The Corner

‘Meanwhile, de Rugy Goes All Laffer Curve’

At least, that’s what Jonathan Chait of The New Republic claims. Here’s what he writes:

Meanwhile, in National Review, de Rugy goes all Laffer Curve and argues that the Bush tax cuts caused the rich to pay higher taxes.

Never mind that I didn’t say that the Bush tax cuts resulted in rich people paying more income taxes. Chait should know, because he copied in his blog post the paragraph from my post where I explain that after the Bush tax cuts, the rich paid a bigger share of income taxes than before.

Here’s what I wrote:

The main impact the rate reduction had in the first place was to make the rich pay an even bigger share of taxes that they paid before. Look at these tables from the Tax Foundation. They provide some very good data about taxes paid by income levels, including the percent of federal income tax paid by each income group. Table 6 in particular is interesting. In 2001, the top 1 percent of income earners paid 33.89 percent of all income taxes collected. In 2008, they paid 38.02 percent, down from the 2007 level of over 40 percent.

Bigger share of taxes collected, not more taxes. And that’s where I don’t quite follow Chait. He claims that if what I said were true (and it is true — the share paid by rich people went up, based on the data), then the share paid by rich people under Clinton would have gone down, when in fact it went up. And it is true that it went up for most years under Clinton before falling in 2000 as a consequence of the recession that year. Under Bush, the percentage started off higher than under Clinton’s first year but climbed to a higher level than seen under Clinton, reaching 40.41 percent in 2007, before dropping to 38.02 percent in 2008 due to the recession. Even that percentage is higher than any seen under Clinton.

The primary reason for the increase in the share paid by the rich after the tax cuts isn’t that they made more money than before, a thought unbearable to Chait. Rather, it is that the Bush-era tax cuts reduced the taxes paid by middle- and lower-income families across the board and even kicked a lot of people at the bottom of the income distribution off the tax rolls altogether — it’s bad economic policy, but it should be something that Chait appreciates. In other words, the main reason why rich people were paying a bigger share of the total income tax is that fewer people at the bottom were paying it — the overall number of people paying little or no income tax increased, hence the share of the burden on those paying taxes, especially at the top, grew.

(FYI, here’s a graph to number of tax returns filed from 1995 to 2008, and here’s a Tax Foundation page showing the increase in returns with no tax liability.)

Chait also seems to have had some trouble with the main point of the article I wrote with Nick Gillespie at, “How to balance the budget without raising taxes.” According to the CBO alternative baseline (the one that takes a more realistic approach to policy and spending changes), total federal revenue in 2020 will be 19.3 percent of a GDP estimated to be $19.5 trillion in 2010 dollars. That means a balanced budget in 2020 can’t spend more than $3.8 trillion. The question is how to restrain spending over the coming years so that such a target can be hit. We took the total amount of projected spending and spread the necessary cuts equally over the coming decade. The point is precisely to make small, systematic cuts that compound over time.

As we wrote,

A balanced budget in 2020 based on 19 percent of GDP would mean $1.3 trillion in cuts over the next decade, or about $129 billion annually out of ever-increasing budgets averaging around $4.1 trillion. Note that these are not even absolute cuts, but trims from expected increases in spending.

The New Republic blogger doesn’t understand that most of the cuts are in the growth of spending (or, if he does, he thinks that it is unacceptable to not allow the budget to grow as fast as it was on track to).

Here’s how it works. According to the CBO alternative baseline, spending in real terms in 2012 will be $3,549.5 billion. In 2013, CBO says it will be $3,661 billion. That’s a $111 billion projected increase in spending. Hence, cutting $128 billion from $3,661 billion means a $17 billion cut from the 2012 level. It gets easier in the following year. Again according to CBO, the spending increase between 2013 and 2014 is $192 billion. Cut $128 billion from that proposed spending increase and you’re left with more total spending in real terms than the 2012 level. And so on and so forth. With the exception of the first year, which requires some $128 billion to be trimmed off, I am not really sure how one can look at this and think that it will require a gigantic sacrifice from the American people. And by the way, it is a stretch  to call cutting $128 billion off a $3.6 trillion a sacrifice. Besides, it’s not as if we have a choice. In fact, this is the minimum we should do before we tackle the real issue: the reform of entitlement spending.

To reiterate, the point of the exercise is to see what it would mean to balance the budget at 19 percent of GDP — the level of revenue that the CBO alternative baseline is projecting we will have in 2020. For those out there who think that balancing the budget at 19 percent of GDP would “impos[e] substantial pain,” as Chait suggests, I would like to put this number in perspective: In 2001, President Clinton’s last budget, spending represented 18.2 percent of GDP.

For much more on these issues you should check out my co-author Nick Gillespie’s responses to Chait here and here. Gillespie, in contrast to Chait, remains very gracious, which, believe me, is harder than one thinks. Here is how he concludes this debate:

Does getting to 19 percent involve “significant changes in the scope of government,” as Chait argues. No, at least as it affects your daily life. Again, think back to the Aughts and the out-of-control spending first under Bush and now under Obama. There is precious little to show for it: two seemingly endless wars, free prescription drugs for relatively wealthy seniors, increased federal control of education without any results to speak of… I could go on.

And then think back to the second Clinton term and the first couple of years under Bush, when government outlays were in fact in the 19 percent range.

If that’s a world you can live in, keep coming back to (you’ll even get arguments about the world would be better still if the government had far less control of your money and your life). If it’s a world that only a psychopath could stand, I suggest you exclusively read The New Republic.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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