Do Tax Cuts Increase Revenue?

On Sunday Treasury Secretary Tim Geithner made the case for letting Bush-era tax cuts for the wealthiest Americans expire later this year. He dismissed concerns that the move could push a teetering economy back into recession and argued that it would demonstrate America’s commitment to addressing its trillion-dollar budget deficit.

Republicans have countered with predictable fearmongering. In a USA Today op-ed, on July 22, Utah Republican Senator Orrin Hatch, wrote that letting the tax cuts expire could potentially “trigger another recession, the last thing out-of-work Americans need…Dr. Christina Romer, chair of the president’s Council of Economic Advisers, found…that there’s ‘a powerful negative effect of tax increases on investment.’ Her analysis showed that $1 in tax cuts results in a $3 increase in GDP, demonstrating why lower taxes are key to investment and an economic recovery.” (OK, Sentator Hatch, then you should be thrilled that Obama gave tax cuts to 95% of Americans…where’s your op-ed about that?)

So we have Treasury Secretary Geithner saying raising taxes back to Clinton-era level is a good thing, but the senior member of the Senate Finance Committee (Hatch) saying it will be devastating to the economy. This illustrates the fundamental differences between Republicans and Democrats is their view of taxes. Democrats believe in progressive taxation–that is, taxing the rich at a higher percentage because a flat tax would take a larger percentage of income from those with lower income; and the past 30 years tells us that it is the Democrats who are the fiscal conservatives when it comes to managing the deficit. On the other side of the aisle, Republicans believe that reducing taxes for high-income earners is better for the economy because it will “trickle down” to the lower income workers in the form of jobs; and they believe that lowering taxes for the rich increases government tax revenues. Repeat: Republicans believe that taking less money from the rich will give the government more money. Yes, they believe this like an article of faith. And they repeat it ad nauseum.


President George W. Bush: “You cut taxes, and the tax revenues increase” (2006)

Vice President Dick Cheney: Keeping taxes low, “does produce more revenue for the Federal Government.” (2007)

Senator John McCain:  “Tax cuts … as we all know, increase revenues.” (2007)

Rudy Giuliani: “I know that reducing taxes produces more revenues.” (2007)

Rep. Lynn Westmoreland, Georgia-R: “This Congress must recognize that tax cuts spur economic growth.” (2005)

Carly Fiorina, U.S. Senate Candidate: Let me propose something that may seem crazy to you. You don’t need to pay for tax cuts. They pay for themselves. (2010)

If this concept holds true then the Bush tax cuts should have brought in more revenue and helped decrease the budget deficit. They did the opposite.

In a Time Magazine article, Justin Fox explained in 2007:

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. (Source)

Let’s go back to the days of Reagan–the man who said, we should “starve the beast” (i.e., cut taxes leading to deficits that will force current and future governments to curtail spending–an argument that contradicts the “tax cuts = more tax revenue” idea).

The economy had been very poor in the final years of the Carter presidency, primarily because of global oil prises and inflation. After this recession, we would expect an natural cyclical upturn coming into the 1980s, and there were improvements in some areas. But it is difficult to know how much Reagan’s policies helped repair the economy (and we will see that it probably did the opposite). One of the first things Reagan did was pass a tax cut. The highest tax bracket went from 70% to 50%, and the lowest bracket from 14% to 11%. It also eliminated taxes on business income, capital gains, interest income, oil revenues, and inheritances. In other words, this was a massive give-away to the wealthy!

When we look at the immediate aftermath of Reagan’s 1981 tax cuts for the wealthy, we recall that the nation soon plunged into a deep recession, and unemployment reached 10.8%.  In fact, there is no sign that Reagan did anything to accelerate economic growth. Clinton’s economists noted that although there was an economic expansion during 1983-90, it was driven by massive borrowing and a flurry of consumerist spending, not by gains in productivity.

Reagan sharply increased military spending, and one year later, as a result of skyrocketing debt, the administration had to stop the bleeding by signing into law the “Tax Equity and Fiscal Responsibility Act of 1982,” one of the largest tax increases in history.

