Supply-Side Boom

[Lefty Wilbury]

the link in the article explains it best

http://www.investors.com/editorial/IBDArticles.asp?artsec=20&issue=20051209

Supply-Side Boom
Posted 12/9/2005

Fiscal Policy: A picture is worth a thousand words, and nowhere is that truer than in the debate over supply-side claims that tax cuts lead to higher revenues.

We were struck by a chart that Treasury Secretary John Snow used last week when he presented the administration's case for making the 2003 tax cuts permanent.
http://www.investors.com/images/editimg/issues1212.gif

For Democrats opposed to the cuts, no argument has been more potent than that tax cuts somehow "cost" the government money — and thus make deficits worse. Snow's chart, shown below, puts the lie to that argument.


In fact, the supply-siders are right: Revenues rise after tax rates are reduced. Federal revenues bottomed at $1.8 trillion just as Bush signed his bill; since then, they've risen 19.4% to $2.15 trillion, an all-time high.

A big reason is that tax avoidance recedes along with rates. When top personal rates are high, the rich find ways to pay less. That's why our tax code is 55,000 pages thick. When rates are lower and flatter, such behavior disappears.

This also explains why the richest Americans' share of all income taxes paid has soared to 34.27% from 19.05% in 1980 even though their average income-tax rate has fallen by roughly a third — from 34.47% to 24.31% in 2003.

More important, however, is the impact tax cuts have on the economy. Since May 2003, when Bush's major plan of tax cuts on both capital and income took effect, the economy has been on a tear. It's virtually impossible to argue the two aren't linked.

In the nine quarters before the tax cuts, GDP grew at an average rate of 1.1%. In the nine quarters since, it's averaged 4.5% — even in the face of punishingly higher interest rates and oil prices.

We also hear how all the tax cuts are going to the "rich." Again, not true. A surge in entrepreneurship, jobs, income and wealth has made all of us richer and more secure.

As Snow noted in his speech Thursday, 57 million Americans now own stocks — or about half of all households. Yet, the median income for shareholders is a very un-Rockefeller-like $65,000.

Many of those investors are retired, and have seen their incomes go up along with dividends. This year, shareholders will deposit or reinvest $201 billion in payouts — up 36% from 2002, the year dividend tax cuts went into effect.

Entrepreneurs are doing well, too. Fed data out Friday showed Americans' net worth is now $51 trillion — about 4.6 times real GDP. What's most impressive is that includes $6.6 trillion of equity in "noncorporate" — or small, entrepreneurial — businesses, up 32% since the start of 2003.

The House passed legislation last week that will trim growth in federal spending by $50 billion but keep most of the 2003 tax cuts intact. The Senate has identified $36 billion in spending cuts but wants to let the tax cuts expire.

The House version must prevail. The economy is surging, and the budget deficit is now shrinking as a share of GDP. Getting rid of the tax cuts that made all this possible would be the height of folly.

 

[Mariner]

shows how rosy the "macro" picture is while ignoring the complete lack of "trickle down." Sure, corporations are doing great, and so are people who own stocks. So why has poverty risen (one in five American children is now living in poverty)? Why are wages for workers stagnant or even declining? What about the severe declines in pensions, medical insurance, and other benefits? (The number of uninsured has grown during the Bush years, and he has no plan to deal with it.) There are 600,000 homeless American school children. These types of concerns seem to go completely under the rah-rah economist's radar.

This is a great economy if you're a CEO, or a reader of the Wall Street Journal, taking home an average $200,000 per year. It's a lousy economy if you work for Wal-mart. This is where supply-side flunks. The Clinton economy, with moderate taxation and true fiscal restraint, was far better for those at the bottom.

Mariner.

 

[BaronVonBigmeat]

shows how rosy the "macro" picture is while ignoring the complete lack of "trickle down." Sure, corporations are doing great, and so are people who own stocks. So why has poverty risen (one in five American children is now living in poverty)? Why are wages for workers stagnant or even declining?

It might have something to do with inflation.

 

[Annie]

It might have something to do with inflation.

Sorry the link didn't work. What was your point? You forgot to state it.

