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December 07, 2010


I hope Brendan will acknowledge in this talk that

1. Tax rate cuts have generally been followed by higher amounts of taxes collected.

2. Economists differ on whether the tax rate cuts were the cause of the increases in tax revenue collected.

Thomas Sowell writes:

These are not new arguments on either side. They go back more than 80 years. Over that long span of time, there have been many sharp cuts in tax rates under Presidents Calvin Coolidge, John F. Kennedy, Ronald Reagan and George W. Bush. So we don't need to argue in a vacuum. There is a track record.

What does that record say? It says, loud and clear, that cuts in tax rates do not mean cuts in tax revenues. In all four of these administrations, of both parties, so-called "tax cuts for the rich" led to increased tax revenues-- with people earning high incomes paying not only a larger sum total of tax revenues, but even a higher proportion of all tax revenues.

Most important of all, these tax rate reductions spurred economic activity, which we definitely need today.

Whether the rate cuts were the cause of the higher tax revenue and increased economic activity is Dr. Sowell's opinion. Other economists disagree with him. However, it's a fact that all four tax rate cuts were followed by increase tax revenue.

I differ with David. I believe Brendan is duty-bound to stick with liberal pieties, lest the brown-baggers at the Center for Ethics and Humanities choke on their tofu and bean sprout sandwiches. It's the ethical and humane thing to do.

As always, I will point out that virtually no reputable professional economist agrees, even the ones who served in the Bush administration and are presumably not biased against conservatives, etc. From http://www.brendan-nyhan.com/blog/2010/07/mitch-mcconnell-versus-bush-economists.html:

-In the 2003 Economic Report of the President, CEAwrote that "[a]lthough 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."

-During his 2003 Senate confirmation hearings to replace Hubbard as CEA chair, Greg Mankiw wasasked about Club for Growth president Stephen Moore's opposition to his nomination. Mankiw responded that Moore was criticizing "a passage [in Mankiw's writing] where I had raised skepticism about claims that tax cuts would generate so much employment growth as to be completely self-financing. And I remain skeptical of those claims."

-A Treasury Department analysis contained in the Office of Management and Budget's 2006 Mid-Session Review concludes that the tax cuts will not pay for themselves in even the most optimistic scenario. As the Center on Budget and Policy Priorities writes, Treasury found that "making the President's tax cuts permanent — and paying for the tax cuts with future reductions in spending — may ultimately increase the level of economic output (national income) in the long run by as much as 0.7 percent... Even if an increase in the level of economic output of 0.7 percent ultimately were to result from making the tax cuts permanent, the effect of this assumed additional economic growth would be to offset only a tiny fraction of the cost of the President's tax cuts."

-CEA Chair Ed Lazear told the Washington Times in September 2006 that "We do not say that the tax cuts pay for themselves."

Thomas Sowell is a reputable economist, isn't he? University of Chicago Ph.D., Full Professor at UCLA, etc.
Sowell is respected as a top economist, having published extensively in economic journals and general periodicals. He also spent the better part of three decades teaching in prestigious academic institutions. Into the 1990s, his name was commonly seen in a weekly column for Forbes magazine and on his syndicated column appearing in newspapers nationwide.

When an economist of Sowell's stature holds the view that the tax rate cuts led to growth in taxes collected, there must be other economists who agree with him. So, the "virtually no" claim is incorrect.

Note that your quotation from the 2003 Economic Report of the President is weak, because they were wildly wrong in their prediction that lost tax revenue wouldn't be completely recovered by the higher level of economic activity. In fact, by 2005 and 2006, the economy had grown so much that taxes collected dwarfed the amount in 2001 - 2003.

The Lazear quote doesn't say tax cuts will not pay for themselves, it's non-committal. That's the most reasonable position IMHO, and one that I suspect most economists hold.

You're probably justified in saying that few economists believe tax rate cuts pay for themselves. But, I think you'd also be justified in saying that few economists believe tax rate cuts cannot pay for themselves. I suspect most economists would say they just don't know.

ISTM the most you can honestly say is that the four major income tax rate cuts since the 1920's were followed by big increases in taxes collected, but, of the economists who have opined on this matter, a majority believe the tax rate cuts were not the cause of the growth in taxes collected. However, I think it's unfair to your audience to omit the fact that the taxes collected actually did rise substantially after each of these four tax rate cuts. In particular, I think it's unfair to quote your study without mentioning that immediately subsequent to that study, taxes collected skyrocketed.

Sowell left UCLA a long time ago and does not do technical economics research. David, I'm not sure how many times I can explain the problem with your argument that tax revenues increase over time. The question isn't whether tax revenues increased from time=t to time=t+1. It's whether the change is *more* or *less* than it would have been without the tax cuts all else equal. That's what CEA is talking about, and the same with the other quotes. And believe me, the consensus is far stronger than "a majority" of economists. Even Laffer has tried to disown this argument.

PS More quotes from http://www.theatlantic.com/business/archive/2010/07/hey-mitch-mcconnell-bush-economists-said-tax-cuts-i-did-i-grow-the-deficit/59728/

2) The chair of CEA from 2003-2005, Greg Mankiw: "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, and I doubt Mr. Paulson does either."

3) He's right! Hank Paulson, Bush's last Treasury Secretary, doesn't: "As a general rule, I don't believe that tax cuts pay for themselves."

4) That opinion was shared by Andrew Samwick, Chief Economist on Council of Economic Advisers, 2003-2004: "No thoughtful person believes that this possible offset [the Bush tax cuts] more than compensated for the first effect for these tax cuts. Not a single one."...

5) ... and Edward Lazear, chair of the Council of Economic Advisers in 2007: "I certainly would not claim that tax cuts pay for themselves."

The question isn't whether tax revenues increased from time=t to time=t+1. It's whether the change is *more* or *less* than it would have been without the tax cuts all else equal.

I agree. We cannot know how much tax money would have been collected in some hypothetical universe, so we can only guess whether actual revenue is more or less than the hypothetical revenue. That's why opinions pro and con are just opinions.

However, I think most people will use the change in tax revenue as a common sense guide. If tax revenue plummeted after a tax rate decrease, they will take that as an indication that the rate decrease led to a decrease in tax dollars collected. OTOH if tax revenue sky-rocketed, I think they will take that as evidence that the rate decrease contributed to the revenue increase.

You may disagree with this reasoning. However, I think your audience is entitled to know the fact that over the last 90 years, all four major tax rate decreases were followed by substantial increases in taxes collected.

BTW here's an opinion that JFK's tax cut probably increased tax revenue: Testifying before Congress in 1977, Walter Heller, President Kennedy's Chairman of the Council of Economic Advisers, summarized:

"What happened to the tax cut in 1965 is difficult to pin down, but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today's terms, and within one year the revenues into the Federal Treasury were already above what they had been before the tax cut."

I'm unimpressed with Samwick's comment. First of all, if it was made in 2003-04, that was before the big tax revenue increase kicked in. I would expect that some would have changed their minds after seeing the dramatic expansion of the economy that followed Bush's tax rate cuts.

Also, the weasel word "thoughtful" pretty much destroys the value of the comment. To say: "No thoughtful person believes..." merely defines all those who disagree as not thoughtful. (BTW does anyone know if this trick has a name?)

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