A recent Washington Post editorial “Mr. Giuliani and the Tax Fairy,” ridicules Rudolph Giuliani’s often repeated claim that tax cuts actually produce an overall increase of reveune to the government. The editorial quotes Giuliani as saying, “I KNOW THAT reducing taxes produces more revenues. Democrats don’t know that. They don’t believe it.”
The editorial says flatly, “There’s a good reason for (not believing) that. It’s not true. And, no matter how many times Republican politicians caught up in the thrill of supply-side thinking pronounce that tax cuts pay for themselves, they cannot will it to be correct.”
Excerpts from the article:
- You don’t have to turn to Democrats to refute this point; just read the studies and comments by Republican economists, including many from the Bush administration. President Bush’s Treasury Department, analyzing the “dynamic” effects of making the Bush tax cuts permanent, found that even under favorable assumptions, the positive economic impact would make up for no more than 10 percent of the tax cuts’ cost.
- “I certainly would not claim that tax cuts pay for themselves,” Edward P. Lazear, chairman of the president’s Council of Economic Advisers, testified last year.
- N. Gregory Mankiw, another former Council of Economic Advisers head in the Bush White House, concluded in 2005 that cuts on capital gains taxes could generate enough extra growth to recoup half the lost revenue in the long run; cutting taxes on wages could recover just 17 percent of the costs.
- An analysis conducted by the Congressional Budget Office under the direction of Douglas Holtz-Eakin, who had been an economic adviser in the Bush White House, found that, under the rosiest of scenarios, a 10 percent reduction in the personal income tax rate would generate enough economic growth to replace 22 percent of lost revenue in the first five years and 32 percent in the second five.
- Mr. Giuliani isn’t the only believer in the tax fairy; numerous Republicans, including the president, have made similarly fanciful claims. But if he were to find himself in the White House and hoping to find that extra revenue he is convinced tax cuts produce, Mr. Giuliani would discover only disappointment under the presidential pillow.
From The Washington Post, December 1, 2007
Oh, puh-leez! Tax cuts don’t (unfortunately we’ve never had one of those), but tax rate cuts do. Despite all the history and evidence to the contrary, the “tax us into prosperity crowd” still promotes this canard.
It all depends on your time horizon. First of all, why anyone wants the government to have more revenue is beyond me, but all things being equal: tax increases increase revenue in the short term, but in the medium to long-term, tax rate cuts increase revenue more due to the stimulant effect on the economy of the latter and the anti-growth effect of the former.
Joe, I think dead-level abstracting, if we’re going to do it, ought to focus on the proper economic measure.
Tax rates are irrelevant to prosperity.
A balanced budget is highly relevant.
When we approach a balanced federal budget, interest rates go down, the dollar is strong for international trade, there’s more money for and interest in investing in this US of A. When the federal deficit balloons, as it has under almost all years of Republican administration in the past half-century (and, counter to the propaganda, NOT in most years of Democratic administration!) then we see recession, high interest rates, weak dollar, and general stagnation in our economy.
Europeans are enjoying high levels of prosperity now, and they pay higher tax rates. Typically, taxpayers in France or Sweden will express that, while they don’t like paying taxes, they realize that they are getting the government they pay for–and their superior government-sponsored health care systems are something the USA really needs to quit fearing and start adopting.
It’s the debt that is killing us, not the tax rates per se. In fact, we’d probably be far better off if the feds would just bite the bullet and raise tax rates to a level that would balance the budget (without shell games like not counting war funding, or siphoning from social security) and pay down the federal debt once and for all.
It might be worth considering a legislative process that would take tax rates out of the politicians’ hands. Something along these lines: the policitians can pass legislation that budgets so many dollars to each program–then the GAO would use reliable forecasts of GDP to determine what tax rates would be essential to pay for all of that–then those tax rates (plus a tiny percentage for reserves) would go into effect for that fiscal year.
This way, we’d not be able to fall for the siren song of candidate cut-your-taxes; what would be left, the voting record, would be a better demonstration of whether the candidate spent in accordance with public values.
Nothing would stimulate our economy like a prime rate of 0.5%, which we’d have if the budget stays balanced and if China no longer holds the mortgage on our future.
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T. Rud.,
Let’s assume you are right – albeit off point. The cause of deficits is too much spending, NOT insufficient revenue; especially since the revenue to GDP ratio (18.4 for 2006) is at or above the historical average (18.3) for the last 50 years. Granted, not all tax rate cuts have the equivalent effect. The stimulative effect is most pronounced with rate cuts for corporations and on capital gains.
Joe C., you claim, “tax increases increase revenue in the short term, but in the medium to long-term, tax rate cuts increase revenue more due to the stimulant effect on the economy of the latter and the anti-growth effect of the former.”