 

[Psychoblues]

I'll give it to you in simple terms. By overfeeding the horses the starving sparrows will survive through the undigested corn in the droppings of the overfed horses. Get it?

Psychoblues

Sorry the link didn't work. What was your point? You forgot to state it.

 

[rtwngAvngr]

shows how rosy the "macro" picture is while ignoring the complete lack of "trickle down." Sure, corporations are doing great, and so are people who own stocks. So why has poverty risen (one in five American children is now living in poverty)? Why are wages for workers stagnant or even declining? What about the severe declines in pensions, medical insurance, and other benefits? (The number of uninsured has grown during the Bush years, and he has no plan to deal with it.) There are 600,000 homeless American school children. These types of concerns seem to go completely under the rah-rah economist's radar.

This is a great economy if you're a CEO, or a reader of the Wall Street Journal, taking home an average $200,000 per year. It's a lousy economy if you work for Wal-mart. This is where supply-side flunks. The Clinton economy, with moderate taxation and true fiscal restraint, was far better for those at the bottom.

Mariner.

You mean the american version of poverty? Where people still have cars, color televisions, brand new tennis shoes, cell phones, and state funded healthcare?

 

[Toro]

December 31, 2005
The Myth That Tax Cuts Pay for Themselves

This will not please the tax cut fanatics and proponents of the Laffer curve. Here's a link to the report from the CBO discussed in this Economic View by Daniel Altman from the New York Times:

Economic View A Bit of Doodling About a Tax-Cut Danger, by Daniel Altman, Economic Scene, New York Times: Early last month, without much fanfare, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." ... t may be one of the most important government publications in years. As Douglas J. Holtz-Eakin, the budget office's director, writes ..., most predictions of the effects of tax-rate changes "do not include the budgetary impact of any possible macroeconomic effects of tax policies." In other words, the predictions don't take into account how tax cuts could affect the overall size of the economy. It is this omission - one often cited by proponents of tax cuts, especially in the White House - that the paper tries to correct.

The author ..., Ben Page, estimates estimates how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue. ... Mr. Page's [results] vary widely depending on his assumptions ... But even within their range, the results answer the fundamental question posed by the Laffer Curve. ... One motivation for Mr. Reagan's tax cuts was a guess that the United States was on the right side of the curve - that is, that lowering rates would actually yield more tax revenue over all. Some recent statements by Joshua B. Bolten, President Bush's current budget director, seem to indicate that he still believes this to be true, though rates are much lower now than when Mr. Reagan took office in 1981. ...

The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). ...

Link

 

[ScreamingEagle]

The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). ...

Mr. Page is comparing the receipts of today with the receipts during the bubble years that caused the recession? What does that prove? What is wrong with being "firmly planted on the left side of the Laffer Curve"?

 

[Toro]

Somebody want to post a study confirming that the US economy is on the right side of the Laffer Curve? Considering that the deficit exploded after Reagan cut taxes, it closed after Slick Willie raised taxes, then opened again when Bush cut taxes, I think not. Seems pretty obvious.

 

[MtnBiker]

Tax revenues and spending are two seperate functions.

The Laffer curve only deals with tax collection, not government spending.

 

[Toro]

There are two arguments to the Laffer Curve currently that apply. First, in highly taxed markets, decreasing taxes will increase total government revenues. For example, during the 1970s, some forms "unearned income", was taxed at a rate of 98% in the UK, which applied primarily to some forms of rental housing. Also, when Saskatchewan cut the royalties on oil exploration in the 1980s, exploration exploded and so did tax revenue, even though oil prices had fallen. However, total tax take in the US is nowhere near such levels. Second, cutting tax rates almost certainly increases the marginal unit of GDP and thus tax collected per unit of GDP. So, for example, if GDP is 200 and taxes are 100, if taxes are cut from 50% to 25%, GDP will rise (in time) to, say 250, and thus taxes will not be 50 but rather 62.5.

 

[ScreamingEagle]

Somebody want to post a study confirming that the US economy is on the right side of the Laffer Curve? Considering that the deficit exploded after Reagan cut taxes, it closed after Slick Willie raised taxes, then opened again when Bush cut taxes, I think not. Seems pretty obvious.

What does the deficit have to do with the Laffer curve? Isn't the deficit more related to the amount of spending being done?

