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?”

Just Another Demagogue?

by Norman Horowitz

I joined CBS in 1968. Shortly after I arrived, the corporation decided to reduce its headcount by 7.5%. Management assigned me to be the enterprise’s representative at the “division” to discuss how we would go about accomplishing the task.

There were about 20 people in the meeting. Because I was “new,” I was asked for my opinion. I said that, if it were up to me, I would first fire the managers who allowed the overhead to get to a point that we could cut 7.5% of the staff without hurting our operation.

(Actually, we could’ve reduced our head count by 50% without hurting our business, but that’s for another time.)

Of course, I was never invited back to another such meeting. CBS was making so much money that the reductions mattered very little.

Congressman Paul Ryan has been in Congress for more than a decade, yet he talks about cutting the budget as though it were the first time in his “historical context” that we’re spending more than we take in. Cuts must be made…what a discovery!   Continue reading “Just Another Demagogue?”