Conservatives like to try to give Reagan credit for the strong economy and budget surpluses of the Clinton years.  Although there were some increases in gross national product in 1983, the overall effects we very poor, and we are still paying for the Reagan years (even though in 2002 Vice President Dick Cheney said that “Reagan proved that deficits don’t matters,” most economists say there is a point where deficits do matter). But perhaps the more damaging aspect of the Reagan years is that we now have a whole new generation of believers in Reaganomics (which George H.W. Bush famously called “Voodoo economics”). And they continue to spread the false gospel of tax cuts for the rich. Here’s a snapshot of what we can expect if we end up giving control back to the Republicans (these numbers are very similar to what came from the Bush years):

Reagan’s Economic Legacy
(from “Tear Down this Myth,” by Will Bunch)

  • Under Reagan there was a large raise in inequality; with U.S. millionaire growing eight-fold, but was matched by rising poverty and homelessness; wages for the the lower and middle classes barely kept pace with inflation; CEO pay climbed from 42 times blue collar workers to 85 times the same worker
  • During the 1980s, incomes rose 44% in noninflation-adjusted dollars for people making between $20,000-$50,000, but rose 697% for those making $200,000-$1 million, and 2,184% for those who earned more than $1 million
  • In the first few years of the Reagan administration, the nation’s budget gap soared from $80 billion to $200 billion
  • Under Reagan, debt increased by about $2 trillion in 1980s dollars, while federal spending and the payroll rose (in real dollars)
  • Federal spending grew 2.5% per year under Reagan (in real dollars)
  • Reagan slashed marginal tax rates for the wealthy–even while payroll taxes socked the working class
  • As President in 1982, he passed one of the largest tax increases in American history one year after his famous rate cut (The Economic Recovery Act of 1981); after his massive 1981 tax cut for the wealth during his first year, he raised taxed ever single year of his presidency after that (mostly to pay for the 40% military spending increase from his first term)
  • A big chunk of the 17 million new jobs added under Reagan were actually females who had become second earners in the household, as middle-class families struggled to keep pace

One of the economist who is largely responsible for the Republican embrace of the “tax cuts = more tax revenue” idea, Artur Laffer (as in the Laffer Curve), has said, that one of the reasons that the Reagan tax cuts brought in more revenue was because the rich were more likely to pay their taxes, and ‘stop finagling.'” (Source) One Republican speech writer admitted that, high tax rates simplyredistribute taxpayers out of taxable activities and onto golf courses, into barter exchanges, and among foreign regimes with lower rates.” (Source) As the Heritage Foundation put it, “The rich pay more when incentives to hide income are reduced.” In other words, “keep taxes low or else the rich will cheat their way out of paying, and the tax revenue will drop.”

At a news conference in March 1992, Bill Clinton declared: “The Reagan-Bush policy of trickle-down economics was a fraud, a damnable lie, and a miserable way to cheat our poorest people.” Once in office, Clinton passed the Omnibus Budget Reconciliation Act of 1993, raising taxes on the wealthy, with a top marginal rate of 39% (still quite low compared to historical levels).  At the end of 2010, Obama will allow the Bush tax cuts to expire, and return to the levels under Clinton. Did the rich really have it so bad under Clinton? Was there a financial meltdown?

This is not to say that tax cuts are bad. Without question, the right kind of tax cuts can stimulate the economy. When the Kennedy administration cut taxes it helped stimulate an economic boom during the 1960s (despite the persistence of poverty during these years).

Where conservatives go wrong is when they want to give the vast majority of tax breaks to the rich, and when they claim that those cuts will “pay for themselves…[or] actually, they will increase tax revenues.”

You need to watch this video of Rachel Maddow reviewing the false logic of “tax cuts = more tax revenue = decreased deficits.”

