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July 14, 2010


Brendan wrote: Senate Minority Leader Mitch McConnell yesterday repeated the all-too-common claim that tax cuts increase government revenue. Not quite. Let's compare three comments:

1. The Bush tax cuts increased revenue
2. All tax cuts increase revenue
3. If extended indefinitely, the Bush tax cuts would increase revenue.

McConnell said #1. Brendan's quote incorrectly attributes #2 to McConnell. The link to Horney disputes #3.

The fact is, there's no way to prove cause-and-effect. Federal income tax revenue in FY 2007 was 34% higher than in 2001, despite (or because of) the lower tax rates. In that period, the economy grew so fast that it more than offset the lower tax rates, and to a huge degree.

Would the economy have grown just as fast had tax rates not been reduced? Who knows? There's no controlled experiment that can answer this question. We can't re-run history. Those who assert that Bush's lower tax rates increased tax revenue can't prove they're right. Those who assert that the lower tax rates didn't increase tax revenue can't prove they're right, either.

Note also this comment from Brendan's first link:

Despite the revenue surge this year, the administration is projecting a precipitous drop in revenue growth to 2.4 percent in fiscal 2007, in large part because of generous cuts in the alternative minimum tax enacted by Congress.

The person quoted (Mr. Lazear) was explaining why he doubted that tax cuts would increase tax revenue. One reason for his doubt was that he expected 2007 to show tax revenue growth of only a 2.4%.

As it turned out, the actual growth in federal income tax revenue in 2007 was 14%! That unexpected spurt in revenue casts some doubt on Mr. Lazear's opinion, which had been based in part on a more pessimistic assumption.

Brendan says, Presumably these people [Bush's ecnomists] are not biased against conservatives or tax cuts...

I think he implies that if Bush's economists err, they will err on the side of supporting the efficacy of Bush's policies.

That seems logical, but it didn't always work out that way. In the comment above, note that Bush's economists dramatically under-projected the tax revenue growth for 2007.

Brendan, I believe this was a well thought out and well written article. I believe that any more tax cuts will hurt our economy.

I'm unimpressed by the addtional cites. Four of them are statements made before the explosion in tax revenues began in FY 2005. A judgment about Bush's economic strategy made before the surge of tax revenue began is no more valid than a judgment about his Iraq strategy made before the success of the surge there. The 5th comment disputes whether tax rate cuts can increases taxes collected in general, but it doesn't address this particular tax cut.

In any event, I'm unclear about Brendan's point. It's impossible to prove whether or not Bush's tax cuts increased tax revenue. Some say they did; some say they didn't; some say they don't know. Therefore...what?

At least Bush's tax cuts, which alleged increased revenue, were indeed followed by a big increase in revenue. More implausible is President Obama's claim to have created millions of jobs, given that the number of jobs has actually decreased by millions.

On second thought, maybe Brendan is subtly using himself to prove his thesis. When he originally wrote his paper, the huge increase in federal kncome tax revenue starting in FY2005 hadn't begun. (The 10-year pattern is shown below.) So it was reasonable for Brendan to believe that Bush's tax cuts clearly didn't increase revenue.

Subsequently, Brendan has resolutely ignored the the enormous jump in tax revenues that began in FY 2005 and continued through FY 2007. His unwillingness to let additional facts change his mind illustrates his thesis. :)

Federal Income Tax by Fiscal Year ($ billion)


As a business owner I have 10 pennies to pay bills, employees and taxes oh and grow my business.

And... maybe enjoy a little profit.

If I have to pay 3 pennies for taxes this year, and 4 pennies next year... It doesn't take an economist to figure out that the more money I have left over after expenses and taxes the more I COULD invest in growing my business (jobs) or participate in our consumer economy (indirect jobs).

Is this over simplified? Only slightly.

There are of course other factors at work. The quotes posted by Brendan above without context are also over simplifications.

The "fact" is, that businesses are in business to stay in business. Owners/Managers have a fiduciary responsibility to insure this. The more money left over after taxes, the more LIKELY these owners and managers are to invest-in/grow the business (jobs).

The other extremely hard to predict and quantify factor is that even with surplus if there is no perceived CONFIDENCE or ORDER & PREDICTABILITY on the owner/managers part all the surplus (tax cuts) in the world will not convince them to invest/grow. It would be throwing money away. (That is where we have been to a greater or lesser extent since 2000. The opposite of Greenspan's "Exuberance.")

So, to look at the Bush Tax Cuts and or any tax cut and suggest that based solely on the existence of the "cut" over X period of time the "cuts" do not have a causal relationship to economic growth is overly simplistic.

But, on a micro level to look at a business rather than an "economy" and ask if tax cuts would help that business... what will be the most likely answer time and again? This micro narrative, however, is NOT overly simplistic. Actually, it is teetering on being a heuristic!

It looks like Paul Krugman is onto it.

"But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back."

I like the Krugman word choice, zombie doctrine. We need to get the zombies and the green-lanterns together.

I hope Brendan is reading these posts with an open mind. It is obvious that one cannot prove either proposition if one believes in rules of evidence and logic. So all we hear are continuing ideological spats between the likes of Paul Krugman and politicians with an axe to grind. But we do absolutely know that revenues rose by record amounts following the "Bush" tax cuts (and, thus, I reject any argument that the tax cuts "caused" the deficit spending. The absolute level of spending simply outpaced the increase in revenue).
In any case, I think we're asking the wrong questions. I would pose two for consideration: 1)What evidence is there that government spending will stimulate an economy? Be honest and, at best, all you can say is that one can't prove the proposition one way or the other, for the same reasons cited with respect to tax cuts. But an honest student of economic history will admit that revenues rise after tax rate reductions and that economic recoveries don't seem to be accelerated by stimulus spending. What say you, Brendan? Others?
2) People are simply death on the estate tax (pun intended). It is perceived as something that benefits only "the rich" who sit on ill-gotten gains. So let's first stipulate that the money in an estate has already been taxed or will be when it transfers to heirs (unless it is shielded in trust, like the Kennedys' fortune, for which the criticism is almost justified). Let's also stipulate that some fraction of estates is comprised of small businesses and family farms. But all of that to one side, I think there is a moral, or fairness, issue. Suppose like Big Russ (Tim Russert's father), one works two full-time jobs for his whole life, in order to provide for his family. Should his estate be taxed in the same amounts and at the same rates as the estates of those who worked only one job? Why are liberals so determined to take someone's hard won estate away from his family? To me it's very unseemly.
My bottom line is a challenge to promote some tax scheme that won't kill the incentive to create jobs. Why do we have so much trouble accepting clear evidence of the effects of tax policy on the economy? And can't we please stop allowing our objectivity to be warped by populous jealousy of those who worked harder and did better than we.

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