cuts is entirely offset by the additional cost of servicing increased debt.
In comparing the 1990s to the 2000s, its difficult to not draw the conclusion that sound fiscal policy at the federal level - even if that means higher taxes - is actually better for the economy. By maintaining a balanced budget (and running surpluses) in the 1990s, the US saw higher economic growth; the federal government’s fiscal mismanagement since 2001 has had the effect of draining the economy of dollars - every dollar the federal government borrows is a dollar not available to private enterprise.
June 16th, 2008 at 11:33 am
Check it:
When I used to be a Republican, no one imagined that a Republican president would ever add more than four trillion dollars to the national debt in just a few years. Who would want to? How would it even be possible? Bush has been the worst president ever by a very large margin.
June 16th, 2008 at 2:59 pm
Your analysis omits several points.
The growth of the 1990s was in large part based on the dot.com bubble, which like all bubbles are not sustainable. The economic downturn of the 2000 - 2004 was the consequence of the bubble bursting and 9/11.
Then, of course, there are normal business cycle effects that we’ve always had to deal with.
The surpluses of the late 1990s and the deficits we currently experience are driven in large part by in reduced military spending in the 1990s and increased military spending in recent years due to the Iraq War.
Federal revenues as a percent of GDP are currently near historic averages, which means that current deficits are not attributable to tax cuts but rather to increased spending (and it’s going to get a lot worse).
Your point would be valid if countries with high tax burdens also had high GDP per capita (adjusted for purchasing power parities, of course), but that is not the case. The few countries with high tax burdens AND high GDP per capita are either resource rich countries (on a per capita basis) such as Canada and Norway or banking havens like Luxembourg.
June 16th, 2008 at 3:03 pm
This Democrat’s explanation of how the Laffer Curve works doesn’t support your main contentions in this post.
http://www.youtube.com/watch?v=aEdXrfIMdiU
Lets face it…decreased taxes can spur economic growth and increased tax revenue but only if they are coupled with fiscal restraint on the part of Congress and the president (an admittedly unlikely scenario).
June 16th, 2008 at 3:10 pm
If Glenden’s point were accurate, to achieve maximum growth, we would have 100% tax rates. Government would tax everything we earn, own, or sell at 100% and then give us government grants as the politicians saw fit.
Of course, we know that 100% tax rates would not maximize economic growth. Therefore, there is a revenue-maximizing point between 0% and 100%, just as the Laffer Curve suggests.
June 16th, 2008 at 3:55 pm
An interesting editorial that seems to refute everything Glendon asserts is here…
Granted, I’m not an economist, nor do I play one on TV.
June 16th, 2008 at 3:56 pm
Just curious, why can’t OneUtah bloggers disagree with people without calling them liars?
Bitterness never was happiness.
June 17th, 2008 at 6:46 am
Andrea - If the deficits were solely to the fault of the business cycle and the Iraq folly, then your argument might hold water. But, if you know you have to increase spending to invade a country, why would you cut taxes? Look at the numbers again - Bush and the Republican congress cut taxes, tax revenue plummeted. If Republicans and conservatives were at all serious about finding the point on the curve that tax revenue is maximized, they would at times raise tax rates. The real world evidence argues against tax cuts raising revenues. The deeper issue at work here is decades of conservative misinformation about taxes and attacks on the validity of the government. Repsonsible governments know that at times you have to raise tax rates - to pay for things like wars. Laffer simply reversed Keynesian curve to make a convenient argument. Conservatives have been using it ever since to argue that we must always cut taxes no matter what is happening in the real world and in the real world, Republican supply economics have utterly failed us.
June 17th, 2008 at 7:08 am
Glenden,
Might want to stop using Cliff’s google skills and do some of your own work.
From Heritage Foundation
Ten Myths About the Bush Tax Cuts—and the Facts
Myth #1: Tax revenues remain low.
Fact: Tax revenues are above the historical average, even after the tax cuts.
Myth #2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.
Fact: Nearly all of the 2006 budget deficit resulted from additional spending above the baseline.
Myth #3: Supply-side economics assumes that all tax cuts immediately pay for themselves.
Fact: It assumes replenishment of some but not necessarily all lost revenues.
Myth #4: Capital gains tax cuts do not pay for themselves.
Fact: Capital gains tax revenues doubled following the 2003 tax cut.
Myth #5: The Bush tax cuts are to blame for the projected long-term budget deficits.
Fact: Projections show that entitlement costs will dwarf the projected large revenue increases.
Myth #6: Raising tax rates is the best way to raise revenue.
Fact: Tax revenues correlate with economic growth, not tax rates.
Myth #7: Reversing the upper-income tax cuts would raise substantial revenues.
Fact: The low-income tax cuts reduced revenues the most.
Myth #8: Tax cuts help the economy by “putting money in people’s pockets.”
Fact: Pro-growth tax cuts support incentives for productive behavior.
Myth #9: The Bush tax cuts have not helped the economy.
Fact: The economy responded strongly to the 2003 tax cuts.
Myth #10: The Bush tax cuts were tilted toward the rich.
