StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Republican Tax Nonsense

17 Jul 2010
Posted by Bruce Bartlett

 On July 13, Senate Minority Leader Mitch McConnell, R-Kentucky, asserted that there was no net revenue loss from any of the Bush tax cuts, in defense of an earlier comment by Senator John Kyl, R-Arizona, that all spending increases must be offset so as not to increase the deficit but tax cuts must never be offset. Said McConnell:

“There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”
 
Bush administration economists, however, never made any such claim. Following are a few of their statements regarding the revenue feedback of the Bush tax cuts.
 
Andrew Samwick, chief economist at the Council of Economic Advisers during George W. Bush’s first term, in a January 3, 2007 blog post:
“You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.”
 
Alan Viard, senior economist at Council of Economic Advisers during Bush’s first term, as quoted in the Washington Post on October 17, 2006:
“Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that.”
 
Robert Carroll, deputy assistant secretary for tax analysis at the U.S. Treasury Department during Bush’s second term, as quoted in the Washington Post on October 17, 2006:
“As a matter of principle, we do not think tax cuts pay for themselves.”
 
Edward Lazear, chairman of the Council of Economic Advisers in Bush’s second term, in testimony before the Senate Budget Committee, September 28, 2006 (p. 11):
“Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data presented above do not support this claim. Tax revenues in 2006 appear to have recovered to the level seen at this point in previous business cycles, but this does not make up for the lost revenue during 2003, 2004, and 2005. The tax cuts were a positive step and have contributed to the enhanced economic growth, additional jobs, higher real disposable income, and the low unemployment rates that we currently see today.”
 
At his Senate Finance Committee confirmation hearing on June 27, 2006, Bush’s nominee to be Secretary of the Treasury, Henry Paulson, was asked if he thought that tax cuts paid for themselves. He replied (p. 18):
“As a general rule, I do not believe that tax cuts pay for themselves.”
 
In a 2006 article published in the Journal of Public Economics, economist Greg Mankiw, who chaired the Council of Economic Advisers during Bush’s first term, estimated the long-run revenue feedback from a cut in capital taxes at 32.4 percent and 14.7 percent for a cut in labor taxes.
 
A 2006 analysis of extending the 2001 and 2003 Bush tax cuts by the Republican-leaning Heritage Foundation estimated that only 30 percent of the gross revenue loss would be recouped through behavioral effects and macroeconomic stimulus.
 
A 2005 Congressional Budget Office study during the time that Republican Doug Holtz-Eakin was CBO director concluded that a 10 percent cut in federal income tax rates would recoup at most 28 percent of the static revenue loss over 10 years. And this estimate assumes that taxpayers have unlimited foresight and know that taxes will be raised after 10 years to stabilize the debt/GDP ratio. Without foresight and no compensating tax increases or spending cuts, leading to an increase in the debt, feedback would be negative; i.e., causing the revenue loss to be larger than the static revenue loss.
 
The 2003 Economic Report of the President during Bush’s first term stated (pp. 57-58):
“Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.”
 
The actual data show pretty convincingly that the Bush tax cuts reduced revenue rather significantly.
 
Federal Revenues During the George W. Bush Administration
Fiscal Year
Revenues/GDP
Revenues/2005-$*
Revenues/2005-$/Per Capita
2000
20.6
2,310.0
8,180
2001
19.5
2,215.3
7,765
2002
17.6
2,028.6
7,041
2003
16.2
1,901.1
6,537
2004
16.1
1,949.5
6,642
2005
17.3
2,153.6
7,271
2006
18.2
2,324.1
7,773
2007
18.5
2,414.0
7,993
2008
17.5
2,288.5
7,508
*Billions    Source: OMB

Good post

Don't confuse them with the facts.


So if extending the Bush tax

So if extending the Bush tax cuts would increase tax revenue, raising taxes (letting them expire) would result in less tax revenue. It's annoying when Kyl and others appear on talk shows and go unchallenged when they make these claims.

