Three Cheers For The Bush Tax Cuts

Wall Street Journal/Hispanic Pundit ^ | August 16th, 2005 | Alfonso Trujillo ?

[Toddsterpatriot]

It was in response to Toddsterpatriot's stunning proposal that, because the government can borrow money at 4% whereas regular people must borrow it at 8%, a $100 billion tax cut represents a yearly $4 billion tax cut that will benefit our children as well as ourselves.

My "stunning proposal" was in response to ex-snooks comment that the tax cuts were simply a "tax deferral to future periods" and were therefore of no benefit to us. If we took your non serious proposal, you yourself admit that the tax deferral is an net actual benefit of $4 billion a year in my example. Are you saying that cutting parent's taxes by $100 billion doesn't benefit their children? It'll help me pay for college tuition, that's not a benefit, is it?

Your claim that the tax cut does not benefit our children seems to be another Concord Coalition type position. If lower taxes contribute to the economy doubling in the next 20 years then they obviously benefit our children.

Did you think the Clinton tax hikes benefited our children? I suppose we should roll back the Reagan tax cuts? The top rate should be 70%, for the children!!

Likewise, my worry is that the intention of supply-side theory is much worse than a misguided attempt to create a free lunch.

That's right. When Reagan cut the top rate from 70% to 28% there was no free lunch. The 60% reduction in rates led to a 60% drop in government revenue. No free lunch there. Wait, you mean government revenues doubled over the 8 years of the Reagan presidency? Maybe there was a free lunch. Or at least a deeply discounted lunch.

I'm just one of those old-time fiscal conservatives!

What was Newt's phrase? A tax collector for the welfare state.

[ex-snook]

"My "stunning proposal" was in response to ex-snooks comment that the tax cuts were simply a "tax deferral to future periods" and were therefore of no benefit to us.

Hey not quite. I did not say 'no benefit to us' that's your add on. On the contrary there was a lot of benefit to 'today's us'. Getting someone else to pay off your credit card bills is a good deal for 'today's us'.

[Toddsterpatriot]

Getting someone else to pay off your credit card bills is a good deal for 'today's us'.

So getting someone to pay off our 12% (16%, 18%, 20%) credit cards with 4% money isn't a tax cut?

[expat_panama]

The repayment of the tax cut was not a serious proposal...

The idea of paying back a reduction of payment was less than not serious, it's not even intelligible.   We're digressing; let's focus on the thrust of the article that started this thread (get back on topic).   The question is whether we should cheer the tax-cuts.   

Four years ago when I got to keep money that I'd worked for and that the big government types had wanted to spend on themselves, I cheered.  At the time, a bunch of sore looser tax'n'spenders warned us all that if they didn't get more of our money, that America would be worse off.   

It's now four years later and both the tax-payers and the tax receivers are richer than ever.  Anyone who is still worried about possible adverse consequences of smaller government needs to remember the double digit inflation and unemployment that was the legacy of decades of over taxing and regulation.   In short, the best way to avoid any possible future 'adverse consequences' is obviously with more freedom, not less.

[expat_panama]

OK fine, we all like America, we all like kids, and we all love freedom. 

Lets focus on whether we should cheer the jobs, wealth, and increased revenue that the tax-cuts helped bring about.   

Some people worry about the debt and want to raise taxes.  Every time in history that taxes were raised, within a decade both spending and the debt were higher than ever.  I consider raising taxes to be a risky scheme that hurts future generations and is fiscally irresponsible.

[remember]

Your claim that the tax cut does not benefit our children seems to be another Concord Coalition type position. If lower taxes contribute to the economy doubling in the next 20 years then they obviously benefit our children.

And your claim that the extra debt that we are piling up will not burden our children seems to be a typical supply-side position. It assumes that our children can continue the Ponzi scheme that we're engaged in. That is, when it's time to pay the extra interest on the extra debt, they can just borrow it. Then, when it's time to pay the extra interest on that, they can just borrow that! Isn't magical thinking wonderful?

Did you think the Clinton tax hikes benefited our children? I suppose we should roll back the Reagan tax cuts? The top rate should be 70%, for the children!!

Don't worry, under the guidance of you supply-siders, it probably will be! In fact, I think that a portion of Reagan's tax cut was sustainable, at least when combined with the closing of tax shelters and other reforms. The rates may have reached a sustainable level under Clinton. We balanced the budget for the first time since 1969 under Nixon. Being a fiscal conservative, I think the important thing is not the precise tax rate but its sustainability. Then people can actually start to plan with some confidence. Now, it's anyone's guess what tax rates will be in ten years (other than higher) and what the form our Social Security and Medicare systems will be. I can't speak for anyone else but I would estimate that, for every dollar of tax cuts I received, I put an additional two dollars in very conservative investments. I don't claim to be able to foresee the future. But Bush has put our national finances in a state that there is a much wider range of negative possibilities that I feel a need to prepare for.

