Hard to argue with the numbers...now, if only the congressional republicans could learn to sit on their wallets... http://online.wsj.com/article/0,,SB111862100030657555,00.html?mod=opinion_main_commentaries -- Real Tax Cuts Have Curves By STEPHEN MOORE June 13, 2005 As legend has it the famous Laffer Curve was first drawn by economist Arthur Laffer in 1974 on a cocktail napkin during a small dinner meeting at the Washington Hotel attended by the late Wall Street Journal editor Robert Bartley and such high-powered policy makers as Dick Cheney and Donald Rumsfeld. The Laffer Curve helped launch the Reaganomics Revolution here at home and a frenzy of tax rate cutting around the globe that continues to this day. The theory is really one of the simplest concepts in economics. Yet its logic continues to elude the class-warfare lobby whose disbelief is unburdened by the multiple real-life examples which validate its conclusions. The idea is that lowering the tax rate on production, work, investment, and risk-taking will spur more of these activities and thereby will often lead to more tax revenue collections for the government rather than less. In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion. Now we have overpowering confirming evidence from the Bush tax cuts of May 2003. The jewel of the Bush economic plan was the reduction in tax rates on dividends from 39.6% to 15% and on capital gains from 20% to 15%. These sharp cuts in the double tax on capital investment were intended to reverse the 2000-01 stock market crash, which had liquidated some $6 trillion in American household wealth, and to inspire a revival in business capital investment, which had also collapsed during the recession. The tax cuts were narrowly enacted despite the usual indignant primal screams from the greed and envy lobby about "tax cuts for the super rich." Last week the Congressional Budget Office released its latest report on tax revenue collections. The numbers are an eye-popping vindication of the Laffer Curve and the Bush tax cut's real economic value. Federal tax revenues have surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts. This Laffer Curve effect has also created a revenue windfall for states and cities. As the economic expansion has plowed forward, and in some regions of the country accelerated, state tax receipts have climbed 7.5% this year already. Perhaps the most remarkable story from around the nation comes from the perpetually indebted New York City, which suddenly finds itself more than $3 billion IN SURPLUS thanks to an unexpected gush in revenues. Many of President Bush's critics foolishly predicted that states and localities would be victims of the Bush tax cut gamble. Alas, all of the fiscal news is not celebratory. The CBO also reports that federal expenditures are up $110 billion, or 7.2%, so far this year as the congressional Republican spending spree rolls on. Nonetheless, it now appears that the budget deficit will be at least $60 billion lower than last year and states and cities, led by California, which a few years ago were awash in debt themselves, will enjoy net surpluses of at least $50 billion. This means that total government borrowing will come in at below 2.5% of national output, which is hardly a crisis level of debt. Many of the opponents of the tax cut maintained that they would push up interest rates, but today long-term rates are so low that we have seen in recent weeks a string of nonsensical warnings from confused economists about the supposed curse of low long-term borrowing costs. On the private-sector side of the ledger, what we are now witnessing is a broad-based investment boom. The lower capital gains and dividends taxes have been capitalized into higher stock values, and that in part explains why the Dow is up 24% since May of 2003 while the Nasdaq has risen 39%. Dan Clifton of the American Shareholder Association estimates that this rise in stock values has translated into roughly $3 trillion in added wealth holdings of American households. The severe slump in business capital spending in 2001 and 2002 has now taken the shape of a U-turn, with spending on capital purchases up an enormous 22% since 2003. Because higher wages and new job creation are highly dependent on business capital investment, the mislabeled "Bush tax cut for the rich" has in reality enormously benefited middle-income workers. All of this brings us to the crucial policy issue of whether Congress will observe these new economic and revenue data and have the common sense to keep a good thing going by making the Bush tax cuts permanent. Thanks to inane budget rules in Congress the capital gains and dividend tax cuts are currently set to expire in 2008. (When was the last time a spending program in Washington expired?) One thing would seem certain: Raising the tax rates on capital gains and dividends would be a formula for choking off the expansion and reversing the stock market climb. Until now, the Democrats in Congress have in unison sanctimoniously charged that the government can't afford the price tag of making the tax cut permanent. But, of course, all this new fiscal evidence points to precisely the opposite conclusion: that we can't afford not to make the tax cuts permanent. Whether Mr. Bush's critics' ideological blinders make them capable of being persuaded by facts and evidence is an altogether different issue.
