Originally Posted by MJ1970
- Things you tax you get less of.
- Things you subsidize you get more of.
It ain't that hard to figure out. Fucking morons.
But there's considerable disagreement about how much government revenue is created by tax cuts. Most economists, I think it's fair to say, think that the government revenues are less as a result of most tax cuts. Not all, but most. That means that unless you cut government spending there's going to be more debt than would have otherwise been.
"The Washington Post, October 17, 2006:
"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."
Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion. An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.
Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said. http://www.washingtonpost.com/wp-dyn...601121_pf.html
Gregory Mankiw, former Chairman of George W. Bushs Council of Economic Advisors, 2003-2005. Economics professor at Harvard.
Below is a description by Matt Nesvisky of the National Bureau of Economic Research of NBER working paper by Gregory Mankiw and Matthew Weinzierl, December 2004:
some observers have suggested that tax cuts can generate so much economic growth that they may more than pay for themselves. Most economists are doubtful about either such extreme. The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing.
Mankiw and Weinzierlfind that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. http://www.nber.org/digest/jul05/w11000.html
In the actual report described above by Nesvisky, Mankiw and Weinzierl state in the introduction:
To what extent does a tax cut pay for itself? This question arises regularly for
economists working at government agencies in charge of estimating tax revenues.
Traditional revenue estimation, called static scoring, assumes no feedback from
taxes to national income. The other extreme, illustrated by the renowned
Laffer curve, suggests that tax cuts can generate so much economic growth
that they completely (or even more than completely) pay for themselves. Most
economists are skeptical of both polar cases. They believe that taxes influence
national income but doubt that the growth effects are large enough to make tax
cuts self-financing. http://post.economics.harvard.edu/fa...ng_05-1212.pdf
Mankiw on his blog, 5/31/06:
Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion credible for most tax hikes. http://gregmankiw.blogspot.com/2006/05/must-read.html
Mankiw on his blog, 3/11/07:
Senator McCain tells the National Review :
"Tax cuts, starting with Kennedy, as we all know, increase revenues."
I doubt that, in fact, Senator McCain believes we are on the wrong side of the Laffer curve. But unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party.http://gregmankiw.blogspot.com/2007/...fer-curve.html
Mankiw on his blog, 7/2/07:
I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.
The book made clear that the critique applied to a particular reason to favor the tax cuts, not necessarily to the policy of cutting taxes. There are many reasons a person might favor tax cuts besides the belief that tax cuts are self-financing there is a big difference between rejecting a policy and rejecting one argument made by some proponents of the policy.
My other work has remained consistent with this view. In a paper on dynamic scoring , written while I was working at the White House,
Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger--about 50 percent--but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the the same thing.
even if I had changed my mind on this issue and somehow decided that broad-based tax cuts were self-financing, I would not feel bad about it. But the truth is, I haven't changed my mind.http://gregmankiw.blogspot.com/2007/...nd-cranks.html
Mankiw, Op-Ed, New York Times, 2/3/08:
"Republican candidates are fond of saying we should cut tax rates because doing so would incentivize more rapid economic growth (true) and raise tax revenue (wishful thinking)."http://www.nytimes.com/2008/02/03/bu...prod=permalink
Andrew Samwick, Chief Economist on Staff of Bush's Council of Economic Advisers, 2003-2004
January 03, 2007
A New Year's Plea
To anyone in the Administration who may read this blog, I have one small wish for the new year. Please stop your boss from writing or saying the following:
"It is also a fact that our tax cuts have fueled robust economic growth and record revenues."
You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. http://voxbaby.blogspot.com/2007/01/new-years-plea.html
Samwick interviewed (audio) 9/24/07 http://www.onpointradio.org/shows/20...924_a_main.asp
Edward Lazear, current Chairman of Bushs Council of Economic Advisers
The Christian Science Monitor, June 25, 2007:
Another supply-side theory, now less popular, was voiced by Bush in February 2006: "You cut taxes, and the tax revenues increase." The theory is that with lower marginal tax rates, people work harder and longer, thereby raising their income and paying more taxes on it. But even topBush economic advisers now reject that thesis. "I certainly would not claim that tax cuts pay for themselves," Edward Lazear, the current chair of the Council of Economic Advisers, has stated. http://www.csmonitor.com/2007/0625/p...gn.html?page=2
Lazear, Testimony before the Senate Budget Committee State of the Economy and the Budget, September 28, 2006:
To determine the effect of tax cuts on revenue, we need to ask, What would revenues have been absent these cuts? This question can be answered by providing estimates of what revenue would have been had we not cut taxes...Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data [we have] presented above do not support this claim.http://www.whitehouse.gov/cea/lazear20060928.html
President Bushs Council of Economic Advisors (Chaired by supply-side economist Glenn Hubbard) concluded in its Economic Report of the President, 2003, that:
although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity. http://www.gpoaccess.gov/usbudget/fy04/pdf/2003_erp.pdf
BusinessWeek, FEBRUARY 17, 2003:
R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, estimates that as much as 40% of the cost of the Administration's proposal would be offset by higher economic growth.http://www.businessweek.com/magazine...tm?chan=search
Glenn Hubbard in THE WALL STREET JOURNAL, November 29, 2005:
Moderator, asks : On taxes, do either of you believe that a significant tax increase is either wise or inevitable either in President Bush's term or in the first term of his successor?
MR. HUBBARD writes: ... I think the administration is missing an important opportunity to talk with the American people about the enormous looming entitlement liabilities and the large implicit flow deficits (larger than the official deficit) that go with them. If we cannot bring these deficits (which conventional spending restraint and economic growth will not control) under control, we will have to raise taxes, with significant adverse consequences for economic growth. I do not believe that a significant tax increase is wise or inevitable. In the context of my earlier remarks, I say this because I believe we should and will scale back the growth in the entitlement programs that are the clear and present fiscal danger.
[The obvious implication in Hubbards statement above is that raising tax rates would have a POSITIVE net impact on revenues] http://online.wsj.com/article/SB113320203715608216.html
Ben Bernanke, Chairman of the Federal Reserve
Testimony before Congress, April 27, 2006:
Chairman Bernanke: The other comment I would make on your issues with respect to evenues I have addressed in a recent letter, and that concerns the issue of dynamic versus static scoring. To the extent that tax cuts, for example, promote economic activity, the loss in revenues arising from the tax cut will be less than implied by purely static analysis which holds economic activity constant.
[skip to later in Q&A session]
Senator Reed:Thank you, Mr. Chairman. Thank you for your testimony today. And just in line with the question about the effect of tax cuts, the former chairman of the Council of Economic Advisors, Greg Mankiw, wrote in his macroeconomic textbook that there is no credible evidence that tax cuts pay for themselves and that an economists who makes such a claim is--quote--``a snake oil salesman who is trying to sell a miracle cure.'' Do you agree with that?
Chairman Bernanke: I don't think that as a general rule tax cuts pay for themselves. http://frwebgate.access.gpo.gov/cgi-...d=f:29738.wais
Bernanke testimony before Congress, Janurary, 2007:
The general view is tax cuts don't pay for themselves. http://online.wsj.com/article/SB1169..._whats_news_us
Greenspan at House Budget Committee hearing, 9/8/04:
[Rep. Jeb] Hensarling [R-TX]: the latest reports I see from Treasury indicate that revenue is actually up since we passed the latest round of tax reliefseemingly suggesting that at least in this particular case, that maybe tax relief did help ignite an economic recovery that has added revenues to the Treasury and actually helped become part of the deficit solution as opposed to
part of the deficit p roblem. So my first question is, have you seen these reports from Treasury, and do you concur that revenues are up now over what they were a year ago?
Mr. Greenspan:Well, Congressman, I think the general conclusion about the fact that revenues are lower than they would otherwise be without the tax cut, but higher because of the tax cut, is best described by saying that a tax cut will immediately lose revenue, and then to the extent that it increases economic activity and generates a larger revenue base will gain some of it back. It is very rare, and very few economists believe that you can cut taxes and you will get the same amount of revenues. But it is also the case that if you cut taxes, you will not lose all the revenue that is implicit in the so-called static analysis.http://frwebgate.access.gpo.gov/cgi-...d=f:95792.wais
Greenspan, September, 2007: [The following is my own commentary.]
Alan Greenspan has expressed regret that his comments were used to support the Bush tax cuts. The inherent implication must be that he believes that those tax cuts have had a net negative impact on revenues and will continue to do so if extended (or at least that the combined effect of revenue impact and additional interest expense has had a negative budgetary impact and will continue to do so). Otherwise, there would be no reason to be regretful.
From The Economist magazine:
Jan 12th 2006:
A surprising rise in tax revenue last year has pushed this chutzpah even further. Mr Bush last week implied that the supply-side fantasy might hold after all: tax cuts do pay for themselves. There's a mindset in Washington that says, you cut the taxes, we're going to have less money to spend, he noted contemptuously, before claiming that recent experience suggested otherwise.
Even by the standards of political boosterism, this is extraordinary. No serious economist believes Mr Bush's tax cuts will pay for themselves. A recent study from the Congressional Budget Officesuggested that, after ten years, up to one-third of the cost of a 10% cut in income taxes can be recouped from higher economic growth. That fraction may be higher for cuts in taxes on capital alone. But it is nowhere near 100%. http://economist.com/world/na/displa..._id=E1_VPRJGQV
July 12, 2006
All told, Mr Bushs tax policy may have played a modest role in boosting a temporary revenue surge. But that is very different from suggesting, as the White House does, that tax cuts were the main cause or that they permanently pay for themselves. Most serious economists have long laughed at the idea that Mr Bushs tax cuts raise revenue. Now, it seems, the presidents own boffins agree. Deep in the Mid-Session Review is a claim that the Bush tax cuts could eventually raise the level of GDP by 0.7%, a relatively modest effect, and one that itself depends on the tax cuts being financed by lower spending. http://economist.com/agenda/displays..._id=E1_STVJTRP
Below is the executive summary of the Congressional Budget Office report mentioned above by The Economist (Jan 12 article). Note: this analysis does factor in the additional debt service caused by revenue loss and the resulting higher debt levels.
Congressional Budget Office, Economic and Budget Issue Brief, Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates, December 1, 2005:
Changes in tax policy can influence the economy, and those economic effects can in turn affect the federal budget. Although conventional estimates of the budgetary effect of tax policies incorporate a variety of behavioral effects, they are, nonetheless, based on a fixed economic baseline. For that reason, they do not include the budgetary impact of any possible macroeconomic effects of tax policies.
This brief by the Congressional Budget Office (CBO) analyzes the macroeconomic effects of a simple tax policy: a 10 percent reduction in all federal tax rates on individual income. Because there is little consensus on exactly how tax cuts affect the economy, CBO based its analysis on a number of different sets of assumptions about how people respond to changes in tax policy, how open the economy is to flows of foreign capital, and how the revenue loss from the tax cut might eventually be offset. Under those various assumptions, CBO estimated effects on output ranging from increases of 0.5 percent to 0.8 percent over the first five years on average, and from a decrease of 0.1 percent to an increase of 1.1 percent over the second five years. The budgetary impact of the economic changes was estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.
Douglas Holtz-Eakin, Director http://www.cbo.gov/ftpdocs/69xx/doc6...centTaxCut.pdf
Bartlett, National Review, April 7, 2003
Supply-siders believe that a dynamic analysis of President Bushs tax plan would show approximately...that the net revenue loss will be between 25% and 33% less than a static estimate would show.
Bartlett on Real Clear Politics, March 28, 2006:
Bush Tax Cuts Don't Pay For Themselves
How likely is it that the Laffer curve is causing revenues to rise, as opposed to normal operation of the business cycle? Not much, in my opinion.
First of all, the Laffer curve came to prominence during a period when the top tax rate on dividends was 70 percent, and the rate on long-term capital gains was 40 percentHowever, when President Bush took office, the top rate on dividends was down to 39.6 percent, and the rate on long-term capital gains was just 20 percent -- far below the rates Ronald Reagan inherited. It is very implausible that these rates were in the "prohibitive" range of the Laffer curve, such that a rate reduction would raise revenue.
But even if we grant the theory, how likely is it that the recent rise in revenue owes anything to this effect? Again, not much.
The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President (pp. 57-58) says, "Although the economy grows in response to tax reductions ... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."
A study by the Congressional Budget Office in December 2005 found that a tax-rate cut would recoup at most 20 percent of the static revenue loss in the first five years.
In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended. The case for extending them must be made on other grounds.
Heritage Foundation -- by Tracy Foertsch, Ph.D. and Ralph A. Rector, Ph.D , February 15, 2007 (EGTRRA and JGTRRA refer to the 2001 and 2003 tax cuts, respectively)
Extending EGTRRA's and JGTRRA's expiring provisions has a positive effect on U.S. GDP, incomes, and employment over the 10-year budget period. It also generates substantial revenue feedbacks ($295.5 billion). Ignoring the macroeconomic effects of the extension plan on individual, non-corporate business, and corporate incomes puts federal tax revenues $991.9 billion below the CBO's projected baseline levels over 10 years. Taking the dynamic effects of the extensions into account reduces the estimated revenue loss to the Treasury to $696.4 billion over 10 years.(Footnote:These estimated changes in federal individual income tax revenues exclude net refundable credits.)http://www.heritage.org/Research/Taxes/wm1361.cfm
Charles Wheelan (Wheelan writes on economics, and is author of "Naked Economics" http://www.amazon.com/gp/product/039...255213-9600866
, although he has no economics degree. His Ph.D. is in public policy from the Harris School at the University of Chicago. His favorite economist is Gary Becker, favorite economics writer is Milton Friedman and favorite economics blogger is Greg Mankiw, all conservative economists)
March 13, 2007:
The Biggest Economics Charlatans: The supply-siders who continue to insist, in the face of all evidence and academic opinion to the contrary, that a country like the United States can boost tax revenues by cutting taxes. Based on my past skepticism of the supply-siders, I know that I'll soon be bombarded by angry comments and emails pointing out government revenues went up after some favorite tax cut, such as the Reagan or Bush tax cuts. But that alone tells us nothing, as government revenues always trend up due to inflation and economic growth. The appropriate question is not whether government revenues were higher after the tax cut than before, but rather whether revenues are higher than they would have been in the absence of the tax cut. All credible evidence on this subject says that there are a lot of good things about tax cuts, but raising extra revenue is not one of them. http://finance.yahoo.com/expert/article/economist/26418
Wheelan, May 2, 2006:
Debunking One of the Worst Ideas in Economics
I'm going to write about what I consider to be the two worst economic ideas -- or at least ideas that pass as economics, though both have been thoroughly repudiated by nearly all credible thinkersthe most pernicious bad ideas in economics are those that have a ring of truth. They're hard to debunk because they have a certain intuitive appeal. As a result, they stick around, providing bogus intellectual cover for bad policy, year after year, decade after decade.
Laffersupposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves.In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation. But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There's no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on. Will it generate new economic activity? Probably. And that will generate some incremental tax revenue for the government. But remember, it also means that the government will be taking a smaller cut of all the economic activity that we already have.
Think about a simple numerical example: Assume you've got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion. Let's cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink. That's basically what happened with the large Reagan and George W. Bush tax cuts In both cases, government revenue was lower than it would have been without the tax cuts.
Neither the Reagan nor the George W. Bush tax cuts were "self-financing," as the Laffer disciples like to arguethe bottom line from the Bush Administration itself is that tax cuts reduce Uncle Sam's take.http://finance.yahoo.com/expert/article/economist/4065