AMERICAN CONSERVATISM IN 2008 AND BEYOND

Prove it.

Wednesday, October 17, 2007

Taxes and Revenues [Ramesh Ponnuru]

Yesterday I noted that Bush's tax cuts had caused revenue to be lower than it would otherwise have been. A number of people have emailed me saying that I'm wrong: Revenues have been growing fast, and are higher than they were before the tax cuts took effect.

That shows that the tax cuts were compatible with rising revenues, not that they caused them. The tax cuts may have boosted our economic growth, but we would have had some growth without them. So the question is whether tax cuts boosted growth so much that they ended up raising money.

I can't think of any serious economist who thinks that happened. The 2003 Economic Report of the President said that "[a]lthough the economy grows in response to tax reductions... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity." Bush's own Treasury Department has disavowed the view that Bush's tax cuts have raised revenue.Rob Portman and Ed Lazear, while serving in the Bush administration (as head of the OMB and the Council of Economic Advisers, respectively), said that the tax cuts had reduced federal revenue.

I'll give the last word to Alan Viard, an economist who worked at the White House before joining AEI. Last year, the Washington Post quoted him: "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."

10/17 06:03 PM

Reagan's cutting of the personal income tax brackets didn't lead to rises in revenues - his tax hikes did.

No. Prove that it was Reagan's tax hikes rather than the tax cuts that contributed to the increase in tax revenues during his term of office. You said it. Now prove it.

You have provided opinions of people taking a somewhat different point of view, but nothing to prove that lowering the tax brackets did not spur economic activity that contributed to and helped sustain the longest continuous peace time prosperity in the history of the nation that had ever been up to that time.

All we can really rely upon to judge the economic value of tax rate reductions is the economic reaction to tax cuts in the past. Fortunately, Bush has history firmly on his side. The 1964 Kennedy income tax rate reductions spurred a bull market expansion and budgets in near balance through the 1960s. The 1981 Reagan tax cuts ushered in 7 consecutive years of prosperity and 15 million new jobs. The 1997 capital gains cut corresponded with a bull market rally in the stock market and a surge of investment spending and venture capital funding for new businesses.

The critics argue that the 2001 Bush tax cut has failed to provide any juice for the economy. But there's a good reason for that. Seventy percent of the tax cuts haven't taken effect yet. All the more compelling reason to speed up the tax cuts so they can provide immediate economic aid. Especially critical is to chop the highest and most economically punitive tax rates. Roughly two-of-every-three Americans who pay the top income tax rate are business owners or sole proprietors. If you want jobs, you need financially healthy and confident employers with dollars to invest.

The dividend tax cut will have the same salutary effect on larger businesses. For example, John Rutledge, a respected Wall Street economist, has estimated that ending the double tax on dividends increases stock values by roughly 10% or an $800 billion increase in wealth, reduces businesses cost of raising investment capital by 25%, and helps stimulate a recovery in the battered high technology and telecom industries most. Many stock analysts, including economist John Rutledge of Kudlow and Co., believe that passing the dividend tax exemption and the acceleration of income tax rate reductions could add another 5 - 10% or so to equity values. That's the equivalent of a $500 billion to $1 trillion instant boost in wealth.

Clearly, even Americans who do own stocks that do not pay dividends or who own stocks in tax free 401k plans or IRAs will benefit from the dividend tax cut because of the increase in the valuation of stocks.
http://www.cato.org/testimony/ct-sm03182003.html

I have posted reams of evidence that counter your 'logic'. The fact is that tax revenues go up when the economy grows. Tax revenues go down when the economy shrinks. That is simple fact that follows simple logic. Yes you can get more money into the treasury for the short term by taking more of the people's money, but that just gives the government more to spend while the people have less and that is not the way to generate a healthy economy.

Prove it.