There are two arguments to the Laffer Curve currently that apply. First, in highly taxed markets, decreasing taxes will increase total government revenues. For example, during the 1970s, some forms "unearned income", was taxed at a rate of 98% in the UK, which applied primarily to some forms of rental housing. Also, when Saskatchewan cut the royalties on oil exploration in the 1980s, exploration exploded and so did tax revenue, even though oil prices had fallen. However, total tax take in the US is nowhere near such levels. Second, cutting tax rates almost certainly increases the marginal unit of GDP and thus tax collected per unit of GDP. So, for example, if GDP is 200 and taxes are 100, if taxes are cut from 50% to 25%, GDP will rise (in time) to, say 250, and thus taxes will not be 50 but rather 62.5.

Apply to what? What is your point?

 

[Toro]

What does the deficit have to do with the Laffer curve? Isn't the deficit more related to the amount of spending being done?

There are two sides of the equation to the deficit - revenues and spending. If revenues go down, the deficit goes up if spending is held the same. What the Laffer curve implies is that if a country is on the right side of the curve and a country is in deficit, if you cut taxes, you will generate more revenue and close if not eliminate the deficit, assuming spending stays constant. This is what was sold to the American people in the 1980s. It was wrong.

Today, I read editorials by supply-siders about how the tax cuts are "working". That's true to some extent. However, these always seem to fail to point out that government spending has soared under the "conservative" Bush, how government spending as a percentage of the economy is higher under Bush than under Clinton, even after the increases in defense spending. I'm sure Keynes would approve.

Apply to what? What is your point?

As it applies to real world examples where government revenue rises to generate the marginal loss from lower tax rates.

The Laffer curve, as picture above, is, of course fundamentally wrong in that it shows the government will receive no revenue at a 100% tax rate. That's false.

Here's a study by the federal reserve on the effects of the tax cuts

http://www.federalreserve.gov/pubs/feds/20.../200532abs.html

Finance and Economics Discussion Series

The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data
Julia Lynn Coronado, Joseph P. Lupton, and Louise M. Sheiner
2005-32


Abstract: The Jobs and Growth Tax Relief and Reconciliation Act of 2003 has been described as textbook fiscal stimulus. Using household survey data on the self-reported qualitative response to the tax cuts, we estimate that the boost to aggregate personal consumption expenditures from the child credit rebate and the reduction in withholdings raised the average level of real GDP in the second half of 2003 by 0.2 percent and by 0.3 percent in the first half of 2004. We also show that households in the survey were well aware of their tax cuts and tended to spend equally out of the child credit rebate and the reduced withholdings, a result that is contrary to the conventional wisdom.

One last thing - I think we should be careful when politicians and ideologues try to ascribe too much credit or blame to economic performance. I'm a big believer in the American economy due, primarily, to the nature of the American people. That's a bigger compliment than assigning credit to politicians.

To bolster my argument, here is total annualized US GDP growth and total annualized government spending growth since the Depression. Its a little skewed since we really should take a look at per capita, but frankly, I'm a little lazy and don't feel like doing so at the moment. But the net effect would be to lower the numbers from the 1950s and 1960s a bit.

I ran the numbers from the US Bureau of Economic Analysis

http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid

US growth rates, annualized

1930-39 0.9%
1940-49 5.6%
1950-59 4.1%
1960-69 4.4%
1970-79 3.2%
1980-89 3.0%
1990-99 3.1%
2000-04 2.6%

Looking at different time periods though, we see a little different picture

1935-44 9.9%
1945-54 1.3%
1955-64 3.8%
1965-74 3.7%
1975-84 3.0%
1985-94 3.0%
1995-04 3.2%

Government spending

1930-39 5.0% (War, New Deal)
1940-49 7.5% (War)
1950-59 5.8% (GOP President)
1960-69 3.8% (Democrat)
1970-79 0.5% (Nixon/Carter, decleration from Vietnam war spending)
1980-89 3.1% (Reagan/Bush)
1990-99 1.3% (Slick Willie, Dem)
2000-04 3.0% (W, GOP)

So much for the GOP being the stewards of the purse strings. Spending has accelerated faster under Republican administrations since WWII than Democrat.

