The Facts About Tax Cuts, Revenue, and Growth
The Facts About Tax Cuts, Revenue, and Growth
Michael T. Griffith
2013
@All Rights Reserved
Fourth Edition
In every case over the last 60 years, major tax cuts have more than paid for themselves. In fact, every major tax cut since JFK has been followed by substantial increases in revenue, not to mention solid economic growth. Moreover, total federal revenue rose at a faster rate after each of those tax cuts than it did before them. Anyone can confirm these basic facts for themselves by checking federal budget data and economic indicators before and after major tax cuts (see, for example, Federal Budget Data, Data 360 Unemployment U.S., and Total Economy Database). Let’s take a closer look at the results of the last four major tax cuts (and then for good measure we’ll examine the Mellon tax cuts of the 1920s).
Bush Tax Cuts: President George W. Bush’s 2003 tax cuts generated a massive increase in federal tax revenue and were followed by 52 consecutive months of economic growth. From 2004 to 2007, federal tax revenue increased by $780 billion, the largest four-year increase in American history. Total federal revenue from 2003 to 2007:
2003 -- $1.78 trillion
2004 -- $1.88 trillion
2005 -- $2.15 trillion
2006 -- $2.40 trillion
2007 -- $2.56 trillion
Total federal revenue for 2008 dropped slightly, down to $2.52 trillion, because a recession started that year, but revenue was still substantially higher than it was in 2003 or 2004. During the same period, income tax revenue rose dramatically, going from $925 billion in 2003 to $1.53 trillion in 2007. As with other types of federal revenue, income tax revenue dropped slightly in 2008, down to $1.45 trillion, due to the fact that a recession began that year.
It’s important to keep in mind that the recession had nothing to do with the tax cuts. The recession was brought on by destructive federal intervention in the subprime mortgage market, irresponsible funding and securitization of subprime loans by Freddie Mac and Fannie Mae, unsound Federal Reserve monetary policy, a lack of oversight by the Securities and Exchange Commission, greed and fraud committed by certain large banks and investment firms, and consumers who bought homes they really couldn’t afford. Furthermore, even in 2009, when the recession neared depression territory and remained severe throughout the year, total federal revenue was $2.10 trillion, which, even adjusted for inflation, was very close to total federal revenue for the boom years of 2005 and 2006.
What's more, after the 2003 tax cuts, the rich paid a higher percentage of the total tax burden than they had at any time in the previous 40 years. This shocked the New York Times, whose astonished editorial board could only describe the gains as a "surprise windfall." This was also true with regard to income taxes. For example, after the Bush tax cuts, the top 1% paid a larger share of all federal income taxes than before. In 2007 the top 1% of taxpayers earned 22.8% of the nation's income, yet paid 40.4% of all federal income taxes, whereas in 2004 the top 1% paid 36.89% of all federal income taxes. So the percentage of income taxes paid by the top 1% went from 36.89% in 2004 to 40.4% in 2007. (Incidentally, this also means that in 2007 the top 1% paid more in federal income taxes than the bottom 95% paid.)
Interestingly, total federal revenue grew at a faster rate during the three years following the Bush tax cuts than it did during the three Clinton boom years of 1998-2000. From 1998 to 2000, following Bill Clinton’s 1997 tax cuts, total federal revenue rose $300 billion, from $1.72 trillion to $2.02 trillion, an increase of 17%. A very respectable, solid increase. But, from 2004 to 2006, total federal revenue rose a whopping $520 billion, from $1.88 trillion to $2.40 trillion, an increase of 27%. The rate of inflation for the two periods was very similar (2.55% vs. 2.98%). So, even adjusted for inflation, the revenue growth that followed Bush’s tax cuts was considerably better than the revenue growth that occurred during the three most prosperous years of Clinton’s presidency.
As for economic growth under Bush, the Wall Street Journal pointed out the following in September 2008:
U.S. output has expanded faster than in most advanced economies since 2000. The IMF reports that real U.S. gross domestic product (GDP) grew at an average annual rate of 2.2% over the period 2001-2008 (including its forecast for the current year). President Bush will leave to his successor an economy 19% larger than the one he inherited from President Clinton. This U.S. expansion compares with 14% by France, 13% by Japan and just 8% by Italy and Germany over the same period.
