Wednesday, July 9, 2008

Refuting the Notion that Tax Cuts Pay for Themselves

This 2006 piece by bonddad offers a strong refutation of the claim that tax cuts both pay for themselves and increase government revenue. It is an educational read, and I quote his conclusions below. But first, my comments:

The notion that tax cuts flood the Treasury with new revenue is an interesting one in that we usually hear it from ideologues who speak of government as though they would prefer to see it as starved as a body with tumors. But when voters give the "starve-the-beast" crowd the keys to the Treasury, what they get is the kind of spending we have had over the last eight years. With tax cuts to boot! Perhaps it is not government or spending they hate so much as government they do not control. The Democrats were pikers, small-thinkers with little nerve who had to move over to let some real gamblers get in the game. Now, these Supply Sider types were the guys who could show us how to get it done - spend a fortune, a gazillion fortunes, and never pay for any of it. Repayment would fall to the chumps who voted for this scam.

McCain, while at one time disavowing Bush's tax cuts as being harmful, now completely avows them and wants to add his own, along with his own unfunded spending. Why not? It's what a lot of voters seem to prefer. It's not "pay as you go" because that would not tickle our shopping addicted brains enough. No, what we want is Harry Potter solutions. Sorcery to allow us to have our heart's desires without a cost to us. Except, stories tell us (or should) that sorcery always comes with a cost.

But when you vote for C students (graded on the curve) to run the world, this is the kind of accounting you get, that of the magical realism variety. Bush happily joked about his C average to a graduating class at Yale, and McCain graduated fifth from bottom of his class at the Naval Academy, which, to his credit, he does not brag about. Maybe they just didn't like to study (not a good sign, either).

Bonddad concludes from his analysis that:
"Under Reagan, the tax cuts led to stagnant government revenue from individual taxpayers. It wasn't until he started raising taxes the government revenue started to increase. However, Reagan spent like a "tax and spend" liberal, increasing the debt/GDP ratio in each year of his presidency from 33% to 51%.

"Under Bush II, the tax cuts led to a 6.7% decline in revenue for the first 4 years of his presidency. Because his spending increases far outpaced the decrease in government revenue, the total national debt outstanding increased 41%.

"To compare, Clinton increased taxes on the upper-income taxpayers, which led to a 97% increase in government revenue. He grew the economy at a health pace. He decreased the debt/GDP ratio in each year starting in 1995 of his presidency.

"The two attempts to prove "tax cuts pay for themselves" have failed. It is clear that if the laffer curve exists, the US tax rates are clearly to the left of the curve's apex indicating a tax cut will in fact decrease revenue."

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