Or

1946-74 3.4%
1975-04 2.3%

 

[ScreamingEagle]

There are two sides of the equation to the deficit - revenues and spending. If revenues go down, the deficit goes up if spending is held the same. What the Laffer curve implies is that if a country is on the right side of the curve and a country is in deficit, if you cut taxes, you will generate more revenue and close if not eliminate the deficit, assuming spending stays constant. This is what was sold to the American people in the 1980s. It was wrong.

True. However, you implied earlier that the tax cuts had no effect on the deficit. My point was that spending is what dampened the Reagan tax cuts and the Bush tax cuts. Reining in the spending is what made the Clinton tax increase look good.

Aren't there two points on the Laffer curve, one on each side, that are identical as far as how much revenue can be produced? Which side of the curve do you think we are operating from today?

Today, I read editorials by supply-siders about how the tax cuts are "working". That's true to some extent. However, these always seem to fail to point out that government spending has soared under the "conservative" Bush, how government spending as a percentage of the economy is higher under Bush than under Clinton, even after the increases in defense spending. I'm sure Keynes would approve.

Gotta agree that spending was soaring out of control although recently there's been attempts to brake it.

"In the fiscal 2006 appropriations cycle, Congress passed administration-proposed spending cuts worth $6.48 billion, according to a fact sheet released recently by the Office of Management and Budget.

With the targeted budget cuts and an across-the-board spending cut of 1 percent affecting most agencies, the 2006 appropriations bills hold discretionary spending growth to 1.1 percent -- below the rate of expected inflation, OMB said. "
http://www.govexec.com/dailyfed/0106/010306m2.htm

As it applies to real world examples where government revenue rises to generate the marginal loss from lower tax rates

The Laffer curve, as picture above, is, of course fundamentally wrong in that it shows the government will receive no revenue at a 100% tax rate. That's false.

Here's a study by the federal reserve on the effects of the tax cuts

http://www.federalreserve.gov/pubs/feds/20.../200532abs.html

One last thing - I think we should be careful when politicians and ideologues try to ascribe too much credit or blame to economic performance. I'm a big believer in the American economy due, primarily, to the nature of the American people. That's a bigger compliment than assigning credit to politicians.

To bolster my argument, here is total annualized US GDP growth and total annualized government spending growth since the Depression. Its a little skewed since we really should take a look at per capita, but frankly, I'm a little lazy and don't feel like doing so at the moment. But the net effect would be to lower the numbers from the 1950s and 1960s a bit.

I ran the numbers from the US Bureau of Economic Analysis

http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid

US growth rates, annualized

1930-39 0.9%
1940-49 5.6%
1950-59 4.1%
1960-69 4.4%
1970-79 3.2%
1980-89 3.0%
1990-99 3.1%
2000-04 2.6%

Looking at different time periods though, we see a little different picture

1935-44 9.9%
1945-54 1.3%
1955-64 3.8%
1965-74 3.7%
1975-84 3.0%
1985-94 3.0%
1995-04 3.2%

Government spending

1930-39 5.0% (War, New Deal)
1940-49 7.5% (War)
1950-59 5.8% (GOP President)
1960-69 3.8% (Democrat)
1970-79 0.5% (Nixon/Carter, decleration from Vietnam war spending)
1980-89 3.1% (Reagan/Bush)
1990-99 1.3% (Slick Willie, Dem)
2000-04 3.0% (W, GOP)

So much for the GOP being the stewards of the purse strings. Spending has accelerated faster under Republican administrations since WWII than Democrat.

Or

1946-74 3.4%
1975-04 2.3%

At least our economy is growing again.

"Barring an unforeseen, catastrophic event, 2006 is shaping up as a copy of '05 -- steady growth and pretty good times," Bill Sirakos, chief economist at Frost Bank in San Antonio, said of the national outlook. He notes that the U.S. economy has grown at 3 percent or better for 10 consecutive quarters, something not seen even during the 1990s, and says that should continue as long as inflation doesn't heat up and cause the Federal Reserve to push interest rates sharply higher."
http://www.dfw.com/mld/dfw/13538341.htm

What do you consider to be the optimal tax rate?

