Bush's Tax Cuts: Good/Bad?

[Ice]

I came about this facascinating article which talked about the idea of how lowering taxes would bring in increased government revenue. It seems to only work in specific situations though.

http://money.cnn.com/blogs/curiouscapitalist/2006/10/path-from-supply-side-economics-to.html

Below is the part relevent to Bush's tax cuts. I'd recommend reading the entire thing if you are interested in economics. It's quite interesting. I think I may have found my future major.


I haven't been able to find any such economists, though, claiming that the tax cuts paid for themselves, Laffer-style. That sort of talk has been the sole province of polemicists and politicians. Here's how President Bush put it in a speech in February:


What happened was we cut taxes and in 2004, revenues increased 5.5 percent. And last year those revenues increased 14.5 percent, or $274 billion. And the reason why is cutting taxes caused the economy to grow, and as the economy grows there is more revenue generated in the private sector, which yields more tax revenues.

The problem with this argument is that the economy, and with it tax receipts, would have grown in 2004 and 2005 even if there hadn't been any tax cuts. Growing happens to be something the U.S. economy does most every year (you can look it up). The tax cuts may have have made it grow a little bit faster, but not enough to make up for the revenue loss caused by the lower tax rates.

This isn't just my opinion; it's also the verdict of the Congressional Budget Office, the nonpartisan maker of deficit projections currently run by a former Bush administration economist. Even after making some pretty liberal assumptions about how much the tax cuts will boost long-run economic growth, the CBO estimated earlier this year that extending them past 2010 would still reduce government revenue, not increase it.

Even tax cuts that don't pay for themselves can be a good idea--I happen to be a big fan of the cut in taxes on dividend income that the President (egged on by Hubbard) pushed through Congress in 2003. But such cuts do eventually have to be paid for, either by cutting spending or raising some other tax. The current administration has so far opted to shunt this burden to future generations (or current generations, a few years down the road).

As I've written before, the Bush administration's deficit spending isn't necessarily a disaster. But neither is it really supply-side economics, because the increased saving by individuals and businesses enabled by the tax cut has been largely gobbled up by increased government borrowing. That makes it either (1) a wartime necessity, (2) closet Keynesianism, or (3) buck passing.

[Kralizec]

Good find. I posted an article from the Congressional Budget Office myself a couple of months ago, but that seemed to have passed unnoticed. IIRC it's conclusion was that the increased spending wouldn't be able to yield back even half of what the tax cuts actually cost, over a 10 year period.

So much for "making a bigger pie".

[Gawain of Orkeny]

So much for "making a bigger pie".

Duh. There is a bigger pie and more money being taken in.


IIRC it's conclusion was that the increased spending wouldn't be able to yield back even half of what the tax cuts actually cost,

? The tax cuts brough in more money so they didnt cost anything. Their not tied to spending. The samething happened under Reagan. He doubled the amount of money coming in. But for every new dollar he brough in congress spent two. Dont blame the deficit on the tax cuts. Blame it on the spending where it belongs.

[Kralizec]

Did you even bother to read the article Gawain?

Tax revenue did increase, because the economy grew. The point is, that little growth that is atributable to the tax cuts don't cover the tax cuts by themselves. Some of the tax cuts probably had a real, self paying effect- but Bush' tax cuts at large didn't.

[Xiahou]

Yes, tax cuts are good- it was the out of control spending that accompanied them that was bad.

[Kralizec]

Yes, tax cuts are good- it was the out of control spending that accompanied them that was bad.

The "laffer curve" argument put forward by Bush boils down to that
#1) there's an optimum tax rate, any higher will bring lower tax revenue (this is pretty much undisputed)
#2) the pre-Bush tax rates were higher then this optimum.

So theoretically, tax revenues should now be pretty close to the maximum potential income, at least closer then the pre-Bush tax regime was. But that's not the case.

Of course, you could wonder wether the government is supposed to maximise its own income. It's pretty much a no-brainer that the answer is "no" if the government isn't capable of doing anything useful with the extra money.

[Pindar]

Tax cuts are nearly always a good. Government is a necessary evil. The beast must be keep chained. This is so irrespective of the Laffer Curve or any other budgetary benefit derived from and/or through economic emancipation from feeding the beast.

[Aenlic]

I'm not a fan of taxes. I'm even less of a fan of hypocrisy. Bush's tax cuts were the height of hypocrisy. Claiming that the tax cuts benefit the country is false at best, considering their actual affect when coupled with massive spending. What good they might have done the economy is far outweighted by the damage being done by the cost of the war in Iraq and all of the earmarked pork barrel projects put in the budget by both Dems and Repubs (but remember it's been the Republicans who controlled those budgets). Only an idiot cuts taxes during wartime, with all of the extra expenses. A huge deficit can be the only result. Massive deficit spending does far more to endanger the economy than taxes, in the long run.

[Seamus Fermanagh]

I like tax cuts -- most taxpayers do.

Whether tax cuts harm revenues or help them is a question of running the numbers.

Hypothetical: economy at 100, taxes at 10, revenue at 10.

Cut taxes to 8. If economy grows to 126 or better, revenues will increase.
Raise taxes to 12. If ecomy shrinks no further than 85, revenues will increase.

This suggests that tax increases are more likely to generate revenue than tax cuts, assuming that the deadening effect on the economy of increased taxes is directly equivalent to the growth encouragement created by lowered taxes. Obviously, human nature leaves this unlikely to be a direct mathematical relationship.

The essential problem with reducing the deficit is the nature of the role of government. With the advent of the broad social welfare responsiblities of the federal government under FDR, particularly as exacerbated under Johnson (and to a lesser extent by EVERY administration subsequent to FDR save Reagan), government spending must increasingly provide for a myriad of social safety programs.

These enjoy a broad, almost systemic acceptance from a clear majority of Americans. As such, this spending may be curtailed somewhat from time to time, but not really reduced in any significant way. The only other major segment of spending without a broad/deep enough pool of political support is defense and related spending. Most of our budget reductions must come from this segment if we are to remove the burden of an ever growing deficit from the economy.

Since WW2, the largest leaps in deficit spending have all occurred as a result of military build-ups (Johnson '64-'68, Reagan 81-'86/'87, Bush-43 '01-P). Our government simply cannot afford to fully fund both "guns" and "butter" within a politically acceptable taxation level. When we do, its a festival of red ink.

I hope for the adoption of the "Fair Tax" as a first step. While taxation will certainly not decrease, the awareness of taxation would increase much more so than with the current "withholding" approach. In the long run, being made aware of just how much they're spending on government just might make people think more about who they put in charge of the dollars.