You seem to flatly disagree with the claims made in the Washington Post article, “Mr Guiliani and the Tax Fairy,” and the Republican authorities that this article quotes: Edward P. Lazear, chairman of the president’s Council of Economic Advisers, and N. Gregory Mankiw, former Council of Economic Advisers head in the Bush White House.
I can understand that many people want to believe that tax cuts raise tax revenues, but, then, we are all attracted to wishful thinking. The Republican authorities cited by the Post, to me, seem to be reaffirming the notion that if something sounds too good to be true, then it probably is too good to be true. I don’t understand your basis for refuting these Republican authorities.
Sigh… I’m not sure why I’m supposed to be impressed with the party affiliation of those those that you cite, but here is a simple explanation for the economic flat-Earthers out there: http://www.optimist123.com/optimist/2007/04/the_curse_of_th.html . As this Treasury analysis shows ( http://www.treas.gov/press/releases/reports/treasurydynamicanalysisreporjjuly252006.pdf ), to which I’m assuming that you are referring, trying to offset the “loss” of revenue to the government by increasing taxes decreases economic output. By simple math, it is obvious that decreasing output by 1% instead of increasing output by 1% eventually causes a net loss of revenue, not to mention output.
Once again, the goal isn’t (or shouldn’t be) to increase revenue to the government (a purposeful increase in dead-weight loss, rent-seeking, and free-riders) – the now defunct Keynesian model – but to grow the economy. Increased economic activity, increases revenue to the government – the down-side to tax rate cuts – which over time will make up for the short-term revenue loss to the government due to increased productivity. As history has shown, political business cycles do not correlated to election cycles and the short economic attention spans of politicians and an ill-informed electorate.
However, tax rates are not the only thing that affect the economy as we saw in the 90’s. Despite the largest tax increase in history, the economy was able to flourished due to 5 major contributors: 1) the productivity gains from wide-scale adoption of computerization and related innovations, especially the Internet, in business and homes; 2) the “peace dividend” from the fall of the Soviet Empire (decreased military and intelligence spending); 3) easy money policy by the Fed (low interest rates); 4) China and India economic liberalization; and 5) conservative policies introduced in government (i.e. welfare reform, capital gains tax cut, balanced budget). Unfortunately, the unintended consequences of numbers 2 and 3 came home to roost in 2001, and #5 was abandoned with the takeover of the government by “moderates” (i.e. liberal Republicans) – Bush et. al. – who naively acceded to liberal policies after the tiny tax rate cuts to “set a new tone.”
Just imagine where we would be economically as a nation even with the small tax-rate cuts and war, if other spending only grew with inflation instead of doubling, and overshadowing the increased revenues. All despite an unprecedented string of economic insults in a short period of time: recession, Internet and housing bubbles bursting, stock market crash, 9/11, Katrina, oil prices, war.
“recession, Internet and housing bubbles bursting, stock market crash, 9/11, Katrina, oil prices, war.”
The same people who created [or failed to prepare for] all of the above stated problems of our world are the same ones who believe in the “Tax Fairy”.
Imagine that…
Joe C.
Thanks for the links. The “Skeptical Optimist” blog looks interesting and I’ve bookmarked it for future reference.
For our democracy, clarifying the goal of taxes and the goal of government is the key task. You seem to be saying that you would be happy if the only goal or purpose of tax policy is to grow the economy. But tax policy historically has had other goals and a complete discussion of the tax policy needs to address these other historical goals.
One historical goal for the tax system is that it should help bring about greater economic justice. We say that our country is all about liberty and justice, but one has little liberty if one has no money. One example: In our democracy many Americans are bankrupted by health problems, but, if they lived in European democracies, they would enjoy tax supported health care systems. Our tax policy must be such that it will collect sufficient revenue to build efficient government programs — health and education are two such programs that come to mind. A vision that says the less government the better has always attracted those who have property or connections. But if our democracy is to have a future, it must have an inclusive vision that shows how the goals of our country — freedom and justice — can be realized by everyone.
Tax policy can’t just be about growing the economy, it must be about fairness. Our democracy decided some time ago that would not tolerate “robber barons” taking unfair advantage of our economic system to accumulate unreasonable wealth. The progressive aspect of the income tax, the estate tax leveled at the very wealthy were not accidental tax policies but were policies deliberately designed to “soak the rich,” because that is what, at the time, our democracy demanded. The idea of using the tax system to redistribute wealth is an old idea that historically has had a consensus. It seems unwise to simply ignore history, yet the movement for lower taxes — beginning with Reagan — does just that.
It is amazing to me how effective propaganda can be. Propaganda has convinced poor people that somehow it is in their interest to oppose the “death tax.” A lot depends on how a product is labeled; poor people who might not think to object to an “inheritance” tax or an “estate” tax for millionaires have become convinced that a “death tax” is bad policy. Amazing.
