Among sentences I do not like to write: Andrew Leonard is mostly right about this one. Tax cuts do not generally increase revenue, and Republicans should stop saying otherwise.
But he’s not quite right to treat all these statements as equivalent:
Here’s Rep. Joe Walsh, (R-Ill.) the self-styled “conservative Tea Party activist” who upset Democrat Melissa Bean in the 2010 midterms, on ABC’s “This Week.”
“In the ’80s, federal revenues went up,” said Walsh. “We didn’t cut spending. Revenues went up in the ’80s. Every time we’ve cut taxes, revenues have gone up. The economy has grown.”
Walsh may be a freshman in Congress, but he’s got the party line down pat. Here’s Senate Minority Leader Mitch McConnell saying in July that the Bush tax cuts “increased revenue, because of the vibrancy of these tax cuts in the economy.” Here’s Speaker of the House John Boehner saying last June that “over the last 30 years#…#lower marginal tax rates have led to a growing economy, more employment and more people paying taxes,” he said.
Walsh’s statement is false if you read it as having an implicit “because.” It is true that revenue went up in the 1980s, that we did not cut spending, and, as Mr. Leonard himself points out, that revenue has gone up following tax cuts, etc. One could make a useful (and true) argument that we can in many situations expect revenue to increase following tax cuts — but, in most cases, not by as much as it would have without the tax cuts. For instance, if the U.S. government were not laboring under a crippling deficit and debt (Imagine!), one might plausibly argue that we could both cut taxes in a given situation and maintain current levels of spending without increasing the deficit. (Might! Might! You’d obviously want some high-grade forecasting on that.) But our current straits suggest that the longstanding Washington compromise — Democratic rates of spending and Republican rates of taxation — produces very large deficits.
McConnell’s statement is false.
Boehner’s statement, like Walsh’s, depends on how much implicit causality you read into it. That is not a trivial distinction: Low tax rates really can and do contribute to a growing economy, which can and does contribute to growing tax revenue. What is not true is that income-tax rate cuts pay $1.30 on the dollar, and that revenue has risen mostly because of (rather than despite) tax cuts — and Republicans should stop claiming otherwise.
The scale of the growth effects of tax cuts is important inasmuch as the naïve supply-siders’ argument credits tax cuts with basically 100 percent of economic growth. But we probably were going to have some economic growth in the 1980s or 2000s without the tax cuts. We’ll probably have some growth from 2011–20 with or without tax cuts (or tax increases).
I am all for having the budget police take revenue effects into account when scoring tax policies, but those effects are not as dramatic as Republican rhetoric would have it. And we should also take into account the possibility that large and persistent deficits may diminish economic growth (this seems to have occurred to a few Republicans already) and consequently that tax cuts that contribute to such destructive deficits have doubly negative effects on revenue. (I do not know that to be the case; I believe that it is a possibility that should be kept in mind.)
There are no free lunches in taxation, or anywhere else.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.
Mr. Williamson and Mr. Leonard are wrong. Tax cuts do indeed increase revenue and Republicans should keep saying so. The vast increase in federal revenues after the big Reagan tax cuts in the 1980s prove this beyond any shadow of a doubt. There are numerous other historical examples of cutting taxes that brought in more federal revenue and improved the economy: the early 1920s Republican tax cut that ushered in the Roaring 20s': the late 1940s reduction in taxes by a the Republican Congress that ushered in the economic golden age of the 1950s, the JFK taxcut in the early 1960s that keep the golden age going another few years, the G.W. Bush taxcuts that helped economic growth in the last several years.
Some of the earliest written historical references to growing an economy with low taxes were made by Muslim scholars in the 13th Century.
Lewis Forro
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Yeah, it is annoying that they keep repeating that as a blanket statement.
The Laffer Curve illustrates that an income tax rate somewhere around 40% is about where revenue will peak, whereas a rate of 91% certainly reduces the revenue realized by those at the top levels of income.
So, SOME rate cuts will increase revenues and I believe what happened in the '80's was that the extra revenues realized from the upper brackets partially made up for the revenue lost by cutting taxes on middle and lower earners.
But simply stating "Tax cuts increase revenue" is kinda cheesy.
Reply to this commentLinkReport AbuseI don't pretend to know which side of the maximum we are on, but there definitely has to be a taxation rate that maximizes government revenue. (Consider that, if tax rates were 100%, no one would work, and government revenue would be 0. Similarly, if rates were 0%, government revenue would be 0. In between, it is non-zero.) If we are at the rate of maximum revenue, then an increase in rate would produce less revenue.
Therfore, it is possible that there is a situation in which increasing rates (I hate it when folks refer to change in 'taxes' when what they really mean is change in 'tax rates') results in decreasing revenue.
DG
Reply to this commentLinkReport AbuseLewis, I think you missed the point.
I think Williamson is not saying that tax cuts can't produce increased revenue, but that they do not *always* produce increased revenue.
