The Tax Cut That Never Was

Finally! Prof. Mishra has offered some evidence to support his argument. Granted, it’s not accurate evidence, but at least he’s trying.

Here’s the example that Prof. Mishra thinks is evidence of tax cuts increasing tax revenue:

Indeed, in 1986, when President Reagan lowered the top tax bracket from 50 percent to 28 percent, it led to an enormous rise in federal tax revenues as well as a great expansion in small business and entrepreneurial activities, leading to more job creation and economic growth.

Well, that’s one way to rewrite history.

As I’ve said over and over, the business cycle that Reagan presided over experienced the exact same economic growth — 3 percent per year — as the one overseen by Nixon, Ford, and Carter. And since tax cuts supposedly increase tax revenues by increasing economic growth, the entire argument falls apart because they didn’t increase economic growth.

But what makes Prof. Mishra’s example really embarrassing is that the Tax Reform Act of 1986 was a tax increase, not a tax cut! Continue reading “The Tax Cut That Never Was”

Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?

A reader asks: If low tax rates lower income to the Treasury and cause deficits and lower economic growth, how do you explain how we ran deficits with a 70 percent top marginal tax rate in the 1970s and we ran surpluses for 1998-2001 with a 39 percent top marginal tax rate with almost identical average GDP growth for the periods? Doesn’t this fact give significant credence to the supply-side argument that lower tax rates increase tax revenue and cause surpluses?

Professor Chandra Mishra made roughly the same argument in our debate over the Bush tax cuts. I didn’t address it in my op-ed because I didn’t expect a tenured professor to advocate such a widely discredited position.

First, a clarification: I never said that “low tax rates…cause…lower economic growth.” On the contrary, the economic evidence indicates that tax cuts have a slightly positive effect in the short run.

In order for tax cuts to increase tax revenue, however, they would have to have such a large effect on economic growth that it outweighs the effect of the lower rates. Taking a smaller percent of a bigger number can yield more than taking a bigger percent of a smaller number, given the right numbers. At a certain point, if you keep raising taxes, people will stop working because it isn’t worth the effort. If enough people stop working, economic output decreases, and tax revenue shrinks despite higher rates. If you like graphs, you can visualize that “tipping point” as the top of the “Laffer curve,” named after economist Arthur Laffer who helped popularize the concept in the 1970s:   Continue reading “Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?”