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?”

How to Discover the Truth with Statistics

Regular readers may remember my post, “How to Lie with Statistics,” where I criticized ASU economist Richard Rogerson for misleading the public with bad math. I showed the nonsense in his claim “that raising taxes will turn us into a bunch of lazy old Europeans.”

Since I’m going to be writing about taxes a lot this week, now is a good time to show how a responsible statistician approaches this issue. The following is a summary of two excellent posts by University of Arizona political scientist Lane Kenworthy.   Continue reading “How to Discover the Truth with Statistics”

What to Read on Taxes

Nine Things the Rich Don’t Want You to Know About Taxes — David Cay Johnston

  1. Poor Americans do pay taxes.
  2. The wealthiest Americans don’t carry the burden.
  3. In fact, the wealthy are paying less taxes.
  4. Many of the very richest pay no current income taxes at all.
  5. And (surprise!) since Reagan, only the wealthy have gained significant income.
  6. When it comes to corporations, the story is much the same — less taxes.
  7. Some corporate tax breaks destroy jobs.
  8. Republicans like taxes too.
  9. Other countries do it better.

Top Ten Tax Charts — Center on Budget and Priority Policies

  1. The United States is a low-tax country.
  2. Federal income taxes on average families are historically low.
  3. Corporate tax revenues are historically low.
  4. Effective tax rates on wealthiest people have fallen dramatically.
  5. Bush tax cuts heavily tilted to the top.
  6. Rise in debt could be halted over next decade by letting Bush tax cuts expire.
  7. Tax expenditures are substantial.
  8. Income gains at the top dwarfed those of low- and middle-income households.
  9. Top 1 percent’s share of total after-tax income has more than doubled over the past thirty years.
  10. Most of budget goes toward defense, Social Security, and major health programs.