Occasional blogging, mostly of the long-form variety.

Tuesday, October 26, 2010

Tax Cuts to the Rich Don't Raise Revenues

The economic and fiscal policies of movement conservatives have been proven disastrous and do not work as advertised. Like many core conservative positions, they have little to no basis in reality. None of these factors have dissuaded conservatives from stridently fighting for them, though.

One of the most pernicious and destructive of these falsehoods is the position that tax cuts – specifically, tax cuts for the rich – raise government revenues. In July, Senate Minority Leader Mitch McConnell and several leading Republicans claimed that the Bush tax cuts increased revenue, even thought the facts say otherwise. McConnell and the Republicans also strangely neglected to mention that "two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households."

The media rarely fact-checks conservatives on any of their fantastical economic and fiscal claims. They've actually been a bit better than usual challenging the GOP push to extend the Bush tax cuts for the richest 2% of Americans, which is horrible policy. Of course, that hasn't stopped Republican leaders like John Kyl, Mitch McConnell, John Boehner and Paul Ryan from deceptively shilling crap like this.

Whether movement conservative policies are called supply-side economics, Reaganomics, the Laffer Curve or trickle-down – they simply don't work as claimed. Yet these notions are articles of faith, core dogma, for modern conservatism. It's one of several reasons it's hard to take modern conservatives seriously. Different policy ideas are fine, but different realties are not. How can we discuss economics or fiscal responsibility seriously when one side simply ignores the data and doesn't give a damn about the truth?

Currently, the very same conservatives (Republicans and the Democratic Blue Dogs) who were screaming about the deficit and the debt are pushing to extend the Bush tax cuts for the richest Americans, even though those cuts would add roughly 700 billion to the deficit over the next decade alone. (The tax cuts for the remaining 98% are also an issue, although it's important to remember that tax rates for the rich are at historic lows.) We'll consider how much of the conservative line is hypocrisy, dishonesty, ignorance or evil later on. But first, I wanted to look more closely at some of the data covered briefly in "Attack of the Plutocrats." ("The Persistence of Ideology" gives more context, as does "The Social Contract", if more tangentially.)


Do tax cuts pay for themselves, or raise revenues? Specifically, we're looking at the supply-side tax cuts favored by Republicans, which go disproportionately to the wealthy. Let's start with the Reagan tax cuts. Here's a chart from Paul Krugman:

As Krugman explains:

A couple of points. First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high.

Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.

This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.

Let's move on the administration of George W. Bush. According to Treasury Secretary Paul O'Neill, Dick Cheney said, "Reagan proved deficits don't matter." That attitude was certainly reflected in the Bush economic approach. Here's a lecture slide from Karl Smith. (Click it for a larger image; it's a bit hard to see at this size.) Here's the Bush tax cuts:

Interesting how that chart compares to Krugman's, huh? As Smith explains:

It's particularly telling that after an adjustment the new revenue curve tracks the old revenue curve at a lower level. Precisely what one would expect if you were taking a smaller fraction of the same pot.

In short, unless you think the economy was permanently damaged, all the way up until 2008, from the dot-com bubble in 2001 then you should expect tax receipts to return to the baseline.

After all they are pretty smooth in the wake of the larger early 90s recessions. You should also note that there is no huge boom from the housing bubble. No, for the most part federal receipts track the long run trend growth in the economy.

Lastly, the core argument here is that supply side didn’t work. Are you really going to tell me that the mildest recession in post-war history was so bad that it lead to persistent underperformance of revenue even though in a counterfactual world revenue would have surged above trend growth?

Smith adds in an update:

...The issue here is that suppose the Bush tax cuts had no effect at all on long term revenue. For example, increases in tax rates were exactly balanced by increases in GDP or decreases in tax avoidance.

So then we might think the decline in revenues was caused by Sep 11th or the Dot-Com burst. In that case we would expect to see a drop in revenues followed by a return to trend as the economy recovers. At a minimum we should expect post dip revenue to grow faster as the economy tries to return to trend.

We don’t see that. We see a permanently lower trend.

Given that this is exactly what you would expect from reducing the percentage of the economy which taxed, I think its pretty strong evidence that this is what happened.