That's right. When Reagan cut the top rate from 70% to 28% there was no free lunch. The 60% reduction in rates led to a 60% drop in government revenue. No free lunch there. Wait, you mean government revenues doubled over the 8 years of the Reagan presidency? Maybe there was a free lunch. Or at least a deeply discounted lunch.

The fact that government revenues doubled during the 80's (it was about 70 percent during Reagan's 8 years) would be impressive except for one fact. That is the fact that they had likewise doubled during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION! They went up 502.4% during the 40's, 134.5% during the 50's, 108.5% during the 60's, and 168.2% during the 70's. At 96.2 percent, they nearly doubled in the 90s as well. Hence, claiming that the Reagan tax cuts caused the doubling of revenues is like a rooster claiming credit for the dawn.

Furthermore, the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up only 91.3 percent during the 80's. Meanwhile, receipts from Social Insurance, which is directly affected by the FICA tax rate, went up 140.8 percent. This large increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 percent of payroll. Hence, the claim that the doubling of TOTAL revenues proves the effectiveness of tax cuts is including revenues which resulted from a tax hike to prove the effectiveness of a tax cut. This seems like the height of hypocrisy.

You can read my full analysis of the Reagan tax cuts at http://home.att.net/~rdavis2/taxcuts.html. I'll ask you what I have asked scores of other supply-siders. Please point out any specific numbers or conclusions that you disagree with. Alternately, please post a link to one budget document or serious economic study that purports to show any major tax cut that has ever paid for itself. I am yet to get a serious response to either of those requests. Act now and you could be the first!

[Toddsterpatriot]

Alternately, please post a link to one budget document or serious economic study that purports to show any major tax cut that has ever paid for itself.

Please define "paid for itself".

[expat_panama]

extra debt that we are piling up will ...   .... continue the Ponzi scheme that we're engaged in.

But public debt is not piling up-- it's being reduced (re your graph and your data).   By all accounts it's lower than it was in the '90's which was lower than it was in the '40's.  You might argue that there are some ways to calculate debt that come out higher than last year, but to say current policy is a 'Ponzi scheme' is like saying the '90's was a nuclear holocaust.  

I don't thing anybody here's saying Clinton was that bad.

[expat_panama]

show any major tax cut that has ever paid for itself....   ...Please define "paid for itself".

Saying the reduction of a tax must be "paid for" is ok on a bumper sticker; but let's talk business-- as in costs, benefits, and money flow.   

The cost/benefit ratio (see here or here) is a standard tool in evaluating the comparative merits of competing public proposals.  Meaningful comparison requires that all factors be reduced to just two-- the cost to the people, and the benefit to the people.  Costs borne by and benefits accrued to the government are ignored, because the government is needed only inasmuch as it serves the needs of the people.   Stated otherwise, 

Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it,

[remember]

But public debt is not piling up-- it's being reduced (re your graph and your data). By all accounts it's lower than it was in the '90's which was lower than it was in the '40's. You might argue that there are some ways to calculate debt that come out higher than last year...

According to the the most recent budget that you reference above, the gross federal debt and the debt held by the public increased as a percentage of GDP from 2003 to 2004 and were projected to increase from 2004 to 2005. That budget was released in February and more recent projections can be obtained from an August update from the CBO. Following is a graph showing the projected debt levels from that report:

The actual numbers and sources can be seen at http://home.att.net/~rdavis2/cbobud05.html. The report projects that, if the tax cuts and the reform of AMT (the Alternate Minimum Tax) are extended, the gross debt will rise steadily from 64% of GDP in 2004 to 81% of GDP in 2015.

[remember]

Please point out any specific numbers or conclusions [in my analysis] that you disagree with. Alternately, please post a link to one budget document or serious economic study that purports to show any major tax cut that has ever paid for itself

Please define "paid for itself".

"Paid for itself" means that the tax cut does not cause tax revenues to be lower than they would have been without the tax cut. For example, the CBO document referenced in my prior post estimated that the cost of extending the tax cuts from 2006 to 2015 would be about $1.9 trillion. That is, it falls $1.9 trillion short of paying for itself.

