"I lowered income taxes by 25 percent. I was collecting 40 percent more from the lower income tax than from the higher income tax."Not surprisingly, this statement was met with loud applause. Conservative sites such as ThinkRight soon had postings up showing Rudy in all his glory, explaining to us poor, benighted liberals why cutting taxes actually increases tax revenue, while raising taxes will surely crush economic growth.
Of course, what Rudy doesn't mention is that, in the time he was busily creating this miracle of modern economics, the stock market was in a huge boom. Tax revenue was, of course, going to go up regardless.
What Rudy also fails to mention is that virtually no economist, of any stripe, seriously argues that supply side economics actually leads to increased tax revenue. At best, it creates enough economic growth to offset some small amount of the revenues lost by lowering taxes. Tax cuts do not "pay for themselves". Nothing is free.
Don't take my word for it, poke around some on your own, try to find any paper in reputable economics journals which claims enough tax revenue will be generated to offset that lost by the tax cut. Make sure you allocate a fair chunk of time for it - it's going to take a while, if you manage to find one at all.
Let's look at a modern example. In 2001, the Bush administration pushed through significant tax cuts, primarily for corporations and the wealthy. From 2001 to 2003 tax revenue declined significantly. Even with recent increases in revenue, once inflation and population growth are accounted for we are only just now back at the revenue level we had in 2000. That's roughly 0% growth in revenue. Meanwhile, we have lost the considerable amount of revenues which would have been brought in had the tax rates stayed at their higher values.
In the 1980's, after the Reagan tax cuts, tax revenues dropped the next two years. It wasn't until four years later that they returned to their original levels (adjusting for inflation and population growth, you actually have to extend to year five), despite a growing economy. Meanwhile, the national debt skyrocketed. Clearly, the cuts did not "pay for themselves".
Meanwhile, in both 1990 and 1993 (the first under Bush I, the second under Clinton) taxes were raised, primarily on corporations and the wealthy. There was widespread grumbling this would harm the economy.
Instead, tax revenue (not really surprisingly) increased at double the rate it had in the 1980's. Economic growth in general remained roughly the same. However, while overall growth remained the same, growth in personal incomes was considerably higher in the 1990's than it was in the 1980's, or has been in the first decade of this century. The rich are getting richer, while the average worker is not seeing benefits from the "booming" economy, either in the bottom line of their pay check or in the form of increased government services.
When Giuliani insists you can increase tax revenues by lowering taxes, he's living in Fantasyland. Unfortunately, a lot of people who either don't have the time or don't have the inclination to actually research the validity of these claims end up believing this wonderful, magical land actually exists somewhere other than in conservative pipe dreams or Disneyland.
2 comments:
I really don't have anything to add to your remarks, just to note that you are spot on.
Tax cut rhetoric and action is our government on its knees for the wealthiest and the lobbyists they support, government "by the rich for the rich."
Those who dig deep enough will see how the Reagan administration had to reverse some of its moves because the deficit spiraled so dramatically.
Sorry I'm a little late to the party, here, but I remember sitting in Walter Heller's economic class debating this very topic. At the time, it was well accepted by both sides that the first months after the across-the-board tax cuts (remember, there were two cuts) the economy immediately begin to show positive signs and congress posted a surplus. Congress responded with skyrocketing spending that obliterated any benefit from the cuts. While liberals whined that congress and the Prez weren't spending enough, they also complained that the tax cuts weren't effective—kind of a warped catch-22. I always thought it funny that Heller (Kennedy/Johnson chief economic advisor) bragged that the idea was nothing knew since he advised Kennedy to do the same thing during his administration and, likewise, saw success. Although Heller and I had some interesting debates, his was one of the best classes I ever took in college.
Reagan admin reversed the double digit inflation and unemployment rates of the Carter years, and the economy has never seen growth like we had during the Reagan years (like 6% GDP). The fall began with the Bush admin which failed to follow through with the Reagan policies including Bush's famous reneging on his "read my lips" promise to not cave in to Democrat's demands to raise taxes. There were a lot of reasons why the mostly later '90s brought a windfall to tax coffers that have nothing to do with strong economic growth. The Bush years, and everything since, has been fairly "sluggish" as the talking heads at CNBC report.
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