 

[Mariner]

had a completely bizarre editorial page piece last week, where they celebrated the large gains in family income of the past three decades.

They completely neglected to mention the main reason for these gains: women entering the workforce. Instead, they made it seem that American families are doing great financially.

If they had shown the curve for individual wages rather than family income, adjusted for inflation, it would be flat or even slightly falling. The New York Times reported today that the wages at the bottom are at their lowest level relative to average wages in 56 years. And they are at their lowest level compared with CEO wages since the days of the robber barons.

What does Congress have against raising the minimum wage? The Times reported that even 70% of conservatives support this. Who can live on $5 an hour? What answer do the trickle-down people have to the lack of trickle down during 6 years of Bush so far? The end result is children growing up in poverty--and those children share the same streets with all the rest of us, so isn't it in all our interest to make sure they are well-educated, well-nourished, and provided basic health care?

Mariner.

 

[rtwngAvngr]

had a completely bizarre editorial page piece last week, where they celebrated the large gains in family income of the past three decades.

They completely neglected to mention the main reason for these gains: women entering the workforce. Instead, they made it seem that American families are doing great financially.

If they had shown the curve for individual wages rather than family income, adjusted for inflation, it would be flat or even slightly falling. The New York Times reported today that the wages at the bottom are at their lowest level relative to average wages in 56 years. And they are at their lowest level compared with CEO wages since the days of the robber barons.

What does Congress have against raising the minimum wage? The Times reported that even 70% of conservatives support this. Who can live on $5 an hour? What answer do the trickle-down people have to the lack of trickle down during 6 years of Bush so far? The end result is children growing up in poverty--and those children share the same streets with all the rest of us, so isn't it in all our interest to make sure they are well-educated, well-nourished, and provided basic health care?

Mariner.

IF you libs instituted your policies, even as families we wouldn't be doing well. The exorbitant taxation would discourage new investment and job creation. The economy would contract. Oh but you're an environmentalist. You don't REALLY care about people, do you?

 

[Toro]

Screaming Eagle.

I have no idea what the optimal tax is. I favour less government for the most part, and thus lower taxes.

Mariner

Wages per capita have been rising fairly consistently over the past several decades. Its true that females have been entering the workforce, but per capita wages grew faster during the past 3 decades when women were entering the workforce compared to the previous 3.

Total US nominal wages paid

http://www.bea.doc.gov/bea/dn/nipaweb/IndexW.htm#W - Wages and salary disbursements, Table 2.1

in billions

1929 $50.5
1940 $49.9
1950 $147.2
1960 $272.9
1970 $551.6
1980 $1,377.7
1990 $2.754.0
2000 $4,892.4
2004 $5,389.4

Annual growth in total nominal wages by decade

1930s -0.9%
1940s 11.4%
1950s 6.8%
1960s 7.2%
1970s 9.3%
1980s 7.5%
1990s 5.6%
2000s 3.8%
Total 6.3%

Annual growth in total national income by decade. This includes rent, dividends, interest payments, and other returns to capital.

1930s -1.5%
1940s 11.0%
1950s 6.6%
1960s 7.1%
1970s 10.2%
1980s 8.3%
1990s 5.5%
2000s 4.5%
Total 6.4%


Real wage growth

(You'll have to adjust for inflation yourself. http://www.bea.doc.gov/bea/dn/nipaweb/IndexW.htm#W - Price indexes, Table 1.1.4)

1930s 1.2%
1940s 5.7%
1950s 4.3%
1960s 4.7%
1970s 2.5%
1980s 2.7%
1990s 3.3%
2000s 1.6%
Total 3.3%

Real total income growth

1930s 0.5%
1940s 5.3%
1950s 4.1%
1960s 4.6%
1970s 3.4%
1980s 3.4%
1990s 3.2%
2000s 2.2%
Total 3.4%


Real per capita wage growth.

(You'll have to adjust the per capita figures yourself http://www.bea.doc.gov/bea/dn/nipaweb/IndexW.htm#W - Population Growth, Table 7.1)

1930s 0.4%
1940s 4.3%
1950s 2.5%
1960s 3.3%
1970s 1.4%
1980s 1.7%
1990s 2.0%
2000s 0.6%
Total 2.1%

Real per capita total income growth.

