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The vast majority (almost 60%) of what the Federal government spends is entitlement and other mandatory spending. This money is spent regardless of how much revenue comes in because the law says it must be spent. As such, even more than just the raw dollars spent, this contributes FAR more to deficits than discretionary spending, as no one asks 'can we afford this?'The first thing I'd do, before cutting taxes, is to rein in the deficit spending. If we're going to go hog wild on spending, then let's man up and decide which taxes are going to go up. Relying on the federal reserve to fix things is simply boosting the hidden tax of inflation.
The vast majority (almost 60%) of what the Federal government spends is entitlement and other mandatory spending. This money is spent regardless of how much revenue comes in because the law says it must be spent. As such, even more than just the raw dollars spent, this contributes FAR more to deficits than discretionary spending, as no one asks 'can we afford this?'
If you want to get a handle on spending, you need to start with entitlements.
1) The Council of Economic Advisers' Report to the President, 2003: "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."
2) The chair of CEA from 2003-2005, Greg Mankiw: "Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion credible for most tax hikes, and I doubt Mr. Paulson does either."
3) He's right! Hank Paulson, Bush's last Treasury Secretary, doesn't: "As a general rule, I don't believe that tax cuts pay for themselves."
4) That opinion was shared by Andrew Samwick, Chief Economist on Council of Economic Advisers, 2003-2004: "No thoughtful person believes that this possible offset [the Bush tax cuts] more than compensated for the first effect for these tax cuts. Not a single one."...
5) ... and Edward Lazear, chair of the Council of Economic Advisers in 2007: "I certainly would not claim that tax cuts pay for themselves."
Yeah - the "tax cuts dont spur economic growth" revisionists are rather tiresome.Funny how history gets re-written and reinterpreted by those in power or by current standards.
Republicans claim to be deeply concerned about the budget deficit and the national debt, yet repeatedly demand additional large tax cuts. For example, former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, supports a balanced budget amendment to the Constitution but also wants an $8 trillion tax cut. He rationalizes this contradiction by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13:
“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”
In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.
The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.
This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.
Republicans also assert that the tax cuts of the George W. Bush years paid for themselves. On July 13, 2010, Senate Minority Leader Mitch McConnell said that there was no net revenue loss from any of the Bush tax cuts, in defense of an earlier comment by Senator John Kyl that all spending increases must be offset so as not to increase the deficit, but tax cuts need 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.”This is a view not shared by economists who worked for Bush. For example, Alan Viard, senior economist at the Council of Economic Advisers during Bush’s first term, told the Washington Post in 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, also told the Post, “As a matter of principle, we do not think tax cuts pay for themselves.” On September 28, 2006, Stanford economist Edward Lazear, chairman of the CEA in Bush’s second term, testified before the Senate Budget Committee:
“Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data…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.”
The truth is that no serious Republican economist has ever said that a tax rate reduction would recoup more than about a third of the static revenue loss. The following studies represent the generally accepted view among Republican economists.
● A 2005 Congressional Budget Office study during the time that Republican economist Doug Holtz-Eakin was 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 actual revenue loss to be larger than the static revenue loss.
● In a 2006 article published in the Journal of Public Economics, Harvard economist Greg Mankiw, who chaired the CEA during Bush’s first term, estimated the long-run revenue feedback from a cut in taxes on capital 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.
For the record, the CBO recently concluded that the Bush tax cuts reduced federal revenues $2.8 trillion between 2002 and 2011.
Table 2.1 from this source does show that total Federal receipts rose from around $517 billion in 1980 to around $1031 billion in 1990, which is what Pawlenty is talking about. But note that this includes payroll taxes which rose from around $158 billion in 1980 to $380 billion in 1990 a 141% nominal increase. Other Federal taxes (mainly individual income and corporate profits) taxes rose from $359 billion in 1980 to $652 billion in 1990, which represents a 81% increase. A little reminder for Governor Pawlenty we increased payroll tax rates during the 1980s.