Highlights from Rachel Maddow on Voodoo Economics (these are great!):
  • MADDOW: When President Reagan entered office, the national debt was about $994 billion. When Ronald Reagan left office, the national debt had swelled to $2.8 trillion.George Bush senior was right. It’s voodoo economics. Tax cuts don’t actually pay for themselves. If they aren’t offset, they grow the deficit, just like spending does. And yet, when George Bush senior’s son was president and pushing through his own massive tax cut, listen to the argument that he made.
  • GEORGE W. BUSH, FMR. U.S. PRESIDENT: Tax relief not only has helped our economy but has helped the federal budget. You cut taxes and the tax revenues increase.
  • MADDOW: If that sounds too good to be true, that’s because it is. That argument was debunked by his dad years before. It was debunked by the experience of the Reagan administration. It was debunked even at the time that George W. Bush was making that argument by his own economic advisors.
    • A 2003 report to George W. Bush from his council of economic advisors said, quote, “Although the economy grows in response to tax reductions, it is unlikely to grow so much that lost tax revenue is completely recovered.” In other words, they’re not paid for.
    • In 2006, Bush’s Treasury Secretary Hank Paulson said, quote, “As a general rule, I don`t believe that tax cuts pay for themselves.”
    • In 2007, Bush’s former chief economist wrote to people still in the administration. Quote, “You are smart people. You know that the tax cut have not fueled record revenues.” Now, you may not care that tax cuts add to the deficit. You may think that the deficit doesn’t matter. You may think that reducing tax rates on rich people is so important that the whole country should take on debt in order to pay for that. But the idea that tax cuts are going to magically not affect the deficit– the idea that as Steve Benen at the ” Washington Monthly,” the tax fairy is going to come in and make giant taxes cuts not balloon the deficit. The argument that one way to cut the deficit is actually to cut taxes, it`s nonsense. It`s magic. It`s — well —
  • GEORGE H.W. BUSH: What I call a voodoo economic policy.
  • BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Now, I have to say, after years of championing policies that turned a record surplus into a massive deficit, the same people who didn`t have any problem spending hundreds of billions of dollars on tax breaks for the wealthiest Americans are now saying we shouldn`t offer relief to middle class Americans.
  • MADDOW: President Obama obviously wants unemployment benefits extended to help ease the pain on the million of Americans who are out of work right now, but he is also making a larger argument about how Republicans govern, what Republican priorities are. Democrats obviously want this upcoming election to be as much as possible about Republicans. They want it to be about what’s wrong with individual Republican candidates, what’s being proposed in terms of individual Republican policies. Republicans, on the other hand, keep saying over and over again now that they really want this election to be about spending and the deficit. They say they want to run on their fiscal conservative credentials — which is a framing that Democrats should welcome.
  • Here’s how the national debt has increased under Republican and Democratic presidents. On the Democratic side, the debt went up 42 percent under Jimmy Carter and 36 percent under Bill Clinton. On the Republican side, it went up 189 percent under Ronald Reagan, it went up 55 percent under George Bush senior, and it went up a whopping 89 percent under George Bush Jr. So, that’s the record of fiscal conservatism that Republicans want to run original apparently.

Alan Greenspan on Meet the Press, Aug. 1st, 2010

Now, one might say, even if tax cuts don’t pay for themselves–or even increase revenues–shouldn’t we be decreasing our spending so we can reduce the deficit? Sure. Just tell me which of these government services you would like to cut:

  • Keeping our country safe and secure
  • Curing and preventing diseases through research
  • Protecting our money in banks by insuring it
  • Educating children and adults
  • Building and maintaining our roads and highways
  • Providing medical services for the poor and elderly
  • Giving emergency help when a natural disaster strikes

It’s not so easy, is it? Progressives would undoubtedly choose to cut superfluous military spending and corporate subsidies. Conservatives would likely want to cut social programs for the vulnerable (health and welfare programs for the unemployed, the working poor, the elderly, and children).

The bottom line is this: government services allow our society and our way of life to continue. I am all for controlling government corruption, bureaucracy, inefficiency, in ways that maximize freedom and and quality of life for all; and we should fight to move government in this direction. And we should try to use markets in areas that benefit people. However, over the past 30 years, the data is clear: Reaganomic policies of tax cuts for the wealthy do not pay for themselves, and have historically let to increased budget deficits and poor economic performance; whereas Democratic policies usually result in more positive outcomes. Republicans will sometimes use fuzzy math to make their case for lowering taxes (see:  Heritage Foundation report); and some measures of economic performance are ideological in nature. For example, conservatives would see the stock market’s performance as a key indicator of a healthy economy, but a progressive would see low unemployment and improved income equality (Gini Index) as key indicators. If taking care of a small group of rich people is the goal, than Reaganomics is your faith. If increasing opportunity across a democratic society is the goal, then we should set this aside  this idea and come back to the real world.

2003 Interview with Paul Krugman, recipient of the 2008 Nobel Prize in Economics

The 1980s were a time of lower income taxes for the rich, but higher payroll taxes for working families (isn’t this upward redistribution?)

Rolling Stone Magazine: If you’re a politician, 2010 is the distant future. Most elected officials 5 aren’t thinking much beyond their next campaigns.

Paul Krugman: You are elected to take some responsibility for the country’s future. If you’re completely cynical, you just let everything go and figure that some future administration will deal with it. And that’s essentially what’s happening now [2003]. (Source)

Krugman’s prediction was right on. The Republicans get upset every time the Obama administration points to the Bush years as the cause of our current financial problems. We should take a lesson from the Republican-dominated Bush years: When Republicans are in control, we can expect tax cuts for the rich, continued spending (mostly going to corporations and military contractors), poor regulation of the financial sector, and massive deficits. Isn’t there an election coming up?

See also this report.