In short, the claim that the Bush tax cuts had such strong secondary effects of boosting GDP and tax compliance that they outweighed the primary effect of reducing taxable income is a complex one. Generally, in science we would expect someone to assemble a strong empirical case for such a claim.

When the empirics match the much simpler, more basic, more parsimonious explanation, that’s pretty damning for the complex claim.

So, the style of tax cuts endlessly favored by Republicans, those that overwhelmingly favor the already rich, do not "pay for themselves" and do not raise revenues. More precisely, the Reagan tax cuts and the George W. Bush tax cuts (which overwhelmingly favored the already rich) did not raise revenues. Claims to the contrary are false. (The Kennedy tax cuts remain a source of debate, but weren't skewed quite as heavily toward the rich.)

A different case can be made for tax cuts targeted at the middle class and the poor, and perhaps for small businesses, because of such cuts' stimulative effect. (We'll return to this later.) Meanwhile, there may be levels of taxation so steep that the Laffer curve would actually apply and higher taxation would lead to decreased revenues. However, we're nowhere near that point in the United States. Not all tax cuts are created equal. It's a standard conservative tactic to obscure this. It's also standard for conservatives to ignore essential context when discussing "fair" tax rates: the massive income and wealth inequity in the United States.

It's worth repeating two CBPP charts featured in the Plutocrats post:

Overwhelmingly, the money that exploded the deficit and debt went to people who were already rich and to military spending.


On deficits and the debt, the record is even more stark. The above chart, by Doug Short, shows federal debt as a percentage of GDP. (Similar takes can be seen here and here.) And here's the national debt by president:

Bill Clinton was partially lucky because of the tech boom. Meanwhile, his economic team of Larry Summers and Robert Rubin practiced a form of Reaganomics, and played an important role - along with Alan Greenspan, Phil Gramm and Bush's economic team – in creating the conditions for the economic collapse. (See Robert Scheer's Great American Stickup for more.) Still, it's important to remember that George W. Bush inherited a budget surplus and a fairly healthy economy, while Obama inherited a massive deficit and debt, and an economic recession. Furthermore, Obama's spending to date has mainly been responsive, while that of Reagan and George W. Bush was absolutely reckless.

Reagan and the Bush the Younger both cut tax rates for the rich while increasing military spending. Reagan almost tripled the national debt, while George W. Bush nearly doubled it once again, adding roughly 5 trillion to it.

It should be hard to spin this, but conservatives keep trying, and often go unchallenged. Karl Rove routinely, shamelessly accuses Obama of fiscal irresponsibility. To do this, he ignores the mess the Bush administration (including Rove) left for Obama - the debt, the deficit and the economic meltdown. He also counts some of Bush's last deficit against Obama. Most of all, he likes to discuss federal deficits as a percentage of GDP, which – coupled with amnesia - is about the only way he can make Bush look better than Obama. It's a fairly common conservative trick these days, generally accompanied by an attack on government spending. Paul Krugman has demonstrated why it's deceptive (one, two and three). From link number two:

As Krugman comments, "Government spending has continued to rise more or less on its pre-crisis trend. Revenue has plunged, because the economy is deeply depressed." Moreover, while the stimulus bill was too small, it did some good, and without that spending, the economy would be even worse.

Krugman also shows that "increased government spending" really doesn't tell the story (from link three):


On unemployment, the Bureau of Labor Statistics shows the annual average unemployment here and a more detailed breakdown here. Unemployment hasn't always been awful under Republican presidents since 1980 (although it’s worth noting that conservative David Brooks has lied about Reagan's magic economic powers on unemployment).

However, the picture is more dire when it comes to job creation and real wages. George W. Bush especially looks horrible on this front. The Washington Post supplied the chart above, in Neil Irwin's article, "Aughts were a lost decade for U.S. economy, workers":

The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth.

It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism -- there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.

There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.

And the net worth of American households -- the value of their houses, retirement funds and other assets minus debts -- has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1950s.

"This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone's well-being," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.