Bruce Bartlett reminded us that prices rose during the 1980s in fact the GDP deflator was over 51% higher in 1990 than it was in 1980. In 1980 dollars, other Federal revenues were only $431 billion. So in real terms, revenues rose only by 20%. Had we left tax rates alone and had we enjoyed the 3.5% average annual growth rates that we had for the period from 1951 to 1980, real revenue growth should have exceeded 40%. But we not only had lower tax rates but we also enjoyed lower real GDP growth during this period. Any serious student of fiscal policy knows this.
The wholesale voodization of the GOP is a sight to behold; apparently the nonsense about the Reagan tax cuts having led to a vast rise in revenue is now something one must claim to believe. Anyway, a quick note about Federal revenue history.
The way I like to look at it is to compare business cycle peaks. We know that recessions reduce revenue and recoveries raise it. So its much more informative to look at peaks (not troughs: all happy economies are more or less alike, each unhappy economy is unhappy in its own way). Oh, and since 1979-82 was really one double-dip recession, I just use 1979 and ignore the 80-81 recovery.
So heres the rate of growth of real per capita federal revenues between successive business cycle peaks:
"If Hitler had not come along, Franklin Roosevelt would have left office in the beginning of 1941 with an unemployment rate in excess of 15% and an economic recovery strategy that had basically failed."
cuts in the individual income tax rates do not pay for themselves, ... The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax. ...
Most tax reductions do not completely pay for themselves with higher revenue, but they do add to economic growth and incomes, creating a significant net benefit to the public. For example, the across-the-board income tax rate reductions and elimination of the AMT recover only about 32 percent and 19 percent of their static revenue losses, but add $2.35 and $1.09 respectively to peoples pre-tax incomes for each dollar of revenue loss to the government (raising after-tax incomes by the economic gains plus the tax cut).
Nonetheless, some tax reductions are unusually effective in raising incomes and recovering revenues. Capital formation is highly sensitive to after-tax earnings. Some tax changes that aim directly at capital formation can trigger enough additional plant building, equipment purchasing, and hiring to come close to, or even more than offset, the initial revenue reduction. These include reductions in the estate tax and steps that offset some of the double taxation of corporate income, including lower corporate tax rates and lower taxes on capital gains (which hit retained after-tax corporate earnings) and dividends (which are paid out of after-tax corporate earnings). Our results indicate that these tax cuts do pay for themselves, meaning they benefit the federal government and the rest of the economy, including federal income taxpayers, low-income people who owe no federal taxes, and state and local governments.
One must count revenue from all sources to determine the revenue effect of a particular tax change. For instance, a lower corporate tax rate does not usually raise corporate tax revenue. Rather, it encourages the creation and use of a larger amount of plants, equipment, commercial buildings, and rental housing in the United States. This added physical capital boosts productivity, wages, and employment, which results in added personal income and additional tax revenue from the higher incomes and payroll. Federal excise taxes and tariffs also rise with the added growth in income and consumption. State and local governments benefit from higher sales and income tax receipts which help their budgets as well.
here's a graph, if you're into that sort of thing...
Attributing the growth in revenue to the tax cuts is false causality. The US economy has grown by about 3% per year since WWII. Growth was higher in the 1960s when taxes were rising. Growth was also higher in the 1990s when Clinton raised taxes. So the idea that higher taxes has lead to more revenue over the past five years does not square with the simple fact that at other times, even more revenue came into the government coffers when taxes were going up and growth was stronger than today.
The argument that revenues are up because taxes are down severely underestimates the American people. It implies that Americans are lazy, and that they only respond to tax cuts. That's silly. Government revenues are going to rise when the economy grows. The economy is going to grow because of the industriousness and innovation of the American people, and has done so over time, not because the marginal tax rate went down 3%.