The latest ICP findings, published by the World Bank in its World Development Indicators 2008, also show that GDP per capita in the U.S. reached $41,813 (in purchasing power parity dollars) in 2005. This was a third higher than the United Kingdom's, 37% above Germany's and 38% more than Japan's. (
Bush Has a Good Economic Record - WSJ.com)
Critics claim that the growth during the Bush years was merely the result of the housing bubble and wild consumer spending. James Pethokoukis responded to this claim in a January 2009 article in U.S. News & World Report:
"Economy Made Few Gains in Bush Years", declared the Washington Post earlier this week. And while the story grudgingly acknowledged the 52 straight months of job growth, it dismissed any economic gains as the ephemeral product of the housing bubble and wild-spending consumers. Except . . . that worker productivity -- the most important long-term indicator of the core health and competitiveness of an economy -- has risen at a really impressive 2.6 annual rate during the Bush years vs. 2.0 percent for Clinton and 1.6 percent for Reagan. . . . This is important stuff. It's one big reason why the World Economic Forum says the U.S. has the most competitive economy in the world. The economic rebound after the pro-growth 2003 tax cuts was no mirage . . .
Bush's successes are destined to be overshadowed by the imploding housing and credit bubbles. They are the economic equivalents of IEDs, and they blew up at the end of his second term. The causes? Everything from Fed monetary policy to government housing policy to cultural dysfunction on Wall Street and Main Street. But as teenagers like to say, "Too bad, so sad." Bush was president, and Big Media has already declared its summary judgment: Failure. Reaching such a mistaken conclusion, though, requires an almost purposeful misreading of the past eight years. (
Big Media Distorts Bush Economic Record - Capital Commerce (usnews.com))
Whatever problems there were with Bush’s economic policies, his tax cuts were not among them.
Clinton Tax Cuts: In 1997 President Bill Clinton signed a tax cut bill that, among other things, created a new $500 child tax credit, raised the income limit for deductible IRAs, nearly doubled the estate tax exemption, and slashed the capital gains tax rate by a whopping 28%. The reduction in the capital gains tax was especially helpful. In 1995, just over $8 billion in venture capital was invested. By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and it doubled again in 1999. At the same time, total federal revenue rose every year after the 1997 tax cuts.
In addition, it’s worth noting that total federal revenue grew at a slightly faster rate in the three years after the 1997 tax cuts than it did in the three years before them. From 1994 to 1996, total federal revenue grew by $200 billion, from $1.26 trillion to $1.45 trillion, an increase of 16%. From 1998 to 2000, total federal revenue grew by $300 billion, from $1.72 trillion to $2.02 trillion, an increase of 17%.
Moreover, although the economy was doing respectably well in the four years before the 1997 tax cuts, it did considerably better after the tax cuts. For example, from 1993 to 1996, the economy grew at an annual rate of 3.2%, but the annual growth rate jumped to 4.2% after the tax cuts (both rates are adjusted for inflation). In the four years before the tax cuts, the rate of real wage growth was only 0.8%, but it rose to 6.5% after the tax cuts. Dr. J. D. Foster:
The Clinton years present two consecutive periods as experiments of the effects of tax policy. The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase. . . .
The economy averaged 4.2 percent real growth per year from 1997 to 2000--a full percentage point higher than during the expansion following the 1993 tax hike. Employment increased by another 11.5 million jobs, which is roughly comparable to the job growth in the preceding four-year period. Real wages, however, grew at 6.5 percent, which is much stronger than the 0.8 percent growth of the preceding period (illustrated in the graph below). Finally, total market capitalization of the S&P 500 rose an astounding 95 percent. . .