Since you mentioned that revenues doubled during the 80s, I assumed that you were one of those lay supply-siders who believe that the Reagan tax cuts paid for themselves. If you simply believe that the tax cuts did not cost as much as was projected, then you may have little disagreement with CBO estimates and my analysis. If you do believe that the Reagan tax cut paid for itself, however, I'd appreciate it if you could reply to the above request. I'd prefer that you critique specifics in my analysis as no supply-sider has ever done that. However, I realize that that could take some time and effort so, if you don't wish to do that, please reply to the second request and post a link to one budget document or serious economic study that purports to show any major tax cut that has ever paid for itself. Thanks.

[Toddsterpatriot]

However, I realize that that could take some time and effort so, if you don't wish to do that, please reply to the second request and post a link to one budget document or serious economic study that purports to show any major tax cut that has ever paid for itself. Thanks.

Do you want links that show that Reagan's capital gains tax cut or the 1997 cap gain cut paid for themselves? Or that the CBO predicted the Reagan cap gain tax increase would increase revenues? Do you really want to defend the CBO and their predictions?

[remember]

Do you want links that show that Reagan's capital gains tax cut or the 1997 cap gain cut paid for themselves? Or that the CBO predicted the Reagan cap gain tax increase would increase revenues? Do you really want to defend the CBO and their predictions?

Sure, go ahead and post the links. However, I'm also curious as to whether or not you believe that the Reagan income tax rate cut paid for itself.

[Toddsterpatriot]

In 1978, Rep. Bill Steiger introduced a bill, over the objection of President Carter, to reduce the maximum capital- gains rate to 28 percent. Many of us who supported the Steiger bill argued the rate cut should increase revenue. Many in the liberal economic establishment ridiculed us. But after the bill passed, capital-gains tax revenues immediately rose about 30 percent.

Under President Reagan, the capital-gains tax rate was cut again in 1981 to a maximum of 20 percent, then increased in 1986 to 28 percent, with a small additional increase in the early 1990s to 29.19 percent. In 1997, as a result of the Clinton-Gingrich compromise, the rate was cut to 21.19 percent. In 2003 the rate was cut to a 15 percent maximum.

Treasury has now released the data through 2002. As result of the frequent rate changes, we have considerable evidence who was right and who was wrong. When the capital gains tax rate was at its maximum in the late 1970s, capital-gains tax receipts averaged slightly under $8 billion annually.

From 1998 to 2002, the maximum capital-gains tax rate was approximately half the rate of the late 1970s, yet capital-gains tax revenues averaged 11 times higher ($88.6 billion per year), though the economy (nominally) was only 4 times larger.

I have summarized some of the new Treasury data in the following table that clearly indicates how sensitive capital-gains realizations are to tax rates.

Tax Rates vs. Revenues

Table

Now, maybe you don't consider these capital gains tax cuts to be "major tax cuts", but I think that a cut that increased revenue can be said to have paid for itself. Do you agree?

[Toddsterpatriot]

However, I'm also curious as to whether or not you believe that the Reagan income tax rate cut paid for itself.

I never thought that the Reagan tax cuts paid for themselves. That never bothered me either. I don't believe the purpose of a tax cut is to maintain the level of government revenues. I believe the purpose of a tax cut is to increase the level of American's revenues. I did find this interesting info from an interesting study.

According to the graph and second table, the GDP reached a high 8-year growth rate of 34.3% from 1982 to 1990. However, the GDP seems to have reaching a similar high about every ten years over the past several decades. It reached a high of 41.57% from 1958 to 1966, 29.20% from 1971 to 1979, and 32.58% from 1992 to 2000. Hence, these figures don't provide any strong evidence that the Reagan tax cuts permanently affected the GDP one way or the other.

This was interesting as well:

The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. The growth of receipts by source, outlays, and GDP over every 8-year period since 1940 is shown in the graph and tables at recgrow.html. As can be seen in the first table, total receipts increased 75.84 percent from 1980 to 1988. However, this was the slowest 8-year growth rate since a 75.62 percent growth in total receipts from 1963 to 1971. Of course, these results are likely skewed by the high inflation that occurred during the 70's. Hence, it makes more sense to look at the "real" growth rates, that is, the growth rates corrected for inflation. The second table shows that the real growth rate from 1980 to 1988 was 20.72%. The 8-year growth rates increased in the following years to a high of 33.11% from 1983 to 1991. However, the real growth rate of total receipts reached higher highs of 38.15% in 1971 to 1979 and 57.02% from 1992 to 2000.

Interesting Study

Now, I don't know if the info from this study is correct, but assuming it is, the first excerpt seems to show that at the very least, the Reagan tax cuts did not cause GDP growth to decrease.