According to conservative dogma, giving money to the rich creates jobs, but the Bush years absolutely repudiate that. Keep in mind that those tax cuts are still in place – yet companies still aren't creating jobs now. In fact, back in July, The Washington Post reported that "Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession." And that's not counting the financial companies, which have generally made out like bandits. (Maybe it's time to try a real jobs program instead, huh? And maybe focus on the middle class?)

Reality-Based Disagreements

Reality-based conservatives on the economy do exist, but they have next to no influence in the current Republican Party. For instance, conservative Bruce Bartlett believes that supply-side tax cuts under Reagan helped combat the stagflation of the 70s, while Paul Krugman disagrees – but Bartlett also feels that the GOP has gone way too far and largely abandoned fiscal responsibility. If Bartlett and Krugman defined the typical discourse, we wouldn't be in such trouble. Of course there's room to debate among people committed to the social contract, interested in fiscal responsibility (not the same thing as fiscal conservatism) and concerned about competent governance. However, modern conservatives have shown precious little interest in reality. As Jonathan Chait recently summed up:

In 1993, conservatives unanimously predicted that Bill Clinton's tax increase on incomes over $200,000 would slow growth, reduce tax revenues, and likely cause a recession. Instead, of course, the economy boomed and revenue skyrocketed. Then George W. Bush cut upper-bracket tax rates, and conservatives predicted that this would cause the economy to grow even faster. Instead, the economy experienced the first business cycle where income was lower at the peak of the business cycle than it had been at the peak of the previous business cycle. It is rare that events so utterly repudiate an economic theory.

None of this evidence has penetrated the conservative mind to the slightest degree. Reading the right-wing press, it is exactly as true today as it was 18 years ago that reducing Clinton-era upper-bracket tax rates holds the key to economic growth. (The latest Weekly Standard editorial: The best place to combine fiscal rectitude and pro-growth economics is the tax code. "After repealing Obama-care, the second agenda item for the new GOP Congress is extending current tax rates.")

Chait wrote this because of an incident with the GOP's candidate for Senator of Pennsylvania, Pat Toomey:

Mr. Toomey says he favors making the Bush-era tax cuts permanent for all Americans — which would add $700 billion more to the deficit over 10 years than the plan advocated by President Obama to let the lower rates expire for the rich. But he also expresses a desire to reduce the deficit.

At the ironworks shop, Mr. Toomey brushed aside a question from a local reporter who pointed out that real income for American workers dropped after the Bush tax cuts, saying he did not believe the data.

Of course, Toomey can't have both, and his dishonest or delusional stance dominates in his party.

Fantasy and Bullshit

Tax cuts to the rich don't raise revenues. Tax cuts to the rich don't create jobs. Tax cuts to the rich that aren't off-set – and they were not under Reagan and George W. Bush - explode the deficit. They accomplish virtually nothing economically but funneling even more money to the rich, and increasing America's already obscene wealth inequity.

One might be able to quibble with those statements on the margins, but there's no doubt that conservative economic and fiscal policies simply do not work as advertised - and that conservatives continue to shill them regardless. As the chart above, from Tim Noah's excellent series on wealth inequity shows, all Americans have benefited economically under Democratic presidents, but really only the rich have benefited under Republican presidents. And as we examined in more depth in the Plutocrats post, the Reaganomics of the past 30 years have really only benefited the rich and the superrich, and have increased wealth inequity in America back to Gilded Age levels.

As we also considered in that post, some conservatives may sincerely believe all the crap they're shilling, some certainly know it's crap, but the majority are probably bullshitting – meaning they don't care if it's true or not. That said, bad faith is more common than not. It's common for conservatives to pretend that any plans to raise taxes on the rich means taxes will go up for the middle class. It's also common for them to ignore how unequal conservative tax plans are, as seen in this graphic (covered in an earlier post):

There's absolutely no good reason why Republicans couldn't give the middle class and poor tax cuts without giving the richest brackets massive tax cuts, but strangely, they never do. It's not as if they pitch their plan honestly, either, delineating who will get what. No Republican anywhere has said anything like, "Yes, we're giving the $30-40,000 bracket an average cut of $894, and we're giving the 1 million plus bracket an average cut of $103,835, but we believe this will help the economy." Such honesty has never happened – nor has any Republican added, "True, this may seem unfair, and this sort of tax cut for the richest Americans has never helped the overall economy in the past, but we feel good about it this time."