In summary, coming out of a recession into a period when the economy should grow relatively rapidly, President Clinton signed a major tax increase. The average growth rate over his first term was a solid 3.2 percent. In 1997, at a time when the expansion was well along and economic growth should have slowed, Congress passed a modest net tax cut. The economy grew by a full percentage point-per-year faster over his second term than over Clinton's first term. (
Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s Boom)
There can be no denying that overall Clinton compiled a good economic record, but some important points need to be made about that record. Rich Lowry:
The deficit reached its 1990s high of $290 billion in fiscal year 1992 and fell to $255 billion in fiscal year 1993, a roughly $40 billion reduction even before Clinton got started. Why was the deficit already declining? The deficit tends to rise during recessions, and fall during expansions. It climbed with the recession of 1990-91, before declining again as the recovery took hold. So, just as Clinton was taking office, natural forces were already working to reduce the deficit. . . .
As for economic growth, the fact is that the economy was already growing before any Clinton policies took effect. In 1992, growth was 3 percent. From 1993 to 1995 it was 3.1 percent annually. In other words, steady as she goes.
Now, later in the decade, the economy did indeed take off in a marvelous boom. This was a result of the corporate restructuring and downsizing of the 1980s and early 1990s, and the fantastic rise of new technology. You cannot attribute all this to the Clinton administration, unless you really do think that Al Gore invented the Internet.
Where Clinton should get credit is basically for getting out of the way of the free market: He . . . let Alan Greenspan keep inflation in check; he signed a "tax cut for the rich" in 1997; he signed various deregulatory bills; and his administration adopted a hands-off policy for the Internet (crafted by, of all people, former health-care guru Ira Magaziner). (
Rich Lowry on Clinton Economic Record on National Review Online)
That being said, the Clinton economic record is impressive by almost any measurement. A White House report discussed the economy‘s performance under Clinton as of November 2000 (just two months before he left office):
Strong Economic Growth: Since President Clinton took office, economic growth has averaged 4.0 percent per year, compared to average growth of 2.8 percent during the Reagan-Bush years. The economy has grown for 116 consecutive months, the most in history.
Most New Jobs Ever Created Under a Single Administration: The economy has created more than 22.5 million jobs in less than eight years—the most jobs ever created under a single administration, and more than were created in the previous 12 years. Of the total new jobs, 20.7 million, or 92 percent, are in the private sector.
Median Family Income Up $6,000 since 1993: Economic gains have been made across the spectrum as family incomes increased for all Americans. Since 1993, real median family income has increased by $6,338, from $42,612 in 1993 to $48,950 in 1999 (in 1999 dollars).
Unemployment at Its Lowest Level in More than 30 Years: Overall unemployment has dropped to the lowest level in more than 30 years, down from 6.9 percent in 1993 to just 4.0 percent in November 2000. The unemployment rate has been below 5 percent for 40 consecutive months. Unemployment for African Americans has fallen from 14.2 percent in 1992 to 7.3 percent in October 2000, the lowest rate on record. Unemployment for Hispanics has fallen from 11.8 percent in October 1992 to 5.0 percent in October 2000, also the lowest rate on record. (
The Clinton Presidency: Historic Economic Growth)
Democrat Al From of the Democratic Leadership Council made some interesting points as he compared the economic records of Clinton and Reagan with the economic record of George H. W. Bush (i.e., Bush I or Bush Sr.) in a 2002 article:
On average, 2.65 million new private sector jobs were created every year during the Clinton Presidency. That's an average annual increase of 2.7 percent. Next best were the Reagan years, with an average of 2.34 million new private sector jobs created each year -- a 2.2 percent increase.
The Bush presidency lagged far behind Clinton's and Reagan's. During the elder Bush's term, an average of 355,000 jobs were created in each of his four years, increasing the number of available jobs by only 0.4 percent. . . .
Not surprisingly Clinton and Reagan had the best records of reducing unemployment, too. Interestingly, both began their terms with the unemployment rate over seven percent -- Clinton at 7.4 percent and Reagan at 7.2 percent. Both reduced unemployment substantially -- Clinton to 4.0 percent and Reagan to 5.3 percent. . . .
Family income, too, rose rapidly during both the Clinton and Reagan terms. In 2000 dollars, incomes increased nearly 23 percent from just over $53,000 a year at the end of the George H. W. Bush Administration to more than $65,000 a year when Clinton left office. In the Reagan years, family incomes (again in 2000 dollars) rose nearly 15 percent from about $47,000 annually to over $54,000. During Bush I, family incomes actually fell.
