Don't Confuse Higher Tax Rates with Higher Tax Revenues

It is absolutely mind boggling how people continue to confuse higher tax rates with higher tax revenues. Numerous pundits continue to argue that we need to raise tax rates to fund the growing budget deficit. But raising tax rates is one sure way of making sure the budget deficit grows even larger.

There are only two ways to shrink a deficit: 1) Spend less money. 2) Generate more revenue. Spending less money is a great idea, but given all the promises the government has made to various constituents, this is not likely to happen in the near future. Therefore, we must raise more revenue, but that will not happen by raising tax rates.

Higher tax rates are a recipe for reduced employment and slower economic growth (or a more severe recession). Time and time again, we have seen how tax rate cuts have spurred employment, economic growth, and tax revenues. Budget deficits during such lower tax rate/higher tax revenue eras are the result of uncontrolled spending, not the result of less revenue.

Politicians should be clear and honest. Tell us we need more tax revenue, not higher tax rates. Then lower tax rates to make sure we get the revenue we need.

Comments

[Dave Wrixon:]

It just goes to prove that if Obama doesn't stop squandering money, there is no way out of this mess. Having said that I wounder if there is any solution to the US financial problem that won't prevoke anarchy?

Jul 15 03:16 AM

[User 357705:]

What? Reduce spending, sure. No brainer. Generate more revenue? Only one way for gov't to do that. Raise taxes. Were we to eliminate corporate welfare (AFDC - Aid For Dependent Corporations) and stop wasting our money on imperialistic wars and 200 foreign military facilities we'd have cut spending enough that taxes will only have to be raised slightly rather than significantly.

Jul 15 04:51 AM

[TCK:]

None of the "Talking Heads" on TV can get this point.

There comes a point of diminishing returns when no further revenue is collected regardless of the rates.

Jul 15 09:19 AM

[Vox Rationalis:]

"Time and time again, we have seen how tax rate cuts have spurred employment, economic growth, and tax revenues."

Complete and utter nonsense. This is a favorite line of the anti-tax crowd, repeated so often in so many forums that many people have come to accept it unquestioningly. But I've yet to see a good argument supporting the notion that in our economy, with tax rates comparable to ours, lowering tax rates results in more tax revenue or raising them leads to less.

I invite anyone who disagrees to build an argument against me on this. But before you do, note that one of Bush's chief economic advisors has clearly stated that tax cuts do not pay for themselves (Greg Mankiw, "Principles of Economics, 1998). And the 2003 Economic Report of the President makes clear that while the economy should grow in response to tax cuts, the economy is "unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity."

Not satisfied? Read the 2003 Treasury Department report (revised 2006) titled "Revenue Effects of Major Tax Bills." Here are the percentage effects on revenue of the Reagan and Bush tax cuts, in the subsequent 4 years:

1981: -5.7, -12.3, -16.5, -18.6
2001: -1.7, -3.9, -4.4, -4.2
2003: -6.3, -3.4, -0.4, -0.1

Now, here's what the Bush Treasury Department report says happened when Clinton raised taxes:

1993: +2.0, +3.5, +3.9, +4.7

I eagerly await any analysis supporting your assertion.

Jul 15 11:36 AM

[1RuleNoRules:]

I thought tax revenues doubled under Reagan.
Complete and utter nonsense is looking to to Treasury Dept. for unbiased reporting of their own failures.
Your numbers only show why phased tax cuts only count in the year after the last phase, Spending and investment is delayed until the complete tax cut. Phasing in Reagan tax cuts only prolonged the recession.
So what happened to revenue in '85, '86, '87, '88, '05?

On Jul 15 11:36 AM Vox Rationalis wrote:

> "Time and time again, we have seen how tax rate cuts have spurred
> employment, economic growth, and tax revenues."
>
> Complete and utter nonsense. This is a favorite line of the anti-tax
> crowd, repeated so often in so many forums that many people have
> come to accept it unquestioningly. But I've yet to see a good argument
> supporting the notion that in our economy, with tax rates comparable
> to ours, lowering tax rates results in more tax revenue or raising
> them leads to less.
>
> I invite anyone who disagrees to build an argument against me on
> this. But before you do, note that one of Bush's chief economic
> advisors has clearly stated that tax cuts do not pay for themselves
> (Greg Mankiw, "Principles of Economics, 1998). And the 2003 Economic
> Report of the President makes clear that while the economy should
> grow in response to tax cuts, the economy is "unlikely to grow so
> much that lost revenue is completely recovered by the higher level
> of economic activity."
>
> Not satisfied? Read the 2003 Treasury Department report (revised
> 2006) titled "Revenue Effects of Major Tax Bills." Here are the percentage
> effects on revenue of the Reagan and Bush tax cuts, in the subsequent
> 4 years:
>
> 1981: -5.7, -12.3, -16.5, -18.6
> 2001: -1.7, -3.9, -4.4, -4.2
> 2003: -6.3, -3.4, -0.4, -0.1
>
> Now, here's what the Bush Treasury Department report says happened
> when Clinton raised taxes:
>
> 1993: +2.0, +3.5, +3.9, +4.7
>
> I eagerly await any analysis supporting your assertion.