1930s -0.2%
1940s 4.0%
1950s 2.3%
1960s 3.2%
1970s 2.3%
1980s 2.5%
1990s 1.9%
2000s 1.2%
Total 2.2%


Looked at another way, real per capita annualized wage growth

1935-1944 9.3%
1945-1954 -0.5%
1955-1964 1.9%
1965-1974 2.7%
1975-1984 1.1%
1985-1994 1.6%
1995-2004 2.1%

or

1945-1974 1.4%
1975-2004 1.6%

or

1980-2004 1.7%

Real per capita annualized income growth

1935-1944 8.1%
1945-1954 0.0%
1955-1964 2.1%
1965-1974 3.1%
1975-1984 2.3%
1985-1994 1.8%
1995-2004 2.1%

1945-1974 1.7%
1975-2004 2.1%

or

1980-2004 2.1%


Here is the labour participation survey

ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt

Its pretty much as one would expect. The percentage rose as more women entered the workforce. Then the rate of growth slowed in the mid-to-late-80s.

Percentage of the population participating in the labour force

1970 - 60.4%
1975 - 61.2%
1980 - 63.8%
1985 - 64.8%
1990 - 66.5%
1995 - 66.6%
2000 - 67.1%
2004 - 66.0%


Percentage of the population employed

1970 - 57.4%
1975 - 56.1%
1980 - 59.2%
1985 - 60.1%
1990 - 62.8%
1995 - 62.9%
2000 - 64.4%
2004 - 62.3%


"Civilian noninstitutional population" is the population who are not children or senior citizens.

 

[ScreamingEagle]

Great commentary re the Laffer curve/tax cuts/CBO report:

Where are we on the Laffer Curve?
Posted by: Jon Henke on Tuesday, January 03, 2006

It's a major question with important policy implications and it comes up every time politicians talk tax cuts. Yet nobody actually knows the answer; to be fair, the precise answer may be unknowable. Are we on the left or right side of the Laffer Curve? And where, exactly, is the inflection point?

Dale has touched on this subject before in various posts.

Republicans would like to tell us that—as Reagan proved—cutting taxes increases revenue, so it'll all come out in the wash. The trouble with that argument, however, is that it assumes that we are still way over on the right side of the equilibrium point as far as taxes are concerned. Reagan cut taxes at a time when tax rates were indisputably on the right side of the Laffer Curve. Arguing that we're still there today, when, two decades later, we are almost precisely where taxes were in 1982, strikes me as a pretty foolish argument. I think we are at best spot on the equilibrium point, and more likely a bit to the left of it. And I wouldn't argue that was a bad thing, or that additional tax cuts wouldn't be nice if we reduced spending at the same time.

It's perfectly correct to argue that a right side of the Laffer Curve exists; it's another thing entirely to permanently maintain that we are on the right side and that tax cuts will continue to increase revenue, as many Supply Siders have done.

Now, helpfully, there is some research on the matter, estimating "how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue". Or not, as the case may be...

Early last month, without much fanfare, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." ... The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve.

Recent empirical evidence substantiates this, author Daniel Altman notes, pointing to the fact that "federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion)."

You can read a PDF of the CBO report here. Now, on to the complexities.

Arguing that an across-the-board tax cut of 10% will not increase tax receipts is not the same as arguing that 1) no tax cuts will increase revenue, 2) that tax cuts should not be pursued in certain instances regardless of their effect on revenue, or 3) that tax cuts are bad.

With theoretical and historical evidence that we're on the left side of the Laffer Curve — and "starve the beast" looking like a perfectly good theory ruined by reality — there seem to be only three legitimate arguments for tax cuts...
(1) The counter-cyclical "stimulus" argument, employed during recessions.


(2) Tax Efficiency: while income taxes as a whole may be on the left side of the Laffer Curve, some brackets or categories of taxes may, in fact, still be on the right side of the curve (temporarily or permanently); it might also be more profitable to reorganize the tax code — e.g., targeting consumption rather than savings, or vice versa — to reduce the economic distortions created by taxes.