This is from Meet the Press on July 11. Gillespie claiming that "revenue was at an all time high" after the taxes were cut. Nobody bothered to tell him they would have been much higher, probably a surplus, had there been no tax cut. The "job growth" was due to the housing bubble since that is where most of the jobs were created. Maybe we can blame the tax cuts instead of the CRE for the housing bubble.

"MR. GILLESPIE: Well, my point was not wanting to go back to the math because the fact is, under the Bush tax cuts, we did have 52 months of--in uninterrupted job creation, longest in the history of the country, and revenues were at an all-time high in 2007."
http://www.msnbc.msn.com/id/38180166/ns/meet_the_press-transcripts/


..so if the tax cuts are

..so if the tax cuts are allowed to sunset, then the average people will begin to prosper? In an economy with virtually no growth, with 10% unemployment month after month, record foreclosures and no end in sight, add to this the impending spector of both Obama's healtcare reform and now the financial reform bill, which will increase the size of government tremendously,....if taxes are not increased by 25% it means Obama and the Dems will have to borrow alot more money. Face it, deficit spending is bad no matter who is in the white house.


Lies

How can we have a sincere debate about policy when we allow all the lies (from both sides)to go unchallenged? (Thks Joe) Just today, Pence was on some show where he repeated the lie about the Bush tax cuts increasing revenue. Now I understand why Indiana has so many auto parts manufactur4ers. There is an abundance of dipsticks in the state. Gillespie's comment about job growth is very misleading, as there actuially was less job growth during the Bush II administration than any comparable modern presidency. The reasons we are in such fiscal trouble today is that the tax cuts did not generate additional revenue, we put two wars on the credit card, and job growth was weak in a consumer driven economy. If we cannot agree with thisw, we will never be able to work our way out of the fix we arfe in.


The press has not done its job..

which is one reason why it is dying. Reporters refuse to call a spade a spade. Why, I don't know. 


Today's reporters

"Reporters refuse to call a spade a spade. Why, I don't know."

Simple. They are too uninformed to recognize a spade when they see it.


Gosh. All that damage from a .5% tax cut.

Who would have guessed the humongous, point five cut, could knock down rev/GDP to 19.6% by your chart. Worse, who could have predicted that another point five cut in 2002 would pummel rev/GDP to 17.6%.

I wish you'd quit beating up on tax cuts. Yglesias reads it, and gets all uppity about more spending and "balancing the budget".
I think a reasonable soul would also cite 9/11, anthrax mailings, and war rumblings as reasons for the revenue decline. Especially since that period was essentially still under Clinton rates.

In fact somebody had a chart showing rev decline in 2001-2 With a flattening in 2003 and resumption of the previous trend thereafter. I had it around here somewhere.


And What Do You Say to Samwick, Viard, Carroll, Lazear, ...

Paulson, Mankiw, Holtz-Eakin, and the 2003 Economic Report of the President?

What do you say to that long lineup of Republican economists presented who all are on record saying "TAX CUTS DO NOT PAY FOR THEMSELVES", and thus, tax cuts cause tax revenues to drop? You say nothing. FAIL.


Effect of Wealthy-Skewed tax cuts..

Some silly comments here on this comments board:

1. the tax cuts massively favored the super-wealth. They spent it by investing on already existing U.S. based companies, by buying securities from other investors-no new funds to generate econcomic growth because it was speculation, rather than investing in new enterprises, with money going directly to the company;

2. a huge portion went to investment in emerging-market economies, which thus boomed, at our expense;

3. they may have used the excess funds to travel to France, Italy or other favored destinations;

4. they already had enough to finance consumer goods--the lifeblood of our economies, so any tax was a mere windfall;

5. according to Warren Buffett, the tax cuts were unconscionable when his secretary's tax rate equaled twice his;

6. the U.S., and its treasury was much more healthy with the higher pre-Reagan tax cuts--and is even worse with the Bush 43 cuts skewed to the wealthy;

7. look at a chart--growth in PER CAPITA GDP was higher in Democratic Presidencies than Republican Presidencies--for the past 80 years, consistently, except for brief blip during the Carter presidencies, due to an immense oil shock, which affects just about everything;

8. a tax cut in payroll taxes, or in middle class/poor taxes gets spent almost exclusively in the U.S.;

9. the wealthy don't create small businesses--the middle class does and hopes they will morph into larger businesses.