Most of all, conservatives withhold essential context by never discussing how massively unequal income and wealth are in America. Because income and wealth are so concentrated at the top, any realistic discussion of taxes must address this. If over 50% percent of national income is earned by the top 5 percent of the population, and 93% of the wealth is held by the top 20%, then it stands to reason that the tax rates for the top 20%, 10%, 5%, 2%, 1% and 0.1% should be much steeper than for the bottom 80%. A few extra tax brackets at the top would be a big improvement.

So why do conservatives routinely spout falsehoods about economics? I'd say there are several reasons, although they're certainly not mutually exclusive.

1. Personal Gain. They and their pals, being rich, will personally benefit and become even wealthier due to trickle-down policies.

2. Political Gain. Rich campaign donors will be happy with them if they funnel them even more money. (This may also help them land a cushy lobbyist or consultant gig after they leave office.)

3. Ideology. Running up the deficit and debt is a deliberate strategy of fiscal recklessness (sometimes called "starve the beast") which will then be used to justify to cutting the social safety net and other programs conservatives don't like. (This strategy depends on no one in power pointing out how despicable this is – but it's worked for about 30 years.)

4. Ignorance. Christine O'Donnell parrots the GOP party line on completely eliminating the estate tax. It's horrendous economic policy that would give another massive windfall to the wealthiest Americans and increase the deficit. O'Donnell's stance is probably why she has some rich supporters. Regardless, it's doubtful she understands the economics of it.

5. The Blithe, Reckless Bullshit Factor. This is the catch-all and probably the most dominant element. The GOP leadership knows this crap sells, both to their rich donors and to the rank-and-file conservatives they're hurting with these policies. The Democrats don't push back against the conservative leadership much, and the so-called liberal media rarely does.

There's plenty of evidence – besides the Bruce Bartlett article above – that conservatives are arguing in bad faith on economic issues. They either know they're being destructive and evil, or they just don't care. Unfortunately, the party that's actively screwed over the middle class for thirty years might regain power again in the midterm elections, and it'll be business as usual again.


Robin said...

Measured in constant 2005 dollars, real federal revenues rose from $968.4 billion in 1970 to $1,197.6 billion in 1980 and to $1508.7 billion in 1990. In other words, the cumulative real revenue gain was 23.7% under the high and rising tax rates of the 1970s, and 26% under the dramatic reduction in tax rates of the 1980s.

Paul Krugman looked at these same figures through his logarithmic Kaleidoscope, and concluded that “the revenue track under Reagan . . . is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.”

Financial Times columnist Martin Wolf was so awed by Krugman’s creative artwork that he imagined “the theory that cuts would pay for themselves has proved altogether wrong.”

Notice that Krugman starts his trend with 1970, which was a year of recession and falling revenue. If he had instead measured real revenue growth between the cyclical peaks of 1969 and 1979, the overall increase would have dropped to 19.5%. Note too that Krugman ends his trend with 1981 rather than 1980, while suggesting 1981 was part of the glorious Carter years:

The Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable.

The comment is strange. There was no recession in 1979, nasty or otherwise. And non-energy inflation topped 11 percent that year – before oil prices peaked in early 1980.

The continually accelerating inflation during the Carter years, 1977 to 1980, pushed more and more families into higher and higher tax brackets. It also resulted in brutal taxation of illusory, nominal capital gains and ephemeral inventory profits. As a percentage of GDP, federal taxes soared from 17.1% of GDP in 1976 to 19% in 1980 and 19.6% in 1981. Does that really look like a sustainable trend that President Reagan interrupted for no good reason?


John said...

The assumption is that the conservative movement is being fully honest about tax cuts. But it isn't in the end an economic argument. It's a mealymouthed excuse to reduce government revenue, raise debt and therefore put pressure on entitlement programs, regulation and government capacity that conservatives believe stand in the way of profit making and profit taking, presented as 'increasing wealth'. This is the thread that runs through everything from entitlement programs to states rights to minimum wage to environmental regulation and beyond. The existence of government and government programs make a different statement on where one believes society and communities should intervene to stabilize and protect the greater good.