Fact: The rich are now shouldering even more of the income tax burden.
From the Treasury department in 2005
This chart
From the New York Times, that extremely conservative right wing paper right?
Note the use of the “unexpected” as if this wasn’t the exact outcome predicted when Bush cut taxes.
How about showing some of the evidence that tax rates plummented?
Further evidence of the success of the tax cuts can be seen in Hauser’s Law.
June 17th, 2008 at 8:08 am
Bob - do you find it at all interesting that the Heritage Foundation - which has long argued tax cuts of any kind at any time are good would publish a list defending tax cuts? Go to the CBO like I did and look at the numbers.
June 17th, 2008 at 8:38 am
Glenden,
If it was just one source like the Heritage Foundation, I would find it interesting or suspect but that isn’t the only source of information. And just because they argue for tax cuts doesn’t mean the information is wrong.
June 17th, 2008 at 9:49 am
Ah, Bob,
So you admit you looked no further than Heritage. Was that admission meant to affirm that you are unwilling to seek objective information?
The Heritage Foundation has been so wrong on everything in the past 7 years as to have become a JOKE in Washington.
If you are so sure there are other sources that claim tax cuts increase tax revenues, why don’t you find them?
Certainly the CBO would count as a somewhat more credible source than Heritage….or maybe Cato?
…or does the NRA list them as the enemy?
June 17th, 2008 at 10:08 am
Cliff,
No, I’m not willing to admit that. I am willing to admit that I’m concerned about your reading and comprehension skills.
Let’s count the number of sources I listed in the original post.
1 Heritage foundation
2. Treasury department
From the Treasury department in 2005
3. The New York Times
My reply to Glenden was that I would find it suspicious IF ONLY the Heritage Foundation was reporting increased tax revenue. A major difference.
I’m unwilling to seek objective information??? Please.
Check out Monday’s Wall Street Journal’s opinion piece by Keith Marsden about government and growth.
June 17th, 2008 at 10:18 am
I linked to the Marsden piece, above.
I’ve noticed, something, Cliff.
For someone who holds themselves up as an educated elite - you are remarkeably misinformed. You make wild fact free statements, call people names, cite sources that contradict your claims and just generally appear to get off on being as abrasive as possible.
The other folks that post on OneUtah make thoughtful and researched posts (for the most part). Even Larry.
What’s your malfunction, Cliff? Why are you so irrationally angry?
June 17th, 2008 at 11:59 am
Andrea Says:
It’s Clinton’s fault!
I don’t know if you’re including me when you say we call everybody liars here, but although I use the word a lot, I don’t think I’ve ever called anybody here a liar, because I’m not sure whether they are or not.
I’m very interested in knowing whether people who don’t use their real names when posting are here for an honest discussion or not. I simply don’t know how anybody can defend this “president” after 8 years. It’s like somebody looking you right in the eye and saying water isn’t wet. To be as interested in truth as they say they are, and still be spreading the lies of the right wing fanatics makes my brain hurt.
If, someday, it becomes completely clear to every single person in America that Bush is a sociopathic killer, Bob S and jdberger will be able to disappear without a trace. If Bush turns out to be a good Christian man with nothing but honorable motivations, I will have to defend everything I’ve said, and I’m prepared to do that.
June 17th, 2008 at 12:21 pm
I lie, GW lies, Clinton and Andrea lie. What’s the beef?
The bitterness comes from having our behavior known for what it is, and not something like ‘mis-speaking’, ommission or simply being masked in secrecy.
June 17th, 2008 at 12:42 pm
Larry,
I’m constantly amazed at the requirements for self identification here. Anonymity has been one of the cornerstones of free speech in America for the longest time. The pamphleteers that agitated for the Revolution are an early example.
What difference does it make if I tell you my full name (Cliff’s google skills still wouldn’t help), use a consistent portion of my name or post anonymously?
Are my words, actions and behavior consistent? Am I hiding behind different names to attack or insult people? No.
So what does it matter if I’m black, white, green, short, fat, tall skinny, male or female. Thought everyone should be trying to live Martin Luther King Jr’s dream of judging people not by their color but by the content of their character?
By the way, I don’t see anything in Andrea’s post that blames Clinton. Where do you see that?
June 17th, 2008 at 12:55 pm
It’s called “PERSEC”, Larry.
I can’t believe that you’re still upset that I haven’t given you a copy of my passport. Get over it.
June 19th, 2008 at 12:06 pm
Using my real name keeps me honest and gives me credibility. If those things aren’t important to you, that’s your choice.
June 19th, 2008 at 12:23 pm
You make a lot of assumptions, Larry.
* That I’m male
* That I’m white (or Caucasian)
* That I’m heterosexual
* That jdberger isn’t my name
* That I live in the US
Others have made some amusing assumptions, too.
* That I’m in the military
* That I’m in the Air Force
* That if I am in the Air Force, that I’m in a non-combat position
* That I like beer (stale beer - specifically)
* That I’m a “redneck”
* That I’m a lawyer (or went to Law School)
* That I own a gun
* That I’m a member of the NRA
* That I’m a Republican
There is no reason that you knowing my identity would give my arguments any more or less gravitas, Larry. It has no bearing on how credible my arguments are, either.