Matt McIntosh put this well in a comment to a recent post, noting that:

"Cutting marginal tax rates on capital, for example, when combined with a modest increase in the income tax would increase the government’s budget while simultaneously making people better off. Once we move beyond this kind of facile "tax cuts GOOD!", "no, tax cuts BAD!" stuff and actully get into the nitty grity details, things aren’t as simple as either side would like them to be."

The 3rd argument for tax cuts — freer markets, more limited government, more individual freedom — is the best as far as I'm concerned, but it requires corresponding reductions in spending, or else it's simply not a tax cut in any ultimately meaningful sense of the word.


http://www.qando.net/details.aspx?Entry=3180

 

[Toro]

I agree that tax cuts should be accompanied by cuts in spending, unless we're in a recession. The spending cuts can happen when we come out of a recession.

 

[Mariner]

You have to take into account not only inflation, but also the gradual erosion of benefits such as health care and pensions, and the lack of movement in the minimum wage. By those standards, wages for workers in the bottom half of the economy are stagnant or even falling over the past decade, while CEOs and the leisure-investing class have seen vast booms. Bush's economy seems designed to create a fat leisure class.

Personally, I think that what no one wants to admit is that in a truly laissez-faire economy, people with money and property rapidly get more and more of it. This fact was covered up in America by several forces--first, the government created a vast farming middle class via homesteading (forty acres and a mule, free from the government). This was a type of welfare or social-improvement program, yet conservatives rarely refer to it as such. Second, we protected our manufacturing with tariffs. You couldn't buy a Japanese car in 1960. These tariffs allowed companies like GM or textile companies to pay their employees well, and give them good benefits. Third, we had redistributive taxation, in which people making a lot of money a higher percentage, and therefore a vastly higher amount, in taxes.

All three of these conditions (along with many others, such as the GI bill, which sent many lower-class people to college for the first time; their kids then went to graduate school for the first time) undid the historical robber baron/peon worker result of capitalism in the Victorian age. All three of these conditions have now been reversed, and as a result, the wealthy are getting wealthier while the poor get poorer once more. Do we really want to live in a country where the top 1% owns most of our wealth? Already, th top 10% own 100 times more per person than the bottom 50%.

I think conservatives need to face the fact that without redistributive taxation policies, or other ways of supporting the working poor, capitalism simply does not take care of these workers--especially in a global economy, where cheaper labor can be found abroad.

Trickle-down is not working. This is the most anemic recovery of the past 30 years. Job growth is half what it should be at this point in an economy. Why? Because the CEO class is keeping the money for themselves, not re-investing it adequately in their companies. (The Wall Street Journal even ran a piece urging CEO's to reinvest rather than taking profits for themselves a couple of months ago.) Shareholders and management are doing great, but the average worker is sliding slowly downhill. In what kind of recovery does poverty rise?

Today's NYT lead editorial:

"Responding to yesterday's government report showing paltry job creation in December, Treasury Secretary John Snow urged Americans not to overreact to one month's snapshot, but to focus on the bigger picture. But that picture is not so pretty.

In 2005, the economy added about 2 million jobs. At this point in the last recovery, the yearly job-gain total was 3.5 million.

The longer view is even uglier. Job growth in the current period is the worst by far of the four comparable economic upturns since the 1960's: 2.7 percent versus the 7.8 percent tallied in the weakest of those earlier recoveries.

It's little wonder, then, that President Bush cherry-picked his way through the latest economic figures in his speech yesterday before the Economic Club of Chicago, rattling off numbers without context. The president's prescription - more tax cuts - has failed in the past to create a robust job market and is still not the right answer.

For the past two years, average hourly wages and weekly salaries have been flat or falling. Americans' borrowing binge has masked the decline in earning power, but good jobs and rising wages are essential for widespread prosperity. Without them, economic growth has become increasingly concentrated among corporations, shareholders and the top 20 percent or so of earners. The holiday shopping season illustrates this situation: retailers that cater to lower- and middle-income shoppers, like Wal-Mart, Sears and Kohl's had disappointing results, while higher-end chains, like Neiman Marcus and Nordstrom, thrived."

www.nytimes.com/2006/01/07/opinion/07sat2.html?th&emc=th

Mariner