Effect of cutting taxes on revenue

#1
rjd970

rjd970

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#1
We all agree Bush has increased government spending on the order of what any dirty, socialist, Karl Marx loving liberal would.

But it seems his tax cuts didn't bring in the revenue that the republicans claim either.

http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf

The whole report is interesting from a historical perspective (and only 21 pages). For all those that don't want to read it, the last two pages of graphs are what I am referring to.

I am being seriously honest here, not trying to start an argument. I really want to read both sides of this argument. I would really like somebody to show me evidence that cutting taxes increases revenue.

It seems to me Reagan and Clinton's plans worked pretty good.


BPV....serious question....is "tax revenue" and "govt. receipts" the same thing? Thanks.
 
#2
#2
rjd970 said:
We all agree Bush has increased government spending on the order of what any dirty, socialist, Karl Marx loving liberal would.

But it seems his tax cuts didn't bring in the revenue that the republicans claim either.

http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf

The whole report is interesting from a historical perspective (and only 21 pages). For all those that don't want to read it, the last two pages of graphs are what I am referring to.

I am being seriously honest here, not trying to start an argument. I really want to read both sides of this argument. I would really like somebody to show me evidence that cutting taxes increases revenue.

It seems to me Reagan and Clinton's plans worked pretty good.


BPV....serious question....is "tax revenue" and "govt. receipts" the same thing? Thanks.
Click to expand...

Reagan's massive tax cuts and cap gains help were the most positive to gov't receipts in our history. Clinton retained reasonable tax rates from a historical perspective. None of the ridiculous marginal rates that existed prior.

Bush's tax cuts helped more than any graphs will depict. He overcame the dot com bust topped by 9/11. Regardless of tax policy, tax revs are based upon economic strength. Bush has resided over a strong economy, but not an enormous business expansion. His tax policy will be seen in the future when investment capital his policies spurred on turns to profitability. Similarly, the Clinton era was dominated by investments made during the era of his predecessors and very early in his own tenure. I just don't think the effect are immediate, except in unemployment numbers and consumer pricing.

Frankly, there is a point of diminishing returns on tax cuts and we're probably close to an inflection point.

I'll respond later to the charts when I'm not too lazy to break out my laptop.
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#3
#3
What we don't know from this information is what tax receipts would have been without the tax cuts. By virtually all accounts, the 01 and 03 (to a lesser extent) cuts made a large impact on the recession both in duration and depth. Tax receipts in 01-03 would have surely been down from 1999-2000 (and possibly 01 depending on when the recession hit) due to the huge economic growth associated with the dot.com and Y2K (I can explain later if you wish) boom. So, we would see greatly reduced revenues in those years. The key question is did the stimulative effect of tax cuts outweigh the reduction in tax rates. This analysis doesn't say but indicates it might since the impact on revenues as a % of GDP 3 and 4 years out (the period of this study) is decreasing to nil.


To put this in current terms. Clearly tax policy can be used as a stimulus and tax receipts are a combination of the rate and the tax base (GDP for lack of a better measure of base). Similar to the concept of elasticity - if a reduction in rate has enough stimulative effect to raise the base by a greater percentage, revenues go up. If not, they go down.

As importantly, raising taxes has the same effect. If the percentage rate increase is less than the negative effect on economic growth then revenues rise - otherwise tax rate increases can likewise shrink tax revenues.
 
#4
#4
volinbham said:
What we don't know from this information is what tax receipts would have been without the tax cuts. By virtually all accounts, the 01 and 03 (to a lesser extent) cuts made a large impact on the recession both in duration and depth. Tax receipts in 01-03 would have surely been down from 1999-2000 (and possibly 01 depending on when the recession hit) due to the huge economic growth associated with the dot.com and Y2K (I can explain later if you wish) boom. So, we would see greatly reduced revenues in those years. The key question is did the stimulative effect of tax cuts outweigh the reduction in tax rates. This analysis doesn't say but indicates it might since the impact on revenues as a % of GDP 3 and 4 years out (the period of this study) is decreasing to nil.


To put this in current terms. Clearly tax policy can be used as a stimulus and tax receipts are a combination of the rate and the tax base (GDP for lack of a better measure of base). Similar to the concept of elasticity - if a reduction in rate has enough stimulative effect to raise the base by a greater percentage, revenues go up. If not, they go down.