The second excerpt seems to show that even after the huge Reagan cuts in the top rates,from 70% to 50% to 28%, real tax receipts still grew by 33.11% between 1983 and 1991. A non-expert could make the argument that a 60% reduction in the top rate that still increased (rather than decreased) receipts by 33.11% has "paid for itself"

But I won't even make that argument. I'll make the argument that the tax cuts at least partially paid for themselves. I don't think you'll disagree with that, will you?

And I'll repeat my earlier belief that the purpose of the cuts is to increase the income of Americans. I wonder if you have an analysis of employee compensation for similar 8 years periods before and after the tax cuts. And for corporate income for similar 8 years periods before and after the tax cuts. Thanks in advance.

[expat_panama]

the purpose of the cuts is to increase the income of Americans.

This is the key.  Our goal is continuing the decades of America's increasing private wealth.   Let's not allow ourselves get side tracked with projections that fail to include the advantages of further tax-cuts.  Long term trends in the reductions of tax rates correlate well with increased revenue as well as with increased income at all strata and increasing total wealth.

 

[remember]

Tax Rates vs. Revenues

Table

Now, maybe you don't consider these capital gains tax cuts to be "major tax cuts", but I think that a cut that increased revenue can be said to have paid for itself. Do you agree?

You're right to suggest that there may be some disagreement as to whether capital gains tax cuts are "major tax cuts". According to a 2002 CBO report titled Capital Gains Taxes and Federal Revenues:

Individual income tax receipts from capital gains realizations normally make up about 4 percent to 7 percent of individual income tax revenues (see Table 1); they are usually between 2 percent and 3 percent of total receipts. Yet they receive a great deal of attention in revenue forecasting.

In any case, I haven't studied the effect of capital gains tax cuts on revenues. Taking a quick look at some of the on-line studies, however, there appears to be some disagreement on this topic. Following is an excerpt from a favorable Cato study titled The ABCs of the Capital Gains Tax:

On balance, the evidence supports the case for an immediate capital gains tax cut. The economic evidence--and more important, recent actual experience-- suggests that a rate reduction would increase capital investment, new business formation, jobs, and the rate of growth of GNP. When the positive economic impact of a capital gains tax cut is fully accounted for, the current proposed capital gains tax cut will almost certainly be a revenue raiser over the long term or, at worst, will leave the deficit unchanged.

However, following is an excerpt from an unfavorable study titled How Much Will the Capital Gains Tax Cuts In The House-Passed 1997 Tax Plan Really Cost?:

The official estimates of these provisions is that they will increase tax revenues by $2.7 billion over the 1997-2002 period, and then lose $37.5 billion over the following five fiscal years. Even based on these estimates, one must question the soundness of such a fiscal policy because of its ever-growing cost in future years. Citizens for Tax Justice has concluded that the official figure are probably grossly optimistic. We find that a more reasonable estimate of the revenue cost of these proposals is $169 billion over ten years.

Also, following is an excerpt from an unfavorable study titled: Would a Capital Gains Tax Cut Stimulate The Economy?:

In the past, the Joint Committee on Taxation has estimated that capital gains rate reductions of the magnitude assumed in the current proposal would boost realizations sufficiently to increase revenues in the first year or two that the proposal is in effect. After this initial surge, however, the additional realizations would subside, and revenues would decline. Another factor reducing revenues over time is that investors would shift more funds into assets that generate capital gains to take advantage of the lower tax rates. By moving more funds out of assets that generate more highly taxed ordinary income — such as interest and dividends — and into capital gain assets, investors would pay less in taxes overall, further reducing revenues to the Treasury over the long term. Although no official Joint Tax Committee estimates of the proposal are available, these effects would be expected to result in revenue losses totaling more than $50 billion over the next ten years. (In 1999, the Joint Tax Committee estimated a similar proposal to cost $52 billion between 2000 and 2009.

Hence, not having studied the issue in detail and seeing the amount of apparent disagreement there is on this topic, I withhold my opinion, at least until I can look at the data in more detail. Unfortunately, there appears to be less data available on this topic. In addition, the volatile nature of capital gains revenues makes it a harder area to study. However, it should be remembered that capital gains revenues normally make up just about 4 percent to 7 percent of individual income tax revenues. Still, I do plan to look at them when and if I have time and will post anything interesting that I find.

[remember]

I never thought that the Reagan tax cuts paid for themselves. That never bothered me either. I don't believe the purpose of a tax cut is to maintain the level of government revenues. I believe the purpose of a tax cut is to increase the level of American's revenues. I did find this interesting info from an interesting study.

Increasing the level of Americans' revenues is a worthy goal. However, it does have to be balanced with the need to keep our country's financing on a sustainable footing. Tomorrow, the government could cut all taxes to zero and publicly proclaim their intention of borrowing all future money required by the government. Our ability to borrow that money would likely degrade in a hurry, however.

