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Thursday, July 06, 2006
Smilin' Norm: Off the Supply Side Deep End?
Ugh. Did Smilin' Norm Coleman really say this:
Senator Norm Coleman , Republican of Minnesota, said it was difficult to explain to voters that tax cuts can bring in more revenue by creating jobs and encouraging investment. "We have to do a better selling job" for the Senate to succeed at enacting more tax cuts, he said.
I think most economists agree that tax cuts generally have some positive economic impact. But by far the vast majority of economists agree that tax cuts do not bring in "more revenue". The paraphrase isn't clear, an error which Smilin' Norm can't be blamed for, but it surely sounds like he's suggesting that cutting taxes increases federal revenue. Here's a handy chart from the Heritage Foundation:
Note that as Reagan raised taxes, revenue went up. As Clinton raised taxes, revenue went up. As Bush lowered taxes, revenue fell. Income tax revenues declined by 20% from 2000 to 2004.
Maybe voters are hard to convince because they are in touch with reality.
3 Comments:
Or alternately we could drop the rate to 1% and see what happens. Sure the Laffer curve is real, the question is where on the curve are current tax rates. It's pretty clear they are on the left side of the curve as I argued here to devastating effect.
Yes, at some point, tax rates are so burdensome that people will forgo the income, hide the income, evade the tax, enter the black market, etc. However, CL, the highest marginal rate hasn't been 90% for what -- 40 years? And hasn't been over 40% for nearly 25 years. Dealing with the here and now, the Laffer curve backs me up 100%. The highest marginal rates aren't 91% (Kennedy) or 70% (Reagan).
So, I stand squarely behind my post. Further tax cuts would have some positive economic impact. Calculating the cost of a tax cut should include a best effort to incorporate the expected positive effects. (The expected positive effects should be clearly documented and measurable, to improve future predictions.) But no mainstream economist would predict that further tax cuts would actually increase tax revenues.
I will make one addendum to my original post, for clarity. Reagan's tax cuts were phased in over his first and second terms. Following a very large tax cut in 1981 were a series of tax increases. I can't find the original article detailing the Reagan tax increases (including the largest tax increase as a percentage of GDP in U.S. history), but an exceprt is available here.
I think the role of government is to take out of people's pockets only the amount that is necessary. I'm guessing our difference, CL, will be over just what is necessary for government to do. I don't doubt that in some future post we just might get around to arguing just that! Externalities aside, the economically efficient tax rate is zero. But since efficiency is not the be all and end all of public policy there is an issue of fairness as well. Again another big topic that I'm sure will come up, and has before. (There is a decent argument that tax rates on all types of income should be the same so the government is not in the business of distorting the market.)
One additional problem with tax cuts spurring economic growth is the "crowding out" effect. If tax cuts, capital gains or otherwise, increase the deficit then the government simply borrows money in the same amount as the revenue decrease and that borrowing eats up the new available investment and it's a wash. And I know what your answer to that is. Spend less! See previous paragraph.