Oh, and the other problem with that graph - especially when it is promoted by economists (who are obviously politically biased) - is that, as any economist knows, fiscal policy occurs with a lag. The fact that revenues began rising at about the time the legislation is passed refutes the idea that the tax cuts caused the economy to start growing again because the fiscal stimulus doesn't occur until 6-18 months after it is initiated.
cuts in the individual income tax rates do not pay for themselves, ... The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax. ...
Most tax reductions do not completely pay for themselves with higher revenue, but they do add to economic growth and incomes, creating a significant net benefit to the public. For example, the across-the-board income tax rate reductions and elimination of the AMT recover only about 32 percent and 19 percent of their static revenue losses, but add $2.35 and $1.09 respectively to peoples pre-tax incomes for each dollar of revenue loss to the government (raising after-tax incomes by the economic gains plus the tax cut).
Nonetheless, some tax reductions are unusually effective in raising incomes and recovering revenues. Capital formation is highly sensitive to after-tax earnings. Some tax changes that aim directly at capital formation can trigger enough additional plant building, equipment purchasing, and hiring to come close to, or even more than offset, the initial revenue reduction. These include reductions in the estate tax and steps that offset some of the double taxation of corporate income, including lower corporate tax rates and lower taxes on capital gains (which hit retained after-tax corporate earnings) and dividends (which are paid out of after-tax corporate earnings). Our results indicate that these tax cuts do pay for themselves, meaning they benefit the federal government and the rest of the economy, including federal income taxpayers, low-income people who owe no federal taxes, and state and local governments.
One must count revenue from all sources to determine the revenue effect of a particular tax change. For instance, a lower corporate tax rate does not usually raise corporate tax revenue. Rather, it encourages the creation and use of a larger amount of plants, equipment, commercial buildings, and rental housing in the United States. This added physical capital boosts productivity, wages, and employment, which results in added personal income and additional tax revenue from the higher incomes and payroll. Federal excise taxes and tariffs also rise with the added growth in income and consumption. State and local governments benefit from higher sales and income tax receipts which help their budgets as well.
Simulating the Economic Effects of Romney's Tax Plan | Tax Foundation
As you can see, total and per capita income tax revenues adjusted for inflation were lower in 2008 than they were at the end of 2001.
tax.com: Tax Revenues: Awful, Any Way You Look at the Numbers
I must admit that I used to believe that tax cuts could pay for themselves;
I must admit that I used to believe that tax cuts could pay for themselves;
they absolutely can. For example, you reduce the capital gains tax on venture capitalists, they have more money to fund more new ventures like Apple Google Intel and Facebook and the government has tons and tons of new revenue for eternity!!
There is no tax on investing. Only on gains at the end of an investment when it is sold.
Investors do not reduce investing due to capital gains. I thought the market would soar when Bush cut capital gains tax in half, but it did not. The market & investment went down & money flowed into housing.
Capital gains should be taxed just like ordinary income.
Once you earn above standard deduction amount you should have to pay just like earned income. This tax money goes to pay someone else who will in turn invest it just as the tax payer would have. the investment is not lost.
One of the truly most bizarre and surreal aspects of the American political landscape is that, no matter what the fiscal situation may be, so many Republicans believe that cutting taxes increases revenues.
Rudy looks like an idiot when he says stuff like this. The problem is that so many of the base believe it to be the case.
Mr. Giuliani and the Tax Fairy"I KNOW THAT reducing taxes produces more revenues," Republican presidential candidate Rudolph Giuliani declares in a new television ad launched Thursday. "Democrats don't know that. They don't believe it."
There's a good reason for that: It's not true. Produces more revenue than what? Than if taxes had not been cut? No -- 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.
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. He's not alone. In the 2003 Economic Report of the President, the council concluded that "although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity."
How unlikely? 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.
Personally, I think the idea that we have to pay for tax cuts is the single most bizarre and surreal aspect of the political aspect. Anyone that thinks we need to pay for tax cuts probably refuses to shop at any store that has a 50% off sale.