How can anyone, who values facts over Rush Limbaugh rhetoric, disagree with any of this?


Nice

Don't get confused with the post. Its giving the facts & truths. So be clear in reading this.
pneumonia symptoms


Citizens for Tax Justice

If you are writing about Republican tax nonsense, it's ALWAYS worth consulting Citizens for Tax Justice for a well-reasoned and very clear exploration of the issues. They are surely the most experienced tax commentators of their kind in the country.

In this case, the relevant post is here http://www.ctj.org/pdf/holtzeakin2010.pdf but the general page is www.ctj.org


What's infuriating about this

What's infuriating about this idea is that its proponents seem to see the Laffer curve as some amazing mathematical insight, and believe that those who disagree with their conclusion must simply lack the sophistication of mind to be able to understand it. Presumably that would include you, Mr. Bartlett.

It's aggravating because, as far as I can tell, the Laffer idea is just not that ocmplicated. Isn't it just a simple application of a first-day-of-calculus-class theorem? The tax-rate versus revenue function must have an absolute maximum that's less than 100%. It's a good insight--that it's at least theoretically possible for tax rates to be so high that raising them would lower revenue and lowering them would raise revenue. But it's not amazing. And it most certainly does not mean that tax cuts raise revenue in general. People have taken a good insight and distilled it down into a simplistic dogma, and then dismiss anyone who disagrees with the dogma as lacking in insight.

What bothers me most about Mr. McConnell's statement, though, is this: "So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject." I'm afraid that's probably true--and then where does that leave us? How is it possible to have any sort of decent conversation about revenues or deficits? I think we're screwed.


The Bush tax cuts

appear to have reduced federal revenues by about two percent of GDP, comparing 2000 to 2007--both peak business cycle years when the cyclical effects are equivalent. The question is, what did we get in return? A stronger economy? No. A simpler, more efficient tax system? No. All we got was lower revenues that raised the debt on which we will be paying interest forever.


What is bogus is comparing

What is bogus is comparing 2000 (the peak of a stock market bubble where capital gains taxes alone contributed $121 billion (1.2% of GDP) in that one year) and 2007 (a housing bubble where capital gains were exempt from taxes because of a 1997 law and where bubblony mortgage interest deductions and property tax deductions on those housing costs reduced taxable income (in primarily high housing cost and high local tax places that vote Dem - ie NYC/Boston/SF/DC/etc)).

Neither of those two were much affected by the Bush tax cuts - and together they account for just under 2% of GDP.

And BTW -- it ain't the revenues that create the deficits. It is the SPENDING. THAT is what government actually controls -- or more accurately what it fails to control while trying to change the subject and fraudulently "account" for the spending. Government cannot control tax revenues -- they can only control tax rates and hope/pray that their assumptions about the revenues it produces are correct. Not that I would expect anyone in DC to actually understand that because no one in DC is remotely competent at anything other than thievery and bamboozle.


Capital gains from home sales

Capital gains from home sales is not tax free. There is an exemption ($250k for singles, $500k for joint) but you have to have lived in the house for at least 2 of the last 5 years. During the housing bubble, there were a tremendous amount of investment activity where people would buy and rent the house, or buy it and flip it. All of those gains were taxable. And even for owner-occupied houses, in certain markets realizing a gain over the exemption amount was common.


Capital gains from home sales

Capital gains from home sales is not tax free. There are exemptions ($250k for singles, $500k for joint). But you have to have lived in the house for at least 2 of the last 5 years. During the housing bubble, there was a tremendous amount of investment activity with people buying and renting out the house or buying and flipping. The gains on those properties were fully taxable. And even for owner-occupied property, in certain markets having a gain above the exemption amount was common.


So you say. The Federal

So you say. The Federal Reserve - http://www.federalreserve.gov/pubs/feds/2008/200853/200853pap.pdf -- disagrees and has statistics proving that that exemption dramatically increased sales volume during the housing bubble (and hence created massive amounts of exempted capital gains).