President Clinton was the only recent President to preside over a substantial drop in child poverty -- from nearly 23 percent to 16.2 percent. The proportion of children living in poverty was just about the same at the end of the Reagan years -- 19.5 percent -- as at the beginning -- 20 percent. . . . Child poverty actually rose during the Bush I term, from 19.5 percent to 22.3 percent of children. (
http://www.dlc.org/ndol_ci.cfm?contentid=250551&kaid=127&subid=305)
Reagan Tax Cuts: In 1994 President Clinton's own Council of Economic Advisers stated: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth."
The Reagan tax cuts were followed by a sharp increase in revenue. Total federal revenue, including income tax revenue, rose every year from 1983 to 1988, after a dip in 1982 (due at least in part to the recession of that year--the recession began in December 1980 and ended in November 1982). From 1982 to 1989, i.e., when Reagan budgets were in operation, total federal revenue rose from $618 billion to $991 billion. (And herein by “in operation” I mean in effect for at least 10 months of a given year.)
Let's look at what happened to federal income tax revenue under Reagan from 1983 to 1989, bearing in mind that Reagan slashed income tax rates across the board:
1983 -- $326 billion
1984 -- $355 billion
1985 -- $396 billion
1986 -- $412 billion
1987 -- $476 billion
1988 -- $496 billion
1989 -- $549 billion
Critics point out that Reagan also signed a few tax increases. However, the fact remains that the total tax burden was far, far lower when Reagan left office than when he took office. In other words, even counting the two tax increases that Reagan signed, taxes overall were still much lower in Reagan’s last year than they were in his first year. For example, when Reagan became president in January 1981, the top marginal tax rate was 70%--yes, 70%--but by the last month of his presidency in January 1989, it was 28%. (Furthermore, Reagan signed those tax increases with the understanding that there would be spending cuts later on, but Congress broke its word and never passed the promised spending cuts.)
As a result of the Reagan tax cuts, tax payments and the share of income taxes paid by the top 1% climbed sharply. For example, in 1981 the top 1% paid 17.6% of all personal income taxes, but by 1988 their share had jumped to 27.5%, a 10 percentage point increase. The share of the income tax burden borne by the top 10% of taxpayers increased from 48.0% in 1981 to 57.2% in 1988. Meanwhile, the share of income taxes paid by the bottom 50% of taxpayers dropped from 7.5% in 1981 to 5.7% in 1988.
It’s interesting to consider income tax revenue under Jimmy Carter, Reagan’s predecessor, in contrast to income tax revenue under Reagan. During the four years in which Carter’s budgets were in operation, income tax revenue rose $106 billion, from $241 billion in 1978 to $347 billion in 1981, an increase of 44%. However, total inflation for fiscal years 1978-1981 (i.e., October 1978 to October 1981) was 51.62% (an average of 12.7% per year). (Inflation from January 1978 to December 1981 totaled 50.40%.) During Reagan’s eight budget years, income tax revenue rose $202 billion, from $347 in 1982 billion to $549 billion in 1989, an increase of 58%, and total inflation during fiscal years 1982-1989 was only 34.48% (an average of 4.3% per year). (Inflation from January 1982 to December 1989 totaled 33.72%.) Thus, income tax revenue grew at a faster rate under Reagan than it did under Carter, both in raw percentage and adjusted for inflation.
When we look at the growth of total federal revenue under Reagan and Carter, a similar picture emerges. During the Carter budget years, total federal revenue rose by $199 billion, from $400 billion in 1977 to $599 billion in 1981, an increase of 50%. However, during the Reagan budget years, total federal revenue rose by $373 billion, from $618 billion in 1982 to $991 billion in 1989, an increase of 60%. Furthermore, as mentioned, counting only calendar years, inflation totaled 50.40% under Carter vs. 33.72% under Reagan (total inflation during their respective fiscal years was even worse for Carter: 51.62% vs. 34.48%).