As importantly, raising taxes has the same effect. If the percentage rate increase is less than the negative effect on economic growth then revenues rise - otherwise tax rate increases can likewise shrink tax revenues.
Click to expand...


Your first paragraph is speculative and the rest of your post is simply explaining the theory of increasing revenue through tax cuts. I understand the theory. It would still be nice to see evidence this concept works.
 
#8
#8
BigPapaVol said:
See Reagan.
Click to expand...

Right, but by that same data, it shows the Clinton plan worked just as well, if not better, and revenues have decreased under Bush Jr. Why not change the current rates back to what they were under Reagan and Clinton, and repeal the Bush cuts? From a revenue standpoint, it doesn't seem to make sense what McCain wants to do with making the Bush cuts permanent.
 
#9
#9
rjd970 said:
What does that graph look like in constant dollars? Or percentage of GDP?
Click to expand...

if you bothered to read the link I provided:

One argument that was made against the President's tax plan was that it would cost the government too much revenue. But, again, the facts since 2003 have shown that the economic growth spurred by the President's tax policies have significantly swelled government coffers. In January 2004, for example, the non-partisan Congressional Budget Office projected that 2004 revenue would be $1.817 trillion. Actual revenue came in $63 billion higher – half a percent of GDP. In January 2005, CBO projected 2005 revenue would be $2.057 billion; actual revenue came in $96 billion higher – 0.7 percent of GDP.
Click to expand...
 
#10
#10
MG1968 said:
if you bothered to read the link I provided:
Click to expand...

Using 2003 as a starting point is disengenous. Revenues from 2003 were the lowest they have been since 1980, both by % of GDP and constant dollars. They had nowhwere to go but up. As a whole, they are still down from Reagan and Clinton.

From a revenue standpoint, I can't see what the argument is for continuing the Bush tax cuts. It seems to me some combination of Reagan/Clinton, with a massive cut in spending would be ideal.
 
#11
#11
rjd970 said:
Using 2003 as a starting point is disengenous. Revenues from 2003 were the lowest they have been since 1980, both by % of GDP and constant dollars. They had nowhwere to go but up. As a whole, they are still down from Reagan and Clinton.

From a revenue standpoint, I can't see what the argument is for continuing the Bush tax cuts. It seems to me some combination of Reagan/Clinton, with a massive cut in spending would be ideal.
Click to expand...
your gross dollars look doesn't help here. Gross dollars doesn't account for tax policy solely. The number of variables driving the train is relatively high.

The graph you're referencing would have been much more hideous and the near vertical nature of the recovery nowhere near as steep without advantageous tax policy driving investment in the interim.

The fact that the '04 and '05 years surpassed the 2000 numbers on the chart (which would have been the back end of the .com boom, suggests that there is merit to the reduced taxes policy, given that nothing had yet occurred to replace the huge cap gains being paid in the tech boom.
 
#12
#12
rjd970 said:
Using 2003 as a starting point is disengenous. Revenues from 2003 were the lowest they have been since 1980, both by % of GDP and constant dollars. They had nowhwere to go but up. As a whole, they are still down from Reagan and Clinton.

From a revenue standpoint, I can't see what the argument is for continuing the Bush tax cuts. It seems to me some combination of Reagan/Clinton, with a massive cut in spending would be ideal.
Click to expand...

hmm, there must have been a reason it was called the 2003 Tax Act
 
#13
#13
rjd970 said:
Your first paragraph is speculative
Click to expand...

Do you think revenues would have been down in 01-03 regardless of changes in tax law? Clearly the answer is yes. What we don't know is if they would be lower or higher than they actually were given the tax change. Call that speculative if you like but it is a critical piece of information that is not included in the analysis.

rjd970 said:
Using 2003 as a starting point is disengenous. Revenues from 2003 were the lowest they have been since 1980, both by % of GDP and constant dollars. They had nowhwere to go but up. As a whole, they are still down from Reagan and Clinton.

From a revenue standpoint, I can't see what the argument is for continuing the Bush tax cuts. It seems to me some combination of Reagan/Clinton, with a massive cut in spending would be ideal.
Click to expand...

Wait a minute - clearly the report you referenced shows what happened to receipts vs. prior receipts. If it's disengenuous to use 2003 then the entire report is flawed since it looks at effect of a tax bill on future revenues relative to what they were.

Using your logic, we can't evaluate the 2001 tax cuts because 1999 and 2000 were banner revenue years due to a hot economy and if no change were made receipts would still be down due to the down economy.
 
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