Engage the theory of the Laffer Curve for proof. Tax rates of 0 percent would obviously produce $0 government revenue. Tax rates at 100 percent would similarly produce $0 government revenue (who would work?). Somewhere in the middle, there is a point of peak gov. revenue.
Now imagine revenue on the Y-axis and tax rate (0-100) on the X-axis. If tax rates are currently to the left of peak, then cutting taxes will indeed decrease revenue - even by Laffer's theory.
When politicians say that lowering taxes will, ipso facto, increase gov. revenue, they assume the nation's tax rates are always to the right of that revenue peak point.
Reply to this commentLinkReport AbuseLewis,
Tax reform in the '80s was a mix of rate cuts and loophole closing. In many ways the key is *effective* tax rates rather than nominal. For instance, the corporate tax is nominally 35% but is effectively closer to 28%, which is still high but not nearly as destructive. Similarly, the pre-Reagan upper tax rates of 70% were not nearly that high in effect; if they had been there's no way we would have had a functioning economy. JFK's tax cut was similar.
Streamlining the tax code with lower nominal rates and fewer micromanaging loopholes can lead to tremendous gains as people are freed to do what *they* want, rather than facing huge rates whenever they stray from the government's path. That productivity leads to higher revenues. But you're also raising taxes in the areas where loopholes existed.
There's also the Laffer curve aspect, but it's impossible to actually know which side of it we're on at any given time, especially when total rates aren't above 50%.
Just saying that tax cuts pay for themselves is simplistic and wrong. There's a lot of context and circumstance behind the history you cited. Kevin is right that under present conditions, tax cuts are unlikely to mostly repay themselves.
Reply to this commentLinkReport AbuseIt is the level of federal spending that determines the incentives facing economic actors.
Spending today generates taxes -- either today or in the future.
If you believe that investors are rational and think about the future, then you'll know that they won't be so naive as to mistake a low current tax rate for what will be prevailing 10 or 20 years from now.
If taxes aren't paid today, they will be paid in the future through inflation or more revenue as a percentage of GDP. Yes, it's possible that the government will actually cut spending to pay for the increased debt service with fixed amounts of revenue, but the markets don't believe that will happen.
Grover Norquist, Steve Moore, and other tax cutters are no better than Keynesians who assume that consumers and business people are devoid of foresight, responding only to current stimuli. That's why they can actually create economic models that show the economy growing with low tax rates while government spending is not simultaneously reigned in. It's all bunk, and no respectable academic economist even believes 1/10th of their nonsense.
So, Republicans. Just. Cut. Spending. Taxes will take care of themselves.
Reply to this commentLinkReport Abuse"One could make a useful (and true) argument that we can in many situations expect revenue to increase following tax cuts — but, in most cases, not by as much as it would have without the tax cuts."
A grand assertion, without, of course, any data offered to support it. Please show us how much revenue would have increased during the 80s without the Reagan tax cuts. First factor out all the growth, then discount the beneficial effects on reduced inflation, adjust for the altered cost of servicing debt, then stir in the eye of newt and toe of frog.
Economists can't predict our own future with any degree of certainty. But anti-supply siders feel quite comfortable predicting the future of alternative universes that never existed.
Since we are into reading economic tarot cards now, I wonder how much more revenue the Reagan tax cuts would have generated if the administration and the Fed had not also had to squeeze inflation out of the economy by provoking a fairly severe recession?
Reply to this commentLinkReport AbuseThere is another little cited variable which invariably skews the analysis...time frame. In the short term (up to one year), tax cuts do of course lower revenue relative to prior rates. This is the "no-brainer" intuitive analysis relied upon by the Left in decrying pretty much any tax cut on the basis of cost. It also underlies static scoring as used by the CBO in scoring tax rates over time.
As any marginally economically literate person knows, however, markets react to incentives over time. If tax policy is set in a growth-friendly manner, then some distance out in time, one could easily see higher tax revenue than the status quo case. This is of course highly dependent upon the initial condition (status quo policy) and upon the actual changes made to the tax code. It's also of course inherently more difficult to forecast farther out the curve (or I'd have bought a ton of oil futures in the late 90's). Kevin rightly calls Republicans to task for oversimplifying this complex situation, but unfortunately the Left's "no-brainer" case is intuitively easier to grasp. We on the Right are left to try to educate folks in 30 second sound bites, which in turn leads to silly concepts like "free" tax cuts. I'm not really sure what the answer to this dilemma might be.
Reply to this commentLinkReport AbuseGaryM:
Of course it is a grand assertion without any data -- I acknowledge as much in the very next sentence. It's a hypothetical, a statement of a possibility to be explored. Every situation is different.
Reply to this commentLinkReport AbuseMaybe you should talk to Kudlow. I will trust him more on this one.