All the gains were actually accrued during 2003 - a period when the euphemism about the Iraqi War still ran high. There have been virtually no increase in both indices since the beginning of 2004. Hmm, wondering where did Enron learn its creative accounting from?
I will agree with Stephen Moore on one point, corporate profits are up, but jobs and individual incomes are certainly not up. Facts don't back those acertions. He jumps to all kinds of conclusions that are not agreed upon by economists. His conclusions about Reagan era tax cuts aren't clear cause/effect relationships. He totally ignores the fact that during the 90's, tax receipts went up at a higher rate even though Clinton raised taxes. The Laffer Curve and supply-side economics are hardly vindicated. Mr Moore is a Cato and Heritage Foundation guy btw
in the short term, no - I don't think many thought they would hurt it, but how much they actually help(ed) is still debatable
In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion. Quick ask Donald Trump why he paid more taxes after Reagan's tax "cut".
Sure one can. He doesn't show a causal link. It could well be that the receipts would have gone up anyway, and that the tax receipts would have gone up another 10% if not for the tax cuts.
Bush Tax Cuts Result in Higher Tax Receipts First of all, this is entirely misleading. It may or may not be true, but nothing in the article discusses this. During the Clinton years, we had a tax increase, and tax receipts went up, so you could similarly say "Tax Hikes Result in Higher Tax Receipts". But as a general principle, it cannot be true that both tax hikes and tax cuts would increase receipts. In both cases, a strong economy was what raised tax receipts so much. Whether the strong economy was substantially impacted by changing tax rates is what no one really knows. yet tax receipts are up, so one can't make the arguement that the tax cuts have hurt the economy. Of course tax cuts don't hurt the economy in the short-term - to argue otherwise would be ridiculous. Where the argument can easily and simply be made is in the long-term. Tax cuts, without equivalent spending cuts, increase debt in the short-term. Increased debt requires higher future taxes to pay off interest (something like 20% of our current spending). Therefore, tax cuts now cause higher tax rates later. If you believe tax cuts help the economy, then in the long run, the accompanying tax hikes slow the economy. The only way to counter this is if the tax cuts grow the economy at a pace that makes up those revenues, which is what I was referring to in the first part of this post. There's no way to tell because we don't really know what spurs an economy. If there hadn't been tax cuts, would the natural business cycle have caused economic growth? No one knows the answer to that. What do know, though, is that after both the Reagan and Bush tax cuts, deficits and debt soared, so on the surface, it appears that the tax cuts don't make up the revenue shortfalls... but in both scenarios, we also went on massive new spending sprees (Reagan defense spending and Bush war/terrorism spending), so it's hard to really know. We also know that under Clinton, a relatively modest tax hike did not slow the economy at all, but we also don't know if the economy would have grown even faster without a tax hike. There's just not enough data anywhere (and too many variables) to reasonably know one way or the other whether tax hikes or drops are beneficial. Even if you subscribe to the laffer curve, the problem is that we don't know which side of the curve we're currently on because no one knows the value of that variable "T".
Great points Major. I think there is something to the Laffer Curve and that if government leaves more money in the economy the economy will do better. That said there still are a lot of other factors to be considered and like the 80's the government is spending more which has a stimulative affect too. All of these issues have to be balanced with the dangers of longterm debt and inflation.
