Tax cuts and their consequences
In a comment to my piece last week on supply-side economics, Dan G. of Milwaukee cast doubt on the forecasts of the Congressional Budget Office: "The CBO can't make predictions, assumptions, or analysis any better than some far left economics professor shielded from business realities on a college campus," he wrote. Then he declared:
History has shown, every time major individual tax cuts have gone through, tax receipts go up considerably quicker than they did during the preceding period. You can call this "coincidence" if you wish, but there is more to it than that.I didn't know if this was a "coincidence." What I really wanted to know was if it was true.
I figured Dan would want me to keep the pointy-headed economists out of it, so I simply looked at the last three decades of personal income tax receipts (taken from this year's Economic Report of the President), adjusted for inflation (measured by the Bureau of Labor Statistics). It was just me and a spreadsheet, mano a Excel. Plus a copy of C. Eugene Steuerle's indispensable book, Contemporary U.S. Tax Policy, so I could see when the tax cuts happened. Here's what I found:
Several modest tax cuts were enacted in the mid-to-late 1970s. Their impact, however, was swamped by that of inflation, which bumped taxpayers into higher income brackets and made capital gains seem bigger than they really were. So, effective tax rates mostly rose during the decade. Tax receipts dropped 6% in 1975, in part because of a big tax rebate paid that year, but after that increased at a healthy clip--up 12% in 1977, 7% in 1978, and 8% in 1979 before dropping 1% in the recession year of 1980.
Then came the sweeping Reagan tax cuts, enacted in 1981 and put into effect over the next three years (the 1981 law also indexed tax brackets to inflation starting in 1984, putting an end to those bracket-creep-induced backdoor tax hikes). After that Reagan-era tax policy was marked by repeated small tax hikes and then the sweeping "revenue-neutral" reform of 1986, which reduced the top marginal rate to 28% but also raised taxes on capital gains and took away lots of exemptions.
What happened to personal income tax receipts? They rose 6% in 1981, then fell 2% in 1982, 6% in 1983, and 1% in 1984 before finally bouncing back 8% in 1985, 2% in 1986, and 9% in 1987. Then they dropped 2% in 1988 and rose 6% in 1989.
In 1990, with the federal government deep in the red, Reagan's successor George Bush acquiesced to a tax bill that included effectively raising the top tax rate to 31%. Bill Clinton and Congress upped that to 39.6% in 1993.
What happened to personal income tax receipts? Down 1% in 1990, 4% in 1991, and 1% in 1992--but up 4% in both 1993 and 1994, 6% in 1995, 8% in 1996, and 10% in 1997.
Congress passed and President Clinton signed into law a variety of tax cuts that year, and revenues kept rising: 11% in 1998, 4% in 1999, 10% in 2000. Then came the Bush tax cuts of 2001, which included a rebate paid out that year, followed by another round of cuts in 2003. Personal income tax receipts dropped 4% in 2001, 15% in 2002 (the sharpest one-year decline since 1949), 10% in 2003, and 1% in 2004 before finally rising 11% in 2005.
Measured by decade, personal income tax receipts rose at a 2.4% annual rate in the 1970s, 1.8% in the 1980s, and 3.9% in the 1990s. So far in the 2000s they've fallen 3.3% a year.
To summarize, tax receipts rose more slowly after the Reagan tax cuts than before. They dropped after the 1990 Bush tax hike, rose after the 1993 Clinton hike, rose after the 1997 tax cut, then dropped after the 2001 Bush tax cut. You can call this "coincidence" if you wish. I just call it confusing.
What are the lessons here? (1) There are reasons why we let pointy-headed economists deal with this stuff, and (2) Dan's statement that "every time major individual tax cuts have gone through, tax receipts go up considerably quicker than they did during the preceding period" is false.
That the pointy-headed economists can not come to any consensus regarding this stuff indicates to me how much of a handle THEY have on it. Let's not forget that some of them (the politically favored) are advising our policymakers through it all.
The faith that we give the central planners (isn't that what they are?) is scary if you ask me. The truth is, people want to do well. Even when the government takes away large chunks of their money, sometimes they do okay in spite of it all. That should be applauded, but don't let the pointy-headed guys take credit for it.
Rather than being closely correlated to marginal personal income tax rates, studies have linked federal government revenues more closely to the size of the economy. Regardless of marginal tax rates, WW II federal government revenues have hovered around 3.5% of the size of the U.S. economy. Thus, policies that tended to promote economic growth would be more effective in increasing government revenues than merely increasing marginal tax rates.
What is lost in this debate is whether taxing citizens to fund programs that don't benefit them is ever moral, whether or not receipts increase or decrease as a result. It's government spending that is completely irrational and out-of-control. We shouldn't be arguing over whether the government should take more or less from its citizens, but rather whether the government should be taking anything from its citizens beyond what is required for defense from external enemies and internal security.
Your summary of the effects of the Reagan tax cuts seems to contradict the conclusion found in the Laffer article referenced in your previous post:
"Over the four years prior to 1983, federal income tax revenue declined at an average rate of 2.8 percent per year, and total government income tax revenue declined at an annual rate of 2.6 percent. Between 1983 and 1986, federal income tax revenue increased by 2.7 percent annually, and total government income tax revenue increased by 3.5 percent annually."
Presumably the difference is due to higher corporate tax receipts in the 1983-1986 period?
Also, the validity of Dan G's statement depends on the definition of "preceding period." The Reagan cuts were not fully implemented until mid-1983, and based on your data we had personal income tax receipt growth of: -1%,6,-2,-6 for 1980-83, and -1%,8,2,9 for 1984-87. Based on this breakdown of the data, tax receipts rose more quickly after the full Reagan tax cuts than before.
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