Pete DuPont: Supply-sider

The Wall Street Journal's Pete DuPont offers more supply-side nonsense that even Bush administration economists reject:

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.

Comments

[David]

When Dupont wrote, "Tax rate reductions increase tax revenues," he committed the error of omitting the quantifier. It's certainly false that tax rate reductions ALWAYS increase tax revenue. But, it's arguably true that they have increased revenues in some cases. The real question is to predict in advance what the impact of some particular change in tax rates will be. That's a question that even the economists have trouble with.

Unfortunately, the error of omitting the quantifier is widespread. One sees headlines like "Xs do Z." Does that mean two of the Xs did Z? Or 100 Xs did Z? Or all of them? One cannot tell.

[Howard]

The Rangel proposal is revenue neutral, it's not a tax increase.

As to how much economic growth is attributable to the Bush tax cuts (or how long lasting it may be) that's purely conjecture. The Congressional Budget Office projects a deficit in 2008 equal to 2007 and increases in the deficit in 2009 and again in 2010.

As to our debt being manageable, during the the Clinton Administration the deficit averaged 0.1% of GDP. How is a deficit figure that's 12 times higher (as a percentage of GDP) a change in the right direction ?

Saying the size of the deficit is low compared to average years is close to meaningless, as it's just one year.

Secondly, the averages (over the past 50 years) were themselves higher than average, largely because of the deficits under Reagan and GW Bush.

A smaller deficit is better than a larger deficit but to say it's "manageable" doesn't make economic sense in the long term. Every annual deficit adds to our total accumulated debt.

Lastly, saying that the country is better off because there is more income earned by the most wealthy (which is how the editorial concludes) is not particularly self-evident.