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December 09, 2005

Tax Cuts Raise Federal Revenues

Federal tax revenues are rising after tax cuts? Yes indeed, and TaxProf highlights the Treasury Dept. graph to prove it. This won't be news to anyone who remembers that tax revenues rose after Reagan cut taxes.

For those in denial from the 1980s, this will, of course, be just another set of data to try and ignore or disparage. (And of course next time they'll continue the mantra that tax cuts reduce federal tax revenue, utterly ignoring history.)

Posted by Doug at December 9, 2005 02:30 PM

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Tracked on December 23, 2005 11:06 AM


I've pointed this out elsewhere, but I keep finding this argument, and it doesn't make sense to me. How can you say that the tax cuts caused revenues to go up unless you compare revenues with what they WOULD HAVE BEEN without the tax cuts? (Tax revenues almost always go up just from inflation, anyway.) I saw an analysis of this here:

Posted by: Joey Z. at December 10, 2005 10:41 AM

From the Angry Bear post:

Yesterday AB illustrated one way in which this claim is nonsense: there is no discernable relationship between tax cuts and economic growth. The 2003 tax cut was indeed followed by economic expansion, but the 2001 tax cut was followed by economic contraction. How can we conclude from that evidence that tax cuts cause greater economic growth? Growth seems to be determined by some other factors in the economy, not by tax cuts.

I think Mr. Bear has forgotten that huge hit our economy took in 2001, commonly referred to as "9/11". Barring an otherwise major economic problem like that, tax cuts have historically raised revenues. Happened under Reagan and Kennedy, as the major examples. And now we have a good third example.

It used to bug me that Democrats used to bad-mouth the economy which came as a result of 9/11 and the worldwide recession that followed, blaming it on Bush administration policy, apparently hopeing folks would forget the blow those planes had on our economy as well as our people. We were hit by that recession, true, but we didn't get hurt nearly as much as other countries, and I believe the tax cuts were part of the reason.

I find it interesting that folks who blame Bush's policies for when the economy drops for reasons outside his influence are also ready to dismiss the idea of giving him credit when his policies are enacted and, "coincidentally", the economy starts booming. Frankly, I give the big credit to Congress for passing them; the President can only propose, the Congress does the heavy lifting.

Posted by: Doug Payton at December 10, 2005 02:12 PM

To paraphrase another commenter at the link you provided:
If this economy were truly soaring, then why haven't we hit ONE month of job growth of 300,000 yet (the average under Clinton)? If the tax cuts under Bush are working so well, then why are the top three automakers suffering such huge losses and cutting their workforces by 25,000-30,000? Why do we have the largest budget deficit in history? The largest trade deficits? The largest government payroll? Lower wages (adjusted for inflation) than under Clinton? More people below the poverty level than under Clinton? Fewer people with healthcare?

The so-called improvement in the economy is deceptive because it mainly impacts the wealthy. Middle income and poor people see few if any benefits. Furthermore, the economy tends to cycle, with a general increase over time. Any claim by you that tax cuts are responsible for the upward trend in federal revenue is just wishful thinking. You have no evidence to support your claim. In fact, I would say it is hypocritical of conservatives to ignore the cyclical nature of the economy yet point to historic global temperature cycles to undercut the idea that we need to take action to prevent global warming.

Here is another criticism of your post: At the link you provide, the y-axis of the graph begins at a non-zero number, thus making the increase look more significant than it really is. In fact, the increase you refer to is a subpar 7.5% over 4 years. GDP growth rate is also lower under Bush43 (as it also was under Reagan-Bush41) than the 3.5% annual growth in real GDP from 1947 to 2000. In short, the economy grows LESS when taxes are cut.

Fiscal irresponsibility has gotten worse in another way under Bush43. Not only have tax cuts disproportionately benefited the wealthy, but much of federal income has come from borrowing trillions of dollars from China and Japan. That money contributes to our record deficit which will have to be paid off sometime in the future, probably by our children.

Bush's attitude about how our children will deal with the enormous financial burden Republicans have dumped on them was reflected in his answer to Bob Woodward's query about how history will view the decisions he has made. "History? We don't know. We'll all be dead!" In other words, he doesn't care about how his policies affect future generations because he won't be around to deal with the consequences. That's not the kind of leader you should be asking us to admire.

Posted by: dem at December 13, 2005 11:07 PM

Dem, what I was really referring to in my original post was the fallacy that somehow tax revenues can only be raised by tax increases. I've read it enough that I promote contrary data when I find it.

It's tiresome to keep having to respond to the "disproportionaly benefits the rich" meme. Yes, the rich get more money back in taxes when there's a cut, because they put in disproporionally more in the first place. But that's fair, and can just as easily benefit the middle class on down. My favorite example of this was when the Democratic Congress, in an attempt to suck more money from the rich, loudly trumpetd a new tax on yachts. What happened was that the rich bought fewer yachts. Who paid for that tax? The middle-class guys who lost their jobs when demand tanked. When the Democrat Congress then (quietly) removed the tax ("tax cuts for the rich!"), who benefited? The middle-class guys who got jobs building more yachts.