Reply to this commentLinkReport AbuseYou can chew over history and counterfactuals until the cows come home. The fact remains that, all else being equal, a dollar left in the private sector will be spent or invested more wisely than a dollar confiscated by the government.
In general, the motivation driving private investment is to make more money. The motivation driving public "investment" is to gain and keep political power.
Reply to this commentLinkReport AbuseTB writes: "The fact remains that, all else being equal, a dollar left in the private sector will be spent or invested more wisely than a dollar confiscated by the government."
I could not agree more. Here's the problem: The government still spends the dollar. Today's deficits are tomorrow's taxes. We haven't had tax cuts; we've had tax deferrals. We will pay for every penny of spending, with interest.
Reply to this commentLinkReport AbuseChug-Bug:
When it comes to the Laffer Curve, you don't have to take my word for it. Take Laffer's:
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Reply to this commentLinkReport AbuseOk. Suppose the government puts a $500,000 per pack tax on cigarettes. They will receive next to nothing on that tax since no one will be able to afford the pack. Do a tax cut to $2 per pack and you will receive much more revenue. The tax cut will pay for itself.
A while back, there was a heavy tax put on luxury items. Revenues went down after the tax because people stopped buying the items due to the heavy tax. That tax was repealed and the actvity started again and revenues rose.
Reply to this commentLinkReport AbuseInteresting, but every minute spent talking about taxes is a minute not talking about spending. Without spending cuts there will never be enough revenue regardless of tax rates. Politicians, even Republicans, will always change the subject from spending cuts given the opportunity - we need to keep the pressure on.
Reply to this commentLinkReport AbuseEdmond:
I'm no tax-modeling expert, but I am willing to bet that you are right: Slap a 500,000 percent excise tax on a product and you'll sell a heck of a lot less.
But I don't think that tells us very much about having a top income-tax rate of 39 percent or 34 percent.
Reply to this commentLinkReport AbuseRE: ifpt999's response to my original post:
You are right about the the Laffer Curve. The Curve is basically correct and I agree that minor tax cuts pass the optimum point on the Laffer curve won't bring in much more tax revenue. I do find some irony in this situation where a conservative like Mr. Williamson is agreeing with a liberal Keynesian like Mr. Leonard on the dubious benefits of lowering taxes. As an interesting side note to spice up the irony, Leonard's school of economic thought considers the Laffer Curve to be junk science of course.
My objection to Mr. Williamson still stands. His sentence:
"Tax cuts do not generally increase revenue, and Republicans should stop saying otherwise" is just flat wrong and bad advice for Republicans.
Deep tax cuts do generally increase tax revenue and grow the economy. I cited 4 historical examples in American history where that is the case. Any Austrian School economist, of which Mr. Laffer is one, could cite plenty more examples throughout world history.
For a conservative like Mr. Williamson to side with a liberal like Mr. Leonard in suggesting Republicans should stop claiming that tax cuts increase federal revenues is dangerous and reckless. Williamson's claim plays into the hands of Keynesians and liberals who never met a tax they didn't like and who got America into our current economic mess. They only way out of the mess is with massive federal spending cuts and deep tax cuts to spur the economy. To do that we are going to need more Arthur Laffers and fewer Kevin Williamsons.
Lewis Forro
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Kevin, you still haven't made a substantive case for tax cuts "never" increasing revenues by firing up the economy. You're just simply jamming your fingers in your ears and shouting "nyah, nyah, nyah; I can't hear you!"
If we were to cut one rate from, say, 80% down to 40%, it could very easily get $1.30 on the dollar. Probably more.
The question is not if tax rate cuts can produce increases in revenue. Only a madman, an incredibly stubborn ideologue, and/or an ignoramus could argue for the "never" position. The question you should be addressing after abandoning your untenable position is whether (and which of) specific tax cuts under consideration do.
Reply to this commentLinkReport AbuseDr. Horrible:
Why would I argue for something that I do not believe?
Surely, one can think up situations in which tax cuts would increase revenue. But none very much resembles our present situation.
Reply to this commentLinkReport AbuseRE: David Ditch's reply to my original postings:
You're right about the benefits of closing loopholes. Reagan did that in 1986 and cut rates 3 times before that in the early 1980s which vastly increased revenue. Any deep tax cut will do that as I cited in my historical examples which are valid. The problem is the government always spends beyond the revenue.
I agree that a minor tax cut may not pay for itself. But the examples I cited were of major tax cuts that did increase revenue and grow the economy and therefore those major tax cuts did pay for themselves. The 1920s and 1980s tax cuts paid for themselves many times over.
My main problem is conservatives like Mr. Williamson apparently going soft and agreeing with liberals like Mr. Leonard who created our current problems. As conservatives, we always need to sell the idea of big, bold tax cuts to stimulate the economy, and concurrently, deep cuts in federal spending to starve the Leviathan. Making friends with Mr. Leonard undermines those 2 goals.
Lewis Forro
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