And there is plenty of stuff online eg -- http://www.bankrate.com/finance/real-estate/capital-gains-home-sale-tax-... -- showing that this tax exemption was a major part of the thinking (and hence advice of) financial planners, tax advisors, tax attorneys, etc DURING the housing bubble itself.

And the growth of those during the housing bubble is directly stated in various IRS/CBO/OMB documents talking about "tax expenditures" (a bogus pomo phrase if ever there was one since it has NOTHING to do with government spending and is simply a deceitful attempt to conflate "spending" with "taxes").

But hey. I'm sure it had no impact whatsoever because your post about condo-flippers is far more credible.


Excuse me. Is there some

Excuse me. Is there some reason you want to ignore the 3% drop of rev/gdp from 2000-2002? You know, before the Bush cuts fully kicked in? It's your data after all.


Passerby is absolutely

Passerby is absolutely correct. The most frustrating and in fact horrifying part of this was that line, "So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

Let's dig into that line for a moment. What he is in effect saying is that virtually every Republican has a "view" on the subject of taxes that is in direct opposision to the facts about taxes. The Republican party has in effect become the 16th century Catholic church dealing with Gallileo. "But it moves"


this just reaffirms my

this just reaffirms my thoughts on bruce for the last few years - he's lost the plot. nothing left in him but selective judgment and bitterness. it also reaffirms if you worked under reagan, no matter how wrong you were, it gives you some credibility. once you get past the numerical jargon you realize tax cuts aren't code for consumer confidence and growth.


It is essential that the tax

It is essential that the tax cuts be allowed to expire as laid out in the original law. For ten years, businesses and individuals have been making investment and other economic decisions based on the original terms, and planning for the expiration. If this is changed, all those calculations will have been incorrect, causing untold damage to the economy.

(Just practicing. Apparently you can get on any number of talk shows, if you can emit stream-of-consciousness nonsense on economic issues.)


They are probably the same

They are probably the same people who like to repeat the lie that Reagan was a small-government Conservative, even though he exploded the deficit, offered budgets to Congress that were bigger than what they were willing to approve on several occasions, and raised...RAISED taxes on many occasions during his presidency:

http://www.pensitoreview.com/2010/07/02/reagan-raised-taxes-7-times/

I believe Bartlett himself has written about Reagan's tax record several times to this effect, but that's besides the point, of course.

the absurd extrapolation of the Laffer Curve that many movement Conservatives like to parrot is precisely that: an absurd extrapolation. if it was true that lowering taxes raises revenue, wouldn't it make sense to just to cut all income taxes to zero? revenues would explode! deficits would disappear! We could break our dependence on the Chinese! it is amazing that such childishness passes for serious policy analysis in the GOP these days.


So what would it take to turn

So what would it take to turn "tax cuts pay for themselves" into an instantly recognizable absurdity? "Voodoo economincs" didn't work. Unicorns are popular. Maybe they'd work.

BTW, if taxes were zero, wouldn't revenue be infinite? i.e. Revenue = Unicorns/T


Thanks for telling it like it is!

Thank you so much for calling the right-wing hacks out for their dishonesty! Their tax policies have never made sense to me, and I've been in debate for a week now with a Republican who advocates for the re-distribution of wealth to the top, because he thinks the top is victimized by America's tax policy. Apparently, a new talking point has emerged stating multi-millionaires and billionaires, who will still be multi-millionaires and billionaires after taxes, will choose to struggle in the middle class paying a higher percentage of their income in taxes, or choose poverty so they don't have to pay taxes at all, if the Bush tax cuts are repealed, therefore, eliminating even more tax revenue.

Something about a crazy dinner in a restaurant where the wealthy in the group pay for the meal while the lower income people eat for free. Very simplistic analogy that can't and doesn't exist in the real world. I mean, the poor can choose (and do) to not eat in a restaurant, but they can't choose to not live. Well, unless Republicans are now advocating all poor people kill themselves.




Recent comments


Advertising


Order from Amazon


Copyright

Creative Commons LicenseThe content of CapitalGainsandGames.com is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.