I think there is something to the Laffer Curve and that if government leaves more money in the economy the economy will do better. I agree - the Laffer Curve makes sense when you look at the edges. Going from 0% to 5% tax rate, you clearly know your tax revenues are going to increase since you were making $0 initially. Going from 95% to 100%, you know taxes will go to $0 because no one will work anymore. The question is the shape of the curve. I don't think most people who argue against the tax cuts disagree with the Laffer Curve, which is why I don't understand why people bring it up all the time to argue that tax cuts help the economy. What most anti-tax-cut people would argue is that we are on the side of the curve that says that revenues rise with a tax increase and fall with a tax decrease. This is honestly one of the worst economic articles I've seen, and I'm amazed it would be in the WSJ. Any article that tries to prove their point with the Laffer Curve is either stupid or disingenious. Then he picks incidents selectively and attributes a cause-and-effect relationship which may or may not exist. Pointing to Reagan's cuts and then saying "the resulting economic boom" and then ignoring Clinton's hikes and the economic boom that followed ignores reality. Saying that because revenues rose over the last 2 years, that means its working is also disingenuous. If tax revenues fell 20% as a result of a tax cut and then rose 10% the following year, where does that leave us? He only mentions the 10% portion (numbers just for illustration). All in all, this article is just terribly developed.
Ya know at one time, Trump consider running for President as a Republican. What got him to throw his hat into the ring was Reagan's tax "cut". The tax bills in question did two things: reduced the marginal rates to something less draconian and got rid of the tax shelters, a cottage industry built to avoid the high marginal rates. Thus, Reagan's tax cuts, which were passed by a Democratically controlled Congress mind you, were a wash. Back to Trump. Trump got hit hard when the tax shelters went away, since they were in heavy use in the real estate industry. Now you know the facts. I predict that we will see another Laugher article in about six months, or about the time it takes you to forget the truth and get back to your "believes".
I wouldn't say the musings of a highly qualified economist are random. I'm not the one making the claim. The author of the story is, and he showed no causal link.
Tax receipts always go up during a recovery (pure GDP I mean). While I agree that lower-tax rates do have a tendency to spur economic growth, it is difficult to prove that Bush's tax cuts had anything to do with the "recovery". All in all - it probably had a slight positive effect - but the increase in GDP would have happened anyways. To claim that the GDP growth resulting from the tax-cuts compensated for the decrease in tax-revenue as one may expect (sans Laffer curve) is impossible to prove. The Laffer curve can also be "used" to argue against tax-cuts for the rich - or rather, for more progressive tax brackets. While a poor person would be more likely to spend his or her tax-rebate money, a super-rich guy would be more likely save it. Depending on the form of the savings - it may not have an effect on interest rates.
SUPPLY SIDE BUFFOONERY http://www.washingtonmonthly.com/archives/individual/2005_06/006496.php ....I don't normally tee off on Wall Street Journal op-eds — although occasionally I make exceptions — but today is a special day: it's Stephen Moore's maiden outing as a member of the WSJ editorial board. A friend emailed to tell me that "knowing how much you enjoy shooting fish in a barrel," I should take a look. He was right! Moore's sermon today is about the wonders of supply side economics: In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion. Tax revenue doubled! That does sound like a triumph for the tax cut jihadists, doesn't it? But this is Stephen Moore, after all, so perhaps we should take a more careful look: 1. First, we should adjust for inflation, shouldn't we? In 1980 dollars, $1,032 billion is actually $670 billion. 2. And of course, population increased over that time too, which naturally increases tax payments. Adjusting for that, tax revenue was $2,283 per person in 1980 and $2,694 per person in 1990. 3. That's not double. It's an increase of 18%. And it's worth noting that a lot of that is due to consistent tax increases throughout the 1980s (details here). Without that, Reagan wouldn't even have gotten the anemic growth in tax revenue that he did. But wait. Is "anemic growth" fair? Why yes. After all, we can play this game with any decade. Annual tax receipts are here. Adjusting for inflation and population growth, the supposedly horrible 70s produced an increase in tax revenue per person of 25%. The Clinton 90s produced growth of 40%. In fact, Reagan produced the slowest growth in tax revenue of any decade since World War II. That's a real supply side triumph. Welcome to the Journal, Steve. You guys deserve each other.
Is it fair to say that the tax-cuts did not have the disastrous effect on revenues that were feared by some - but most probably did not do anything to actually increase revenues?
