“I’m betting that your answer was influenced by listening to Limbaugh and Hannity’s (confused) comments on supply side tax cuts, the Laffer curve, and related topics that they manage to routinely mangle.”
Please explain where Rush is wrong about this.
Well their errors are legion so it’s a bit hard to know where to start.
Rush likes to say that tax cuts increase the amount of tax revenue to the Treasury. And that you can determine this increase by subtracting the tax receipts of 1981 from those of 1989.
These statements are simply wrong and were disowned by Reagan’s own economists, Martin Anderson’s book ‘Revolution’ being a good source. Their view was confirmed in a complex study of the Reagan tax cuts conducted by Lawrence Lindsey.
The idea that “tax cuts pay for themselves” is an exaggerated claim popularized in the press. Reagan’s economists never believed that tax cuts pay for themselves. If they had believed that they wouldn’t have included spending cuts as part of their program.
What they did believe is that tax cuts wouldn’t lose as much revenue as static analysis forecast. They forecast that economic growth stimulated by the entire Reagan program, which was more than simple tax cuts, would recoup as much as 60 cents of each dollar cut. The Lindsey study validated their prediction. The one tax cut that did increase revenue was the capital gains cut, ironically a cut signed into law by Carter.
If you could determine the effect of tax cuts on Treasury revenue by simply subtracting the receipts of one year from another then life would be much easier. It’s not that simple of course, and Lindsey’s ‘The Growth Experiment’ study did the regression analysis that is actually necessary. You have to factor out deficit stimulus, tax credits, the business cycle, population growth, and so forth, in order to isolate the impact of tax cuts alone.
The revenue impact of the tax cuts is far smaller than what you get when you subtract the receipts of 1981 from 1989. But then the tax cuts were never intended to grow Treasury revenue. They were intended to grow the economy.
The tax rates were set to optimize economic growth, not to optimize tax revenue. Rush and Hannity conflate the two with a wave of the hand to the Laffer curve, not realizing that the two rates are on two different curves. Raising rates will increase Treasury revenue, but will also shrink the economy. How you set rates depends upon what your goal is. You want a wealthier government and poorer populace you raise rates. You want a wealthier populace and a smaller government you lower them. What you don’t get as an option is what Martin Anderson labelled “the myth of the supply siders”, lower rates and more money pouring into the Treasury.
You can find some of Anderson’s book online here:
Lindsey’s book:
and some Niskanen:
http://www.econlib.org/library/Enc1/Reaganomics.html