I always chuckle when I hear a Democrat decrying fiscal irresponsibility. I don't deny that Republicans in Congress have not held spending down now that they've got the power to do so, and I'm mightly against that. But to hear Democrats, who did precisely that for decades prior, complain about it is quite the cognitive dissonance.

In general, tax cuts are a fine way to bring the country out of an economic downturn. I mean honestly; would doubling the tax rate have brought us out of the Great Depression? "Not enough economic growth? Great, let's make everything cost more!"

And ending on a quote out of context; wonderful. Bush could have just as easily meant that he can't speak for history since he won't be there. Could have been a joking comment. Don't know. But you interpret it in the darkest light. I'm cool with that.

Posted by: Doug Payton at December 14, 2005 10:04 AM

My name is Andrew and I am an 18 year old high school student. I first became a published author when I was 17 for publishing an article about deficit spending. Now, this year I am with a group publishing a book and I have been selected to write the chapter on Taxation and the Deficit. I do not know the age of Mr. Payton or the authors of the other posts, but I can assume that most of you are older than I from your diction and style of argument. You cannot use the argument that I am a Democrat advocating fiscal responsibility when I didn't care about it for so many years, nor can you say I am a Republican defending the current administration's position when my doctrine was so fiscally conservative for so long. I am young and brand new in the political world. I am unjaded by past party trends and free of accusations of flip-flop hipocrisy. I came upon this blog while searching for information on the historical trend of tax revenues over the last several decades, and felt moved by the duality of the arguments to post a message. Allow me to tell you how a new mind sees the current situation. You can feel how you like about issues, you can assert the facts until you die, but in the end what matters is what you impart on the next generation.

President Bush saddens me and nearly everyone I know. I am surrounded by a plethora of extremely smart and talented people. Why do we keep getting politicians who are corrupt, or liars, or unintelligent? President Bush, President Clinton, and all the rest are not necesarily bad men and I do not wish to turn this into an ad hominem, but their decisions as President has been much less than President-like many times. I would note that George Bush's performance as a leader has caused the conscious section of my generation to lose faith in politics all together. In reality George Bush is a charismatic figure head, delivering the ideas of masterminds such as Carl Rove to the surface.

The political process has become a game. Here you all are arguing across party lines and dismissing opposing arguments. There is truth in both arguments. Economics is math done in infinite dimensions, with an infinite number of variables including the most complex variable of all-human beings. It is an inexact science. There is a myriad of theories which strives to explain the cyclic and randomn nature of the economy, but none can fully encompass it. There is, however, one thing we can all agree on. Taxes cannot be cut or raised all the time, and government spending cannot be expanded or contracted all the time.

Why then do our politicians make their decisions based on party lines? Sound bites sell because the American public is manipulatable, but their is more to life than the next election. Every politician, Republican and Democrat, needs to be able to raise taxes or cut them, expand government spending or slash it, etc. Decisions that effect the general welfare of America should not be government by party lines, but rather by the context of the economic situation of the current and coming time.

The latter arguments presented by Mr Payton and the other repliers are trivial in the olympian view. Our political process is corrupt. Fiscal policy has become a tool to buy votes. In this last election the prescription-drug industry gave an inordinate amount of money to the Repbulican party and low and behold it made decisions that benefited the prescription-drug companies at the obvious disadvantage of seniors.

I am aware that some of my arguments are strongly opinionated, some are relative to my young age, some lack enough insight. I, however, am also open to changing my opinion. I do not think this is hypocritical, but rather necessary for an intelligent person who can acknoledge that they do not know very much.

The youth of America see an unprecedented deficit paying for massive tax cuts which are not overly effectual and a war that has cost hundreds of billions more than expected. Is a deficit not another form of tax later? Are we supposed to embrace a massive deficit which has cut our education by over four billion dollars, and done nothing to stop the gas prices or the diminishing supply of water and fossil fuels. There is a lot more to be said on this topic, and much more insight to be incorporated lest I assert a rude opinion rather than a blatant truth.

I do not criticize any of the posters. All of your arguments are cognitively respectable and I admire you for your awareness of American economics. If we could have more citizens aware such as these, perhaps we could begin to attack the real problems.

Posted by: Andrew at October 8, 2006 10:41 PM

Andrew, thanks for your comment. This is an old entry, so that's why your comment was moderated initially. (Helps hold spammers at bay.)

The main reason for this post was to combat the assumption that you voiced; that we have "unprecedented deficit paying for massive tax cuts". The deficit comes from two places; receipts and expenditures. Receipts, since the tax cuts, have been going up, not down, since they have fueled economic growth, more activity, and thus more tax receipts. The big problem is the the expenditures have risen far, far faster than receipts have.

I place more of the blame for this on Republicans because they ran on the concept of smaller government. Democrats would have increased spending anyway (they always complain that Bush isn't spending enough on the things that pass), so I don't blame them for acting contrary to their principle, which is that government should pay for and be the solution for all of society's ills. I don't agree with that concept, but they at least are consistent. If the Republicans were really for smaller government (and not just smaller than the Democrats would have made it), we wouldn't be nearly in the same position we are now.

But the main point of the post was to provide further evidence that tax cuts always mean less revenue coming in to the feds. There have been enough examples to the contrary that it shouldn't be assumed.

Posted by: Doug Payton at October 9, 2006 09:16 AM