Jul 15 03:05 PM

[Vox Rationalis:]

On Jul 15 03:05 PM 1RuleNoRules wrote:

> I thought tax revenues doubled under Reagan.

Even though I've twice refuted your previous such assertions quite completely and utterly: "Even without adjusting for high inflation, even with the economy recovering from a deep recession, this doesn't hold true. Individual and corporate income tax revenue: 1981 - $347M; 1989 - $549M. [It's almost true for Social Security taxes, which Reagan RAISED enormously: 1981 - $183M; 1989 - $359M.] Factor in inflation, and the increase in revenue diminishes substantially: nominally during Reagan's two terms, income tax revenue increased 58%; in real terms it was 16%. (source: EROP tables B-80 and B-60) [seekingalpha.com/user/... and seekingalpha.com/user/...]

> Complete and utter nonsense is looking to to Treasury Dept. for unbiased
> reporting of their own failures.

How is anything here a failure by Treasury? Are you trying to say that revenue is lower because of Treasury's implementation of the law, rather than because of the law itself?

> Your numbers only show why phased tax cuts only count in the year
> after the last phase, Spending and investment is delayed until the
> complete tax cut. Phasing in Reagan tax cuts only prolonged the recession.

Nonsense. The numbers show exactly what I say, and what common sense would tell you - that tax revenue declines with lower tax rates and increases with higher rates. The recession was triggered by the Fed, and ended naturally as monetary policy was loosened. The strength of the recovery isn't surprising, considering the depth of the recession.

> So what happened to revenue in '85, '86, '87, '88, '05?

How about you do a single bit of research and tell me? See, you made an assertion, then I presented facts and made assertions that directly refuted your assertion. To support your assertion and make this an argument, you need to present some facts and make additional assertions refuting my (well-established) counter-argument. Good luck in that.

Jul 15 11:27 PM

[1RuleNoRules:]

So you agree that revenue went up under the Reagan administration even though you cherry picked your years. I now assume that because you have such a secure grip on the facts that you already knew that economists do not look to the affects of a phased tax cut until after the final year. Going no further I see that the facts are not what you are looking for. The original argument for supply side tax cuts was that the small decrease in revenue would be offset by the greater increase in economic production. The problem with this was that revenue did indeed go up as you have pointed out after being pressed for more info, and the supply siders did not expect that. True, I don't have the details as you do but I do have the truth my friend. Perhaps you need to reread your data and first remove your bias.

Jul 18 03:40 AM

[Vox Rationalis:]

On Jul 18 03:40 AM 1RuleNoRules wrote:

> So you agree that revenue went up under the Reagan administration
> even though you cherry picked your years.

First, let's remember that your claim was that "tax revenues doubled under Reagan," not that they increased. Still waiting for you to provide some justification for this assertion.

Second, how exactly do you think I cherry-picked the years? I used FY1981 (Carter's last budget) and FY1989 (Reagan's last budget). What about this appears to have been selected for effect, and which years would you have me select that would be more appropriate?

Third - OF COURSE revenue went up. The economy was recovering from the deepest recession since the 1930s. By the way, when I quote a Republican President's Treasury Department and Chief Economic Advisor, do you think I'm cherry-picking my experts?

> I now assume that because
> you have such a secure grip on the facts that you already knew that
> economists do not look to the affects of a phased tax cut until after
> the final year.

Any chance you try to explain why this is relevant, since all of Reagan's cuts are included in the studies and data I cited?

> Going no further I see that the facts are not what
> you are looking for.

You have yet to provide factual support for ANYTHING you've written.

> The original argument for supply side tax cuts
> was that the small decrease in revenue would be offset by the greater
> increase in economic production.

The arguments for tax cuts change with the winds, but the predominant argument that still lives on from Reagan's cuts relates to Laffer's napkin, which was a fine theoretical discussion with no applicability to our economy, as our tax rates are and were well to the left of the revenue curve peak.

> The problem with this was that revenue
> did indeed go up as you have pointed out after being pressed for
> more info, and the supply siders did not expect that.

Please note that after being pressed for ANY info, you have provided... none. Now, you're telling me you think the supply siders expected revenue to decline? Then why have you cited Laffer before, when clearly that's not what he said? Seems like you don't even know what the arguments for the tax cuts were.

> True, I don't have the details as you do...

Yes, those details are so hard to find. One has to be able to type google.com into one's browser and then search for them.

> ...but I do have the truth my friend.

1. How would you know, since you can't provide any supporting data?

2. Ain't my friend, palooka.

> Perhaps you need to reread your data and first remove your bias.

Hilarious - this statement would apply to you, except of course that you've never bothered to actually look at any data. Just for kicks, here's some - if you stop reading now, you may be better able to cling to your wrong-headed belief.

Real income tax revenue growth:
Reagan administration (1981-1989): 16.1%
Clinton administration (1993-2001): 49.1%

One of these Presidents raised tax rates, the other lowered them. Gee, I wonder which was which.

So now I've given you some clear data backing up the common sense answer, in addition to quoting studies by a prominent Republican economist and a Republican Treasury Department. Which of the two of us needs to reconsider his bias?

Jul 18 06:22 PM