A big headline recently was that federal tax revenues have made a big jump. They have been coming in far above all projections and up are 15% overall from last year.
But no one can report this on the simple level that I just did. The Bush administration wants to attribute part of it to tax cut stimulation and its opponents are digging deep to spin their retort.
The most common spin attempt is simply omission. Just as most media outlets have ignored the positive action in the stock market, they have also turned a blind eye towards this favorable tax news. Of course the media will ignore whatever they want for a variety of reasons. Some may deem positive economic news to be too boring while others may be pushing political agendas, be they socialist, anti-Bush or whatever. Thankfully, the press, for all its ills, is mostly unregulated in this country.
I have heard more than a few times, that every time marginal income taxes were cut, tax revenues have increased dramatically. So my curiosity was piqued and I did some minimal research. Apparently there have been three major instances of marginal tax rate cuts: President Coolidge in the 1920s, followed by President Kennedy in the 1960s and then President Reagan in the 1980s. In all three cases, tax revenues immediately jumped drastically.
Only on a surface level would this seem counterintuitive. After all, how could lowering rates possibly raise revenue if everyone was supposedly going to pay less tax than the year before? The answer is that tax policies are dynamic – meaning that they actually alter the way people behave, work, and invest. The US economy is not a static pie but rather a growing dynamic one. Lower taxes motivate people to work more, invest more, take business risks, realize capital gains, etc. It has worked every time.
I think President Bush’s tax cuts were smaller than other presidents’, and this is certainly a subject of debate for some idling economists. I also think that Bush’s cuts are really just offsetting some of the creeping Alternative Minimum Tax. But this line of thinking is purely speculative and absolutely un-provable.
But I discovered a few interesting things while researching this blog. First, in line with my contention that the media is ignoring the increased tax revenue story, I had a hard time finding a link to a basic news summary of it. I couldn’t believe it.
Next, when I googled “tax cuts increase revenue”, the first non-news link that comes up is this, described as “A liberal essay rebutting the myth that tax cuts increase tax collections. ...”
How is this significant? Well a little lesson about Google search results. Google does rank sites on keyword matches, but also on how many times they are hit and hyperlinked to in other sites. What my search told me was that this link is currently (search results change over time) a prominent and popular destination. Furthermore, this link was followed by several similar essays, all denouncing “supply-side” economics.
I was very surprised, given the recent news of higher tax revenues, that all of these links dominated the search results. It would be like googling Tiger Woods after he won his second major tournament this year and being led to websites declaring that he was in a slump.
But anyway I visited a few of these sites and read a bunch of studies and essays similar to the one hyperlinked above. Many seem quite convincing and authoritative at first, but a mere two minutes of thinking revealed their flaws to me. They all start out with dubious assumptions. From the link above: “assume the economy always grows X percent”, “let’s adjust for inflation”, “assume a normal business cycle of X years”, etc. And then carry on to some pretty complicated, yet convoluted thinking.
What all of these “studies” had in common was they all looked out about 10 years from the time of the cuts. Basically, the salutary short term effects were so obvious they had to widen the sample period to try to prove their theses. But this completely invalidates them, once you look out ten years, you introduce so many more variables that all claims so derived are FUNDAMENTALLY AND CATEGORICALLY FLAWED.
Since the tax cuts of the early 1980s there was a real estate market hiccup, the end of the Cold War, massive increases in federal entitlement spending, demographic shifts, etc. Where does this stop? Is the 2015 recession going to be blamed on Reagan’s tax cuts? It is pretty ridiculous that this passes for academic research.
Much of economic theory seems to have been hijacked by highfalutin propagandists.
Anyone that thinks taxes aren’t anathema to economic growth is living in la-la land. Marginal tax cuts have been associated with short term economic recovery now all four times they have been tried.
I was surprised to learn that the top marginal rate was as high as 70% when Reagan came in to office. Can you imagine getting a $10,000 bonus and only seeing $3,000 of it after taxes? And the rates were even higher between 1936 and 1962.
My wife’s father was in the real estate business and it was almost a rule that whenever he sold one building, he would immediately parlay the proceeds into another. I just assumed that this was a small tax avoidance strategy to avoid capital gains, but now I realize how huge and necessary this tax deferment was, given the exorbitant tax rates of yesteryear. It is called a 1031 Exchange, and they are still extremely popular now with today's hot real estate market, even though top marginal tax rates are half what they once were.
Politicians, and far too many of their constituents, just don’t understand the basic laws of taxation. Consider the Russian oil industry. It accounts for 11% of world output. Now one would think with $60 oil, the Russian oil companies would be swimming in cash and ramping up exploration and development. But they are not. Some companies, such as Sibneft, actually are spending less money on exploration than they were spending with oil $20 per barrel lower, 2 years ago. The culprit is a 89% Russian marginal tax rate. Why dig something up if the government is just going to confiscate it via taxes.
If income tax rates were 100%, nobody would work. So as tax rates drop from 100%, the incentives to earn income rise and thus so does tax revenue. The point of diminishing returns is just frankly not known. Some surmise that it is drastically lower than today’s rate of 35% and I would be inclined to lean this way. I think some of the developing Eastern European countries have instituted much lower flat taxes and so far the evidence is supporting my hypothesis. This I will have to look into.
Tax cuts are great..... If only we could slow goverment spending.
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