According to the graph and second table, the GDP reached a high 8-year growth rate of 34.3% from 1982 to 1990. However, the GDP seems to have reaching a similar high about every ten years over the past several decades. It reached a high of 41.57% from 1958 to 1966, 29.20% from 1971 to 1979, and 32.58% from 1992 to 2000. Hence, these figures don't provide any strong evidence that the Reagan tax cuts permanently affected the GDP one way or the other.

This was interesting as well:

The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. The growth of receipts by source, outlays, and GDP over every 8-year period since 1940 is shown in the graph and tables at recgrow.html. As can be seen in the first table, total receipts increased 75.84 percent from 1980 to 1988. However, this was the slowest 8-year growth rate since a 75.62 percent growth in total receipts from 1963 to 1971. Of course, these results are likely skewed by the high inflation that occurred during the 70's. Hence, it makes more sense to look at the "real" growth rates, that is, the growth rates corrected for inflation. The second table shows that the real growth rate from 1980 to 1988 was 20.72%. The 8-year growth rates increased in the following years to a high of 33.11% from 1983 to 1991. However, the real growth rate of total receipts reached higher highs of 38.15% in 1971 to 1979 and 57.02% from 1992 to 2000.

Interesting Study

Now, I don't know if the info from this study is correct, but assuming it is, the first excerpt seems to show that at the very least, the Reagan tax cuts did not cause GDP growth to decrease.

I don't know if you're aware but that "interesting study" was the one that I was soliciting comments on. Anyhow, thanks for reading and commenting on it. I hope that you can see that I did try to be objective. I didn't try to jigger the numbers to make GDP growth under Reagan appear sub-par.

The second excerpt seems to show that even after the huge Reagan cuts in the top rates,from 70% to 50% to 28%, real tax receipts still grew by 33.11% between 1983 and 1991. A non-expert could make the argument that a 60% reduction in the top rate that still increased (rather than decreased) receipts by 33.11% has "paid for itself"

Of course, that "non-expert" would be making a mistake. That real gain of 33.11% was due to much more than the change in the top marginal rate. In fact, the real gain in income tax revenues was a smaller 22.68% (see the first column at recgrow.html). Also, the study points out the tax hikes that were in the Tax Reform Act of 1986, the bill that reduced the top marginal rate from 50% to 28%.

But I won't even make that argument. I'll make the argument that the tax cuts at least partially paid for themselves. I don't think you'll disagree with that, will you?

No, I don't disagree with that. If nothing else, some of the tax cut will be spent and returned to the government in new taxes. That which is invested will likely lead to additional capital gains taxes. In fact, to some degree, the same thing will happen with additional government spending.

And I'll repeat my earlier belief that the purpose of the cuts is to increase the income of Americans. I wonder if you have an analysis of employee compensation for similar 8 years periods before and after the tax cuts. And for corporate income for similar 8 years periods before and after the tax cuts. Thanks in advance.

I don't have that analysis but, if I should run across one, I'll post it.

[MarkL]

As much as I applaud and support cutting taxes, I'd rather see the govt. (fed, state, and local) cut these goofy regulations and paperwork, such as the type in which a business (prior) to starting has to file numerous reports on traffic impact, environmental impact, cultural impacts, etc.

A great example of this was recently illustrated with the new "Sprint Arena" being built in downtown Kansas City. You see, the city had everything planned out. They began demolishing the buildings they needed to knock down for the new arena, and then it was time to begin excavating the site... Well, it seems that nobody ever actually put in a bid to excavate the site! That's right... The city began the project even though a major part of the project had never been bid upon by any contractors! The reason given in radio talk show interviews was because of the paperwork and bureaucrocy(sp?)

Mark

[Toddsterpatriot]

Tomorrow, the government could cut all taxes to zero and publicly proclaim their intention of borrowing all future money required by the government. Our ability to borrow that money would likely degrade in a hurry, however.

I don't think the government should cut all taxes to zero. Capital gains though I think could be cut to zero. It would make us more competitive.

I've seen studies that suggest the government cannot realistically collect more than 20% of GDP as taxes over the long term. Sound familiar?

I don't know if you're aware but that "interesting study" was the one that I was soliciting comments on.

Duh! :^) Are you the author?

I didn't try to jigger the numbers to make GDP growth under Reagan appear sub-par.

You would have lost all credibility if you had.

You have any predictions/forecasts on how real receipts are growing/shrinking since 2001? Is the CBO still using static analysis for their tax projections?