Choosing your side is choosing your morality - whereas arguing the numbers, as Vagabond Scholar has shown, is increasingly useless; someone such as Robin will come along and dispute them on arcane methodology, or simply deny everyday realities.

The reality-based inferences remain plain: more money is going to fewer people at the expense of public and common goods. Opening entitlement programs to privatization increases the wealth of those backing movement conservatism at the expense of those providing the 'resource' - ie their pay, livelihoods and future well being. Lack of regulation increases the destructive power of individual actors in a capitalist system just as too much regulation crushes the creative power of capitalism to generate enough wealth.

By any reasonable measure, American capacity, society, quality of life and infrastructure have declined under neo-conservative policies that pile on debt and provide no real social or economic investment in return.

Jerry Critter said...

Excellent summary. Thanks for the effort.

Stephen Kriz said...

Great post! This should be required reading for every American.

ray said...

You lost all credibility with your chart from Paul Krugman. BTW, the total debt was not 13.3T when Bush left office...how convenient that the chart you used attributed the 3T of debt growth by Obama to Bush.

If you really want the facts on revenues, outlays, and the debt, please go here:


Or here:

The bottom line is that economic growth is what drives tax receipts. Raising the tax rates on the wealthy and businesses will result in reduced investment and growth.

Jerry Critter said...

Historically, economic growth is greater with higher taxes, not with lower taxes.

Jerry Critter said...

Also, the more the tax burden was reduced during the first two years of an administration, the slower the economic growth in the following six years.

In other words, a reduction in the tax burden decreases economic growth.

ray said...

Do you have any facts to support that statement?

I would say that there is strong evidence to the contrary, considering the U.S. ranking for GDP since 1980, tracking back to the massive tax cuts enacted under Reagan.


Jerry Critter said...

Thirdly, the way to shrink government is to raise taxes, not lower them.

ray said...

Your last post doesn't make sense. A presidential term is 4 years, not 8.

The Bush tax cuts were enacted in 2003...GDP grew at an annual rate of just 1.7 percent in the six quarters before the 2003 tax cuts. In the six quarters following the tax cuts, the growth rate was 4.1 percent. Economic growth remained positive until March 2007.

Jerry Critter said...

Just read the references.

Batocchio said...

Folks, thanks for stopping by. I've actually got a follow-up post in the works that addresses the Cato post that was cut-and-pasted here. I'll try to check out your links in more depth as well. Don't stop arguing on my account, but I'm afraid my blogging/commenting time is limited. If nothing else, there are a number of excellent econoblogs out there that live and breathe this stuff.

ray said...

Correlation is not causation, as other, more important factors than the tax rates affect economic growth.

Three vignettes:
Bill Clinton raised the tax rates while the economy expanded. At the same time, the internet/tech boom occurred - which had nothing to do with tax rates. And as a result of the internet/tech boom, the number of people who invested in the stock market doubled due to it being more accessible to everyone.

If you go by the charts presented, why wouldn't economists and experts try to enact the same policies as FDR? Seems like he did the best. Because if it moved FDR taxed it and the burden on the middle and lower classes was unbelievably high (mainly due to the taxes on goods).

One of the Federal bureaucracies was asked what the effect would be if the tax burden on the richest 1% of Americans was 100%. They dutifully went about calculating the massive increase in tax receipts then projected what that meant in terms of deficit reduction. Of course, their projections were totally wrong because they made the fatal assumption that an individual would continue to work if taxed at 100%. As tax rates rise, there is a disinsentive to be productive.

Jerry Critter said...

If there is no causation when raising taxes, then there is no causation when lowering taxes. Then you must admit that taxation, either up or down, is simply a red herring and just used to falsely influence people.

Peter John said...

The reason why higher tax rate on the rich is good for the economy is that most of the excess wealth that the rich have is either dead or it is used to drive speculation. Both are bad for the economy. Higher tax rate on the rich converts this "dead" money into consumption which drives economical growth. Nobody asks what happens to a country when the rich own most of the wealth. The answer is all over the world. They are called thrid world countries.