Time: Tax Cuts Don't Boost Revenues

[Omaha Steve]

http://www.time.com/time/magazine/article/0,9171,1692027,00.html

Thursday, Dec. 06, 2007 By JUSTIN FOX

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.


Virtually every economics Ph.D. who has worked in the Bush Administration acknowledges that the tax cuts of the past six years haven't paid for themselves.


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.

FULL story at link.

[glowing]

1. Ending an illegal occupation would help.

[kentuck]

2. Excellent !

Pass this around to the four corners of the world.

[PSPS]

3. Gee! You mean that if I lose money on every sale, I can't make it up in volume???

This non-sequitur inexplicably gained currency over twenty years ago (lower tax rates increasing tax revenue.)

[Bucky]

4. Put down that feather. I could fall and hurt myself here! Tax cuts DON'T increase revenues?

Shit, that's just crazy talk.

The biggest economic growth spurt in the past 60 years came on the heels of two tax increases--the 1991 Bush tax hike and the 1993 Clinton tax hike. It helped shut down the deficit and spur on seven years of unprecedented economic expansion.

But you know what? That was just a coincidence. Reagan told me tax cuts increase revenues because all those jillionaires uses their tax cuts to create jobs. And I'm sure they'll create them here instead of in China or India. Right? So there you have it.

[Soon2bRenditioned]

5. We can't leave them behind.

I think that all Republicans who believe that cutting taxes (revenue - money coming in) it decreases the amount of money you have available to spend. Time to catch them up to speed on basic economics (the law of diminishing returns), basic math and throw in some basic english for good measure (that way torture does not become a synonym for swimming).

[RC]

6. If tax cuts increase revenues, than why aren't people making minimum wage rich?

[ticktockman]

7. The reasons for the phony argument that tax cuts pay for themselves

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.

When I heard about the touted rise in revenues after the Reagan tax cut, I went and looked at the numbers myself. After all of the bragging that I'd heard from supply-siders, I really expected to find something. Instead, the numbers were pretty much what one would expect. When taxes are cut, revenues go through a quick drop and then continue to grow with the GDP as before, just at their new lower level. Hence, tax cuts are not a free lunch. They require us the weigh their benefits versus their costs, just like most things in the real world.

I've posted the results of my study of the numbers at http://home.att.net/~rdavis2/taxcuts.html . For years, I've asked supply-siders to tell me any specific numbers or conclusions in my analysis that they disagree with. Alternately, I've asked them to post a link to one serious economic study that purports to show evidence of any income tax cut that has ever paid for itself. None have.

This is one of the insidious problems with the myth that tax cuts pay for themselves. It's now impossible to have a rational conversation with many supply-siders about the costs versus the benefits of tax cuts. If tax cuts are truly a free lunch where everybody wins, no such conversation is necessary! I can't help but wonder if this short-circuiting of the debate is a major reason why many Republicans make the argument that tax cuts pay for themselves. They support them for other reasons but use what they know is a phony argument to avoid debate. Since they will not openly state their agendas, they are likely beyond convincing. However, there may be others who truly are fooled by these phony arguments. It is worth passing this information on to them.

[dtotire]

8. Kicked n/t