Reply to Uncle T. on Bush tax cuts and deficits

Uncle T.,

I've also ready many articles which say the same thing, but with no quantitative analysis to back up their claims. (Neil Cavuto of FOX and Larry Kudlow of WSJ are the two biggest offenders in the so-called "business press"). In the business press, whose paying audience is investors, tax cuts are favored because they put more money into the individual investor's pocket. The business press just assumes the best and salves investors' conscience by saying what's good for them is good for everybody.

My question to you and other supply-siders is: If tax cuts always grow the economy and thereby increase tax revenue, why did the 90's economic boom happen amid Clinton's "largest peacetime tax increase in U.S. history"? And why did America have unprecendented prosperity after WWII (1946-63) when the highest tax bracket was 88%?

To maintain our integrity, at the very least we have to admit that other factors must be at work beside tax rates -- factors that can mask or even counteract the effect of tax rates. Something else is going on here.

Perhaps the most honest conservative, pro-supply-side appraisal I have read is this by Donald Luskin in National Review Online.

But then read this quote from the article “Claim That Tax Cuts ‘Pay for Themselves’ Is Too Good To Be True,” from the Center on Budget and Policy Priorities:

"In 1981, Congress approved very large supply-side tax cuts, dramatically lowering marginal income-tax rates. In 1990 and 1993, by contrast, Congress raised marginal income-tax rates on the well off. Despite the very different tax policies followed during these two decades, there was virtually no difference in real per-person economic growth in the 1980s and 1990s. Real per-person revenues, however, grew about twice as quickly in the 1990s, when taxes were increased, as in the 1980s, when taxes were cut."

So yes, the whole article below hinges on that word "apparently," because by sticking that tricky word in there, the journalist can spend the other 289 words giving you, the reader, the false impression that the link is proven, but at the same time cover his own journalistic ass by admitting there is still a fair amount of uncertainty, i.e. stealthily admitting the issue is by no means decided. But when enough pundits repeat, by implication, this myth enough times, then people start to believe it.

I, on the other hand have forwarded you articles, and do so again (see below), that show there is no proof of a link between increased gov't revenue and tax cuts. And we must agree that, even if there is indeed such a link, it can only take effect after several years, while all of these new businesses are being created and business growth is taking place, because this won't happen overnight. So, even if you believe that tax cuts increase tax revenues, you must admit that tax cuts will cause deficits in the short term, because investment doesn't show a return overnight.

Furthermore, you should hopefully agree that it was irresponsible of Bush not to repeal his tax cuts after 2001 and 2003, knowing they would create deficits (at least in the short-term), at the same that he started 2 wars, which could have raised the price of oil, or otherwise harmed our economy unpredictably.

Must read:

http://www.nytimes.com/2007/07/12/washington/12bush.html

http://www.slate.com/id/2146868/

http://www.brendan-nyhan.com/blog/2006/10/wp_factchecks_b.html

--> Includes great quotes from Bush Admin. officials saying tax cuts don't increase revenue!

http://pages.stern.nyu.edu/~nroubini/SUPPLY.HTM

http://www.washingtonmonthly.com/archives/individual/2004_12/005340.php

http://www.huppi.com/kangaroo/4Inequality.htm

http://www.washingtonpost.com/wp-dyn/content/article/2007/02/06/AR2007020601529.html

http://www.nytimes.com/2007/01/08/washington/08tax.html?ex=1325912400&en=e1dc82f54ac7eacb&ei=5090

07/13/2007 11:56 PM
To: <>
From:

Subject: RE: US budget deficit shrinking

I’m not sure that I understand your point. My interpretation of the article is that tax cuts so stimulate the economy that the govt tax revenue actually increases with tax cuts. ( the same thing happened with the Reagan tax cuts). You take one word out the whole article, ie: “apparently” and declare (or imply) that there is no basis that tax cuts stimulate the economy and a strong economy increases govt tax revenue. Although I cannot immediately forward you a scientific study verifying same, I can represent that I have read numerous articles that have said exactly what the below article emphatically says.

From: Jay
Sent: 07/13/2007 3:46 AM
Subject: Fw: US budget deficit shrinking

You'll love this!

U.S. Budget Deficit: The Incredible Shrinking Twin
By J. Christoph Amberger

The U.S. budget deficit will narrow to about $205 billion in 2007, the Bush administration announced. That’s quite a bit lower than the $244 billion that the government had forecast in February, and down 17% over last year's shortfall.

The original 2007 budget had forecast a decline in the U.S. household deficit to $354 billion, which was estimated to be 2.6% of United States GDP. The current estimate thus is coming in 42% lower than the original conjecture, which would reduce the percentage of GDP borrowed to 1.5% -- well below the 40-year historical average deficit.

But the thing about the Bush administration’s new debt numbers is that for the past four years, they have been sandbagging. Typically, their projected new debt has come in not only far below the original budget, but also far below their consecutive updates.

Accordingly, the consensus estimate of Wall Street economists comes in even lower. The median estimate of 40 economists in a Bloomberg News survey places the actual deficit this year at $170 billion -- less than 1% of GDP.

That is far below the new debt levels of the supposed paragons of economic virtue… like Germany, Japan or even China.

Of course, perma-bears never tire to point out that new debt as a percentage of GDP declines if economic growth takes place. New federal debt also says nothing about existing debt levels of states and municipalities.

What they usually leave out is that new debt also declines when tax receipts increase, also as a consequence of a growing economy. Apparently, the Bush tax cuts have not just worked wonders in turning the near recession of 2001 into an economic boom; they’re also generating higher tax revenues by virtue of charging taxpayers less.

[I like that word "Apparently." To be honest, you have to say "apparently" and not "certainly" because no one that I know of has bothered to study the real effects of Bush's high-income tax cuts and capital gains tax cuts on economic growth. – J]