In fact, by omitting my identity, my arguments carry more weight because they don’t come from an emotional point-of-view.
I don’t claim knowledge based on membership of a certain identity group. My posts about Gay Marraige aren’t based on my point of view as a lesbian. My posts on the war in Iraq aren’t based on my work with the National Democratic Institute. My posts on Katrina aren’t based on my involvement with the California Highway Patrol.
My posts stand on their own. You have to take them at face value - and you have to argue your position with honesty, without appealing to race or gender or any of that other “Identity” crap.
June 19th, 2008 at 12:53 pm
Whatever.
You don’t have a gun?
June 19th, 2008 at 1:12 pm
The point is that it doesn’t matter, Larry.
I don’t need a gun to advocate for the Second Amendment.
I don’t need to speak or belong to a Church (or choose not to belong) to advocate for the First.
I don’t need to have been searched to advocate for the 4th
…etc.
This “identity” thing, which you require/rely on, is pretty destructive. It almost (and might still) cause a bloodbath within the Democratic party. “People who voted for Hillary were ‘racist’ and people who didn’t were ’sexist’”. You heard the charges.
It’s what doomed the Dems in 2004. Kerry assumed the identity of “War Hero”. Instead of running on ideas and postions, he ran on “reporting for duty“. It was asinine. For balance, recall how friggin stupid Jack Kemp looked pantomiming the football pass every time he got off an airplane.
“Identity Politics” reduces you and your argument to a caricature. It should be able to stand alone.
June 19th, 2008 at 1:26 pm
I think your point is a very good one, jdb.
But sometimes when the attacks are so personal, it’s hard to separate that emotion out of your response. I’d love it if more straight people would fight for my rights, so I didn’t always have to be the caricature of the “angry lesbian.” But until then, I have to fight that fight myself in whatever ways I can…and sometimes that means letting my emotions get the better of me.
Plus…everyone always believes they are right and everyone else is wrong. ;)
June 19th, 2008 at 2:52 pm
Well, I agree about one thing jd. Jack Kemp is a caricature for ruining our economy, but then so is John Kerry for taking the sails out of the Democratic party by walking away from another stolen election after taking millions of dollars and lots of precious time from people who really couldn’t afford it.
What about my point sheri?
June 19th, 2008 at 3:04 pm
Larry,
I was agreeing with jdberger that sometimes being TOO attached to a certain identity can take some of the power out of your argument…that sometimes a certain anonymity (and therefore more a reliance on facts over emotion) can give your arguments more power.
I think his (i’m doing it too jd…i’m assuming you’re a guy) reference in an earlier comment to you, stating that his posts on gay marriage aren’t coming from the standpoint of a lesbian, was a veiled insult at his and my discussion under another post on the site, and my emotional reactions to those who call my relationship inferior.
That’s all.
June 19th, 2008 at 3:43 pm
OK. Thanks for the reply sheri. I’m off to work.
June 19th, 2008 at 3:44 pm
Sheri, I didn’t mean to insult you. I’m sorry if I did.
I was trying to grab 2 “protected classes” at once. Gay and female. Originally the standpoint was of a “black gay lesbian”. I was, instead, poking fun at “identity politics”.
J
June 19th, 2008 at 3:48 pm
No, not at all, I took it in stride. I didn’t think you meant it in a mean way. Despite my “angry lesbian” persona, I can still laugh at myself. I know I get too emotional and take things too personally at times.
Thanks for interesting discussion.
June 19th, 2008 at 5:56 pm
JD, You must be so impressed with yourself challenging Larry’s assumptions about you.
There is one thing of which I AM SURE. You are do not have the courage or sufficient “rep” to disclose your real identity.
Put another way, you’ve chosen to hide and as such, your ability to expect resepct and your influence as a meaningful contributor to any discussion are greatly diminished.
I’m sorry you choose to hide and make fun of others because of it.
June 19th, 2008 at 6:24 pm
I have made personal connections with a number of you all and therefore do not feel as though anonimity in a blog setting such as this should be any more of an issue than being ‘right’ist (correct) as opposed to ‘left’ist (incorrect, probably black or kinky), Straight or crooked (nixon was not a crook). It has been a long discussion and I’ll side with the prevailing case for anonimity. The ’shadow government’ confirms it as well.
June 19th, 2008 at 8:36 pm
Oh, Cliff -
Just because your search engine skills suck doesn’t mean I’m anonymous. It just means that you’re a crappy researcher.
We’ve seen it so many times. It’s like waiting for a Chevy Chase pratfall.
July 22nd, 2008 at 8:51 am
….and if you continue that listing of years and inflation-adjusted tax revenue, you see a surge from 2004 through 2007. Not only did revenue increase at the fastest 4 year rate in history, it increased faster than the CBO projected it would increase, with or without the tax cuts.
It doesn’t always happen in Year 1 but yes, over the long run, tax cuts can pay for themselves.