Do tax cuts ever raise revenues?

Taxes should be raised. People enjoy paying taxes. If people did not like paying taxes, they would get jobs that paid under the table. We all know that there are jobs that pay handsomely that do not deuct taxes. The work isn't too clean or honorable but the tax benefits are astounding!

The common thread is that these were cuts in punitively high marginal rates. They paid off in large part because they removed incentives to shelter income from taxes.

um.... you seem to be forgetting that these tax cuts were accompanied by changes in the tax code that reduced the opportunities to shelter income from taxes.

And we should also understand what you mean by "incentives" -- we're talking loopholes that made it more 'profitable' to made otherwise bad economic decisions. The same (actually, better) results could have been accomplished merely by elimination the "shelter" provisions alone.

An argument can be made that lower tax rates at the bottom increase tax revenues, because the tax cuts are generally spent, and the multiplier effect comes into play. But tax cuts for the wealthy don't increase consumption to the same degree -- they simply lead to inflation in stock prices, depressed yields on bonds, etc. as more dollar wind up chasing the same (essentially) finite investment opportunities.

IMHO, the mistake you made was in even mentioning increased tax revenues in a discussion of Lauffer. Simply put, the man is a charlatan, because his theories rest on the assumption that the real productivity gains of those in the top tax brackets will offset lost revenues.

(for instance, just to be revenue neutral, a 91% to 70% cut in the top tax bracket requires that those in the top tier make 30% more than before. Does Lauffer really believe that those in the top tax bracket were over 30% more productive? Or is it just a case of people getting paid more for the same work?)

Hi Justin:

This is a good topic to get aired out, so thanks for raising it. I've posted a response at:

http://economistsview.typepad.com/economistsview/2007/12/do-tax-cuts-eve.html

Mark

I read Thoma's response, and while I agree with his conclusions, his arguments are, well, lets just say 'lacking in intellectual rigor.' For instance...

There's no controversy about whether deficits increased after the Reagan tax cuts - they did - so the Reagan tax cuts were not self-financing.

this pretty much ignores the "spending" side of the equation, doesn't it? And with spending rising from 746 Billion in FY 1982 to 1.144 trillion in FY 1989, its not hard to see that using the increase in the budget deficit to argue that tax cuts don't increase revenue isn't exactly a rock solid argument.

http://a257.g.akamaitech.net/7/257/2422/13feb20061331/www.gpoaccess.gov/usbudget/fy04/pdf/hist.pdf

p_lukasik, obviously what Mark Thoma meant is that the deficit increased by more than the increase in public spending. Because revenue fell. It's not a lack of intellectual rigour, just a case of not spelling everything out (it is a blog, not an academic paper).

Besides your numbers appear to be uncorrected for inflation, making the increase in spending appear much bigger than it actually was.

I am not an economist but expanding the scope of this argument beyond the USA, tax rate cuts in India since 1985 have repeatedly resulted in increased tax revenues. The tax rate cuts have almost always been across the spectrum and not only at the higher marginal rates. The increased revenues were immediate and had follow-on effects that increased revenues for a few years thereafter.

Pervez, I think comparing with India is a little tricky (I live in India myself, so I know at least a little bit about things here). India is a developing economy nearing double digit annual growth rates. Besides the tax base (although still very small) has been expanded considerably as the bureaucracy has become more effective in collecting taxes. In order to make a correct analysis of the effects of India's alleged tax cuts, you would have to isolate those effects from all these other processes going on. I'm pretty sure that India's tax revenue would increase enormously every year, no matter what. But does it increase more or less because of the alleged tax cuts?

Pervez, the question isn't whether revenues go up after tax cuts. It's whether they go up more than they would have in the absence of the cuts. That can only be estimated, of course, which is why this debate goes on and on and on ...

Esben...
The "inflation adjusted" numbers tell the same story -- spending went way up (1.168 trillion to 1.4 trillion in 1996 dollars).

...and income tax receipts up as well (from 298B to 446B between 1982 and 1989 -- those are not in constant dollars, but my quick calculations say its 466B to 546B in 1996 dollars.)

In other words, while income tax receipts went up, spending went up far more -- and that is why Thoma's argument (even your version of it) doesn't hold water.

Now, I personally think that neither set of numbers is all that helpful because income tax receipts as a percentage of GDP was 9.2% in 1982 and 8.2% in 1989, and if the tax cuts were paying for themselves, those numbers would be much closer. (and by my calculations, even if you assume that the 'economic stimulus' value of the tax cuts increased GDP growth per year from 2.75% to 3.75% annually over that period, you only come close to breaking even.)

I would be happy to volunteer as a controlled test subject where my tax rate were cut to 0% for 20 years to be compared with someone else's didn't get the same tax break.

I think when talking about the political arena, and saying a tax cut will pay for itself, you have to take the tax cut as a whole. Maybe with the Reagan/Kennedy examples you were, I don't know much about them.

On the other hand, I think the economic stimulus/multiplier effect thing is bunk.

Take a 100 dollar economy at 30% tax rate: revenues are 30 dollars.

Lower taxes to 20% - revenue is now 20 dollars. To grow the economy enough to regain that revenue, the new economy at 20% has to be 150 dollars - 50% growth!

In terms of multiplier effect, I think it is kind of the same math at work.. At first you take 30% of a dollar, then 30% of 0.7, then 30% of 0.49 and you have 0.65 in revenue.

If you take 20% of 1 dollar, then 20% again and a again, then you've got 0.48 in revenue. So that extra 0.10 that's floating around multiplying - how many time does it have to go through the till again before it breaks even?

And in the meantime, it isn't like the government wasn't going to spend that money itself - it was going to buy a tank or build a road or something, and that's got a multiplier effect, too.

Here is a hard fact for you: total federal revenues in 1984 were higher than in 1982. Tax cut paid for itself.

"Here is a hard fact for you: total federal revenues in 1984 were higher than in 1982. Tax cut paid for itself."

In a growing economy tax revenues increase, hardly a surprise. While a 15% decrease in taxes generally doesn't mean a 15% decrease in tax revenue, it only in rare cases results in a tax revenue increase.

[...] that they did for small subgroups at the very top is debatable and subject to interpretation. Do tax cuts ever raise revenues? - The Curious Capitalist - TIME.com __________________ "No nation could preserve its freedom in the midst of continual [...]