Wednesday, March 25, 2009

Tax Cuts Don't Boost Revenues

From Time Magazine, December 6, 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.


Anonymous said...

Further in the article:

"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?"

Read the whole thing. Of course tax cuts for lower-income workers don't boost revenue. They don't invest enough to spur growth and production significantly. And of course transfer payments to non-taxpayers don't boost revenue. They didn't pay any tax to begin with and giving them direct cash payment is a cost.

But lowering marginal rates on upper-income earners DOES boost revenue. That's the supply-side model, which is supported by facts and history. Tell the whole story...

Nick D said...

Even further in the article:

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.

Nick D said...

"The Laffer Curve should not be the reason you raise or lower taxes." - Art Laffer. That just might be my website's new slogan ;)

Anonymous said...

Yes, Reagan's tax cuts for the non-rich were big money losers, as is usually the case with tax cuts for the non-rich and as I referenced above. But a money loser for Big Government is a GOOD thing...

On the slogan: It IS a good slogan. And very true. All kinds of really good reasons to cut taxes. I'm for cutting all of them, for everyone.

I gotta go do something productive. Cheers, buddy.