A progressive tax system that includes an estate tax are ideas that our democracy hammered out years ago. Tax policy must be connected to a big vision of economic justice and fairness. Tax policy can not simply be about growing the economy.
Mike,
You seem to be expecting alot from a tax system. The tax system is meant to raise money to run the government, nothing more. All these other supposed “goals” (i.e. fairness, econommic justice) are inefficient political bastardizations of a tax system. These ethical principles, to the extent that they are achievable, would be attained more rapidly and cheaper without much of the economic intrusions of government. How about another trillion dollars a year on the economy to provide health care, jobs, wages, credit, and capital for innovation, just to name a few.
Gary,
I’m not sure who these “people” are that “created [or failed to prepare for]” recessions, market bubbles, stock market crashes. These have been around since the advent of market economies; and war since the advent of Man, and hurricanes even longer. We know who masterminded 9/11 and the ideology whose only product is terrorism. Likewise, we all know of the policies in the heady 90’s that “failed to prevent it” as well as the state corruption that could have mitigated the flooding from Katrina. As for oil prices, that’s complex, but certainly the eco- and legalo-terrorists and their supplicants in government that have prevented the drilling of oil and gas in Alaska, continental shelf, and Gulf, and prevented the building of refineries and nuclear power plants over the past decades shoulder the majority of the blame.
I’m pretty sure you were just feebly trying to make what you thought was a pithy political point that you assumed made sense.
Another trillion dollars per year in the economy would be great — but not if it is simply a trillion dollars that we have borrowed and that will end up as a huge debt impinging on the future of today’s children and grandchildren. George W. Bush, in his short time in office, has put over $3 trillion of borrowed money into the economy. Yes, I know there was extra expense with Katrina, 911, and the Iraq War, but much of Bush’s debt comes from his tax policy, — his tax cuts and his unwillingness to ask for any additional taxes regardless of year after year of deficit spending.
The point I am trying to make is not to describe what I personally expect out of a tax system. The point is that a democracy, if it is to have any validity, must have a fair and open discussion about taxes, the purpose of taxes, etc. You are free to say what in your opinion the purpose of a tax system should be — “to raise money to run the government, nothing more” — but the point is, it is our democracy that should actually decide what the purpose of a tax system is, and, the fact is, our democracy again and again has loudly disagreed with your opinion. Advocates of lower taxes have failed to explain how their policy proposals impact widely accepted consensus views about fairness and tax purpose. To me, it is a disturbing symptom — of how failed our democracy is — that our political process has not demanded that advocates for lower taxes give a more thorough accounting of their ideas.
You seem to promote the notion that another trillion dollars in the economy will somehow trickle down to the poor and to the average citizen — this is a notion from the time of Reagan and I think it is fair to say that, regardless of the trillions already released into the economy, since Reagan, via tax cuts, there is little or no evidence that “trickle down” is a valid economic theory. Quite the opposite. The number of the working poor continues to increase. The number of people needing to work two or three jobs in order to make ends meet continues to increase. Won’t another trillion in the economy simply go for more McMansions, yachts, luxury cars and vacations? How can you defend your notion that it will “provide health care, jobs, wages, credit, and capital for innovation, just to name a few.” ?
Sigh, again… OK. I just don’t live in the same Upton Sinclair world as you. When you and the rest of the proletariat get to the 1930’s, let me know so I can prevent you from making the same mistakes that we did.
It is a question of silent evidence, because I could make the claim that the Supreme Court’s decision caused 9/11, because the personnel in charge of terrorism at all levels would have remained the same thereby giving the Gore administration a chance at preventing the tragedy. It is about road’s not taken.
When it comes to economic data and spin there is really no one to believe in punditry land; however, one might try to review the data presented at Shadow Stats.
I could go on about wasting treasure in Afghanistan, Iraq and investments in un needed weapons systems, but most people like Joe C. consider the military budget unassailable.
Dwight D. Eisenhower would be proud how America and Dayton did not heed his warning.
What peace dividend?
I can’t believe someone thinks the resolution to the financial crisis is to raise taxes to balance the budget. How about we stop all the spending? The weak dollar isn’t a wholly terrible thing – it increases US exports and that translates to more jobs, where as France is looking at 9.9% unemployment and the U.S. already has a low 5% unemployment rate.
As far as taxes go, give the people their money back so they can spend it and give the companies back their money to pay their employees. More money going into the hands of the government is not the answer.
“it is our democracy that should actually decide what the purpose of a tax system is”
No, we live in a constitutional republic, not a “democracy,” where the constitution allows for geographically uniform tax collection in order to provide defense, coin money, regulate interstate commerce, etc. – it was not meant for pork barrel spending or entitlements by way of personal income. I believe that’s grounds for modern-day revolution.