Do Tax Cuts Lead to Economic Growth?

[TonyR]

Good read by Leonhardt. It's short, give it a look. The whole thing is worth reading but here's an excerpt:

Beyond taxes, Mr. Romney has declined to detail what spending cuts he would make, although he has promised to make big ones. And some of the programs that would be at risk — medical research, education, technology, roads, mass transportation — probably have a better historical claim on lifting economic growth than tax cuts do.

The policies that new presidents pass tend to be ones on which they laid out specifics, be they the Bush and Reagan tax cuts or the Obama health overhaul. Based on the specifics, Mr. Romney puts a higher priority on tax cuts than anything else. Yet the reality of the last two decades has caused conservative economists, and Mr. Ryan himself, to acknowledge the limits of tax cuts.

http://www.nytimes.com/2012/09/16/opinion/sunday/do-tax-cuts-lead-to-economic-growth.html?_r=2&hp

[TonyR]

Analysis of six decades of data found that top tax rates "have had little association with saving, investment, or productivity growth." However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality.... Well into the 1950s, the top marginal tax rate was above 90%. Today it's 35%. But both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s. At the same time, the average tax rate paid by the top tenth of a percent fell from about 50% to 25% in the last 60 years, while their share of income increased from 4.2% in 1945 to 12.3% before the recession.
http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

[DBruleU]

Why, yes they do!

http://www.aei-ideas.org/2012/09/sorry-new-york-times-tax-cuts-sure-do-lead-to-economic-growth/


Sorry, New York Times, tax cuts sure do lead to economic growth

As Bruce Springsteen puts it so well at the end of “Brilliant Disguise“:

God have mercy on the man,

Who doubts what he’s sure of.

And one thing policymakers and journalists — and voters — should be sure of is that cutting tax rates can be a pretty effective way to boost economic growth. And raising tax rates hurts economic growth. I could point to numerous studies and historical examples. But here’s just one, a study from Christina Romer, President Obama’s former top economist: ”Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.”

Now some folks, mostly found on the left, would like to believe this economic reality isn’t so. They would like to believe that America can pay for the coming deluge of entitlement spending by raising taxes on the rich with no impact on economic growth.

Example: this opinion piece from liberal New York Times columnist David Leonhardt, which suggests tax cuts don’t lead to higher economic growth. Basically, his whole argument is one of simple causality. There have been times when high taxes rates and high economic growth have peacefully coexisted. In fact, growth has been higher in the U.S. when taxes have been higher. Leonhardt seems to think this conclusion from a Congressional Research Service is an argument ender:

The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

But this a very old, very tired argument.

1. Yes, from the late 1940s though the early 1960s, economic growth averaged 3.7% even though top tax rates were around 90% (though effective tax rates were much lower). From 1983 through 2007, when top tax rates were 50% or less, GDP growth averaged around 3.3%.

2. But as I have written frequently, the post-World War II decades were affected by many one-off factors, not the least of which was that they occurred right after a devastating global war that left America’s competitors in ruins. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. … This was obviously a transitory situation.”

And as former Bain Capital executive Edward Conard notes in his new book, Unintended Consequences:

The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.

3. Starting in the early 1970s, economic growth slowed in advanced economies (perhaps because the benefits from great innovations from the Second Industrial Revolution had run their course.) But growth slowed less in nations that embraced pro-market reforms such as deregulation and lower marginal tax rates. For instance, while U.S. per capita GDP grew by 55% from 1981-2000, French per capita GDP grew by just 39%.

4. Then there are the Clinton years. Clinton raised taxes and the economy did just fine. What about that?

Well, a) when Clinton signed that tax hike bill, the economy had been growing for 9 straight quarters, including by 3.4% annually over the previous six quarters; b) the ’90s saw a big drop in oil prices, from $23 a barrel in 1991 to $12 in 1998, boosting real disposable incomes; c) government spending declined from 22.3% of GDP in 1991 to 18.2% in 2000, meaning fewer resources as a share of the economy were being used unproductively by Washington; d) the late 1990s saw a big cut in the capital gains tax rate to 20% from 28%; e) the late 1990s also saw a big surge in private investment, particularly in the software and business equipment category which contributed a full point to GDP during those years. Did the Clinton tax hikes cause that or was it a combo of the Internet Bubble, Year 2000 preparations, the cap gains cut, and the beginning of a computer networking and communications revolution? My bottom line on the 1990s:

The U.S economy entered the 1990s after undergoing a huge revamp in the 1980s: marginal tax rates were lowered from 70% to 28%, the inflation menace slayed, regulations reduced, and businesses got restructured and way more efficient. Then in the 1990s, government spending and debt were reduced, investment taxes cut, and a technological revolution kicked into high gear. Plus the Soviet Empire collapsed and the cloud of possible nuclear holocaust was lifted. Market capitalism was on the march. People were optimistic as heck about the future. And in the midst of all that, taxes were raised in 1993. So that means taxes should be raised now — and Obama wants to do so in the most economically harmful and inefficient ways — in a time of economic stagnation and pessimism?

Taxes and tax rates aren’t the only things that matter to economic growth, of course. And every tax cut won’t pay for itself. Moreover, government needs enough revenue to pay for defense, basic research, and a safety net.

But taxes are pretty important. And pro-growth tax reform – particularly if the U.S. shifted from an income tax to a consumption tax – could boost employment and income growth and give government more revenue to pay down debt.

Have mercy on the nation that doubts that.

[DBruleU]

And....

http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates

The Historical Lessons of Lower Tax Rates

There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and "rich" taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden - a consequence that should lead class-warfare politicians to support lower tax rates.

Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to "soak the rich," the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.

1) Lower tax rates do not mean less tax revenue.
The tax cuts of the 1920s

Tax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.

According to then-Treasury Secretary Andrew Mellon:

The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.
The Kennedy tax cuts

President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. Recognizing that high tax rates were hindering the economy, President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).

According to President John F. Kennedy:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.
The Reagan tax cuts

Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

According to then-U.S. Representative Jack Kemp (R-NY), one of the chief architects of the Reagan tax cuts:

At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.

2) The rich pay more when incentives to hide income are reduced.
The tax cuts of the 1920s

The share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.
The Kennedy tax cuts

Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.
The Reagan tax cuts

The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.
Harmful Spending & Complexity

Lower tax rates are important, but they are not the only critical issue. Both the level of government spending and where that money goes are very important. And even when looking only at tax policy, tax rates are just one piece of the puzzle. If certain types of income are subject to multiple layers of tax, as occurs in the current system, that problem cannot be solved by low rates. Similarly, a tax system with needless levels of complexity will impose heavy costs on the productive sector of the economy.

This WebMemo is excerpted from the author's, Daniel J. Mitchell's, Backgrounder, The Historical Lessons of Lower Tax Rates, published July 19, 1996. The original publication, found here, contains footnotes and numerous charts.

[Blart]

http://www.sourcewatch.org/index.php?title=American_Enterprise_Institute

http://www.sourcewatch.org/index.php/Heritage

DBruleU, your sources of information come from billionaire-funded think tanks. Got anything else?



For a change of pace, here's a graph from Mark Zandi (http://www.economy.com/mark-zandi/), Chief Economist at Moody's.
http://voices.washingtonpost.com/ezra-klein/bang_for_the_buck_for_various_stimulus_methods_%28 LARGE%29.png

[BroncoInferno]

^ Ha! DBruleU bitch-slapped by the facts once again.

[L.A. BRONCOS FAN]

DBruleU, your sources of information come from billionaire-funded think tanks. Got anything else?


I had to L0L when I saw that too.

Heritage? Ha!

DBruleU is just another useful tool for a handful of oligarchs who have hoodwinked him into voting against his own interests.

[L.A. BRONCOS FAN]

https://sphotos-b.xx.fbcdn.net/hphotos-snc6/260050_470761892945681_297820091_n.jpg

[TonyR]

Sorry, New York Times...

The NYT didn't do the study. They just reported on it. Here's the study from the Congressional Research Service:

http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

[TonyR]

Non payers by state:

http://t.co/u3Tpvw1k

[L.A. BRONCOS FAN]

The NYT didn't do the study. They just reported on it.

Isn't it funny how Fox News lemmings like DBruleU always have trouble making that distinction?

:laugh: