Full Version: Have the Bush tax cuts increased our tax receipts?
I caught this in another debate and thought that it might be fun to hash out this issue of the conservative liberal divide. Even more fun is the fact that facts and data can be introduced in abundance (not that everyone will feel compelled to support their opinions in this manner), but on a subject like this there will always ne a level of conjecture left at the end of the day because nobody can know what the receipts would have been without the tax cuts.
Link to post
Here is the quote from Carlitoswhey:
The question for debate here is essentially:
Is this quote correct in its facts and argument?
or
Have the Bush tax cuts increased our tax receipts?
Link to post
Here is the quote from Carlitoswhey:
QUOTE
It's not about tax cuts, it's about tax receipts. The government will get somewhere between 6 and 9 percent more money this year thanks to the tax cuts. That's how economic growth works.
The question for debate here is essentially:
Is this quote correct in its facts and argument?
or
Have the Bush tax cuts increased our tax receipts?
QUOTE(Eeyore @ Feb 8 2005, 12:06 PM)
I caught this in another debate and thought that it might be fun to hash out this issue of the conservative liberal divide. Even more fun is the fact that facts and data can be introduced in abundance (not that everyone will feel compelled to support their opinions in this manner), but on a subject like this there will always ne a level of conjecture left at the end of the day because nobody can know what the receipts would have been without the tax cuts.
Link to post
Here is the quote from Carlitoswhey:
The question for debate here is essentially:
Is this quote correct in its facts and argument?
or
Have the Bush tax cuts increased our tax receipts?
Link to post
Here is the quote from Carlitoswhey:
QUOTE
It's not about tax cuts, it's about tax receipts. The government will get somewhere between 6 and 9 percent more money this year thanks to the tax cuts. That's how economic growth works.
The question for debate here is essentially:
Is this quote correct in its facts and argument?
or
Have the Bush tax cuts increased our tax receipts?
I am not sure where Carlitoswhey got his figures, so I won't comment on them.
As for the second question: the real answer (from my point of view) is: who cares?
Was the purpose of the tax cuts to generate more revenue? Was it to stimulate the economy? Was it to give people more of their own money back?
A Sober Case for Tax Cut Policies
The answer to the question is that it is impossible to tell. There is no way to model the behavior of the economy had the tax cuts not been put into effect.
QUOTE
Model A says that tax cuts do not stimulate the economy or produce beneficial economic activity, but do rob the government of revenue and increase governmental debt, thereby actually damaging economic performance. Model B says, au contraire, tax cuts increase the GNP, increase incomes, and stimulate economic activity, thereby actually providing government with increased revenues. (Although, in fairness, most advocates of Model B would not find the prospects of a government deprived of some of its revenue a particularly unfortunate event.)
It is well past time for laymen to realize that these models, indeed any specific prediction of an economic future, are utterly useless. The outcomes of the models are predicated by their assumptions, which are largely driven a priori by the modeler's beliefs about economic behavior. There is one thing about which we can be confident regarding almost any economic prediction or projection: It will be wrong, and probably grossly so.
Given the nature of a free economy, this should be surprising only to professional economists. An economy is the amalgamation of millions of individual decisions, billions or trillions at the national level, made daily about economic matters: Do I buy this or that? Do I take this job or the other one? Do I purchase this stock or bond? Do I buy a new home or do I put away money in my 401(k)? Trying to guess the cumulative outcome of the millions, billions, or trillions of individual daily decisions made over any future time period is a fool's errand.
It is well past time for laymen to realize that these models, indeed any specific prediction of an economic future, are utterly useless. The outcomes of the models are predicated by their assumptions, which are largely driven a priori by the modeler's beliefs about economic behavior. There is one thing about which we can be confident regarding almost any economic prediction or projection: It will be wrong, and probably grossly so.
Given the nature of a free economy, this should be surprising only to professional economists. An economy is the amalgamation of millions of individual decisions, billions or trillions at the national level, made daily about economic matters: Do I buy this or that? Do I take this job or the other one? Do I purchase this stock or bond? Do I buy a new home or do I put away money in my 401(k)? Trying to guess the cumulative outcome of the millions, billions, or trillions of individual daily decisions made over any future time period is a fool's errand.
That article is quite informative and quite long to be honest.
QUOTE
Usually the effects of tax cuts are calculated based on what is known as a "static" analysis. In other words, if these tax cuts had been in effect over the last year, and economic behavior did not change as a result, the government would have gotten this much less revenue. However, economic behavior does change as a result of tax cuts, a concession made by even the most ardent opponent of tax cuts as public policy. The question is: How much does economic behavior change, and what are the consequences of that change for government revenue.
Tax cut advocates believe Americans are significantly overtaxed, which suppresses economically beneficial behavior. The result of tax cuts, therefore, will be to stimulate economically beneficial behavior in a way that increases economic growth and activity, which in turn increases the yield the government gets from taxes.
Too often, this "dynamic" view of the effect of tax cuts on government revenue is caricatured as claiming that "tax cuts pay for themselves" in terms of short-term government revenue. And indeed, there are some incautious tax cut advocates who do claim exactly that.
More cautious advocates (including me) do not claim that this so-called "feedback" effect fully restores government revenue in the short term. For one thing, since it is impossible to know what the economic future actually holds, it is impossible to know whether tax cuts have fully restored government revenue, since we do not truly know what it would have been.
Tax cut advocates believe Americans are significantly overtaxed, which suppresses economically beneficial behavior. The result of tax cuts, therefore, will be to stimulate economically beneficial behavior in a way that increases economic growth and activity, which in turn increases the yield the government gets from taxes.
Too often, this "dynamic" view of the effect of tax cuts on government revenue is caricatured as claiming that "tax cuts pay for themselves" in terms of short-term government revenue. And indeed, there are some incautious tax cut advocates who do claim exactly that.
More cautious advocates (including me) do not claim that this so-called "feedback" effect fully restores government revenue in the short term. For one thing, since it is impossible to know what the economic future actually holds, it is impossible to know whether tax cuts have fully restored government revenue, since we do not truly know what it would have been.
The answer is that we can never know with certainty what would have happened had tax rates not been decreased.
cbo figures (scroll down to table 4-1) show that individual income tax receipts are increasing at somewhere near 10% per year for 2005 - 2008. Since individual income tax receipts are going up at 10%, and tax rates are holding steady or even declining, I conclude that economic growth is leading to more tax revenue. As an aside, this will reduce the deficit.
If I were to modify my original post, I would have said that tax receipts will increase at least partially due to the tax cuts. Tax cuts at least to some extent stimulated the economy and led to the recovery that is increasing the tax base.
There is historical reason for inferring that tax reductions "lift all boats" and thus stimulate the economy. Under Harding, Kennedy, Reagan and now Bush Jr., taxes were cut and economic growth followed, resulting in higher personal income. We tax personal income, so tax revenue increases, even if the tax rate is cut slightly. As Amlord notes, there are many individual events that all contribute to the revenue, but tax decreases historically have been followed by more revenue to the IRS. The problem is that we always manage to spend it all and then some!
If I were to modify my original post, I would have said that tax receipts will increase at least partially due to the tax cuts. Tax cuts at least to some extent stimulated the economy and led to the recovery that is increasing the tax base.
QUOTE(cbo)
Projecting Receipts in 2005. CBO projects that individual income tax receipts will grow by a strong 11 percent in 2005 (see Table 4-2). That growth in receipts is partly driven by CBO's projection that taxable personal income--as measured by the national income and product accounts--will grow by 5.9 percent in 2005, the largest increase since 2000.
...
growth in receipts of individual income taxes typically exceeds growth in personal income by roughly a percentage point in an expanding economy (the phenomenon of "real bracket creep" described below),
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The implementation and expiration of tax provisions enacted in JCWAA and JGTRRA (carl's note - tax cuts) are projected to contribute about $30 billion, or 3.5 percentage points, to revenue growth in 2005.
...
growth in receipts of individual income taxes typically exceeds growth in personal income by roughly a percentage point in an expanding economy (the phenomenon of "real bracket creep" described below),
...
The implementation and expiration of tax provisions enacted in JCWAA and JGTRRA (carl's note - tax cuts) are projected to contribute about $30 billion, or 3.5 percentage points, to revenue growth in 2005.
There is historical reason for inferring that tax reductions "lift all boats" and thus stimulate the economy. Under Harding, Kennedy, Reagan and now Bush Jr., taxes were cut and economic growth followed, resulting in higher personal income. We tax personal income, so tax revenue increases, even if the tax rate is cut slightly. As Amlord notes, there are many individual events that all contribute to the revenue, but tax decreases historically have been followed by more revenue to the IRS. The problem is that we always manage to spend it all and then some!
QUOTE(carlitoswhey @ Feb 8 2005, 02:35 PM)
There is historical reason for inferring that tax reductions "lift all boats" and thus stimulate the economy. Under Harding, Kennedy, Reagan and now Bush Jr., taxes were cut and economic growth followed, resulting in higher personal income. We tax personal income, so tax revenue increases, even if the tax rate is cut slightly. As Amlord notes, there are many individual events that all contribute to the revenue, but tax decreases historically have been followed by more revenue to the IRS. The problem is that we always manage to spend it all and then some!
Lift all boats? The problem with these tax cuts is that there are other important dire consequences that may drown a lot of boats. The recent Microsoft dividend had almost as much affect in terms of income adjustment as did the tax cuts. Although dividends are now much less taxed, so the revenue would be smaller.
I realize this isn't the question put forth in the thread, but I think the appropiatness of the tax cuts is much more of an issues than if they generated tax revenue. Also, there was a famous economist who said "Bush's tax cuts provided very little bang for the dollar, but there were a lot of bangs".
I don't doubt the revenue increased, the question is "what was the price?".
Have the Bush tax cuts increased our tax receipts?
Well, doesn't look that way according to this pdf:
Levels of US Taxes 1940-2003
It's interesting to see how SS receipts have grown, corporate receipts have shrunk, and the whole shebang dips during the Bush first term. I'm sure a lot of factors have to do with this trend, not just tax rates.
But this is all percentage of GDP, so has GDP grown enough to offset the reductions in percentages?
This link helps put dollars to the percentages:
What Was GDP Back Then?
Let's take the first three years of the Bush administration's numbers and work them out:
2001 tax % GDP - 19.8
2002 tax % GDP - 17.9
2003 tax % GDP - 16.5
2001 GDP $ - 9,866 billion (year 2000 USD, all)
2002 GDP $ - 10,080 billion
2003 GDP $ - 10,390 billion
2001 tax receipt $ - 1,954 billion
2002 tax receipt $ - 1,804 billion
2003 tax receipt $ - 1,714 billion
Okay, the results are obvious -- fewer bucks coming into the treasury in 2003 than 2001.
Tax cut does not equal more tax receipt, by this data.
It'll be interesting to see the 2004 - 2008 numbers.
Well, doesn't look that way according to this pdf:
Levels of US Taxes 1940-2003
It's interesting to see how SS receipts have grown, corporate receipts have shrunk, and the whole shebang dips during the Bush first term. I'm sure a lot of factors have to do with this trend, not just tax rates.
But this is all percentage of GDP, so has GDP grown enough to offset the reductions in percentages?
This link helps put dollars to the percentages:
What Was GDP Back Then?
Let's take the first three years of the Bush administration's numbers and work them out:
2001 tax % GDP - 19.8
2002 tax % GDP - 17.9
2003 tax % GDP - 16.5
2001 GDP $ - 9,866 billion (year 2000 USD, all)
2002 GDP $ - 10,080 billion
2003 GDP $ - 10,390 billion
2001 tax receipt $ - 1,954 billion
2002 tax receipt $ - 1,804 billion
2003 tax receipt $ - 1,714 billion
Okay, the results are obvious -- fewer bucks coming into the treasury in 2003 than 2001.
Tax cut does not equal more tax receipt, by this data.
It'll be interesting to see the 2004 - 2008 numbers.
QUOTE(carlitoswhey @ Feb 8 2005, 11:35 AM)
cbo figures (scroll down to table 4-1) show that individual income tax receipts are increasing at somewhere near 10% per year for 2005 - 2008. Since individual income tax receipts are going up at 10%, and tax rates are holding steady or even declining, I conclude that economic growth is leading to more tax revenue. As an aside, this will reduce the deficit.
Are increasing over the next 3 years? Are you consulting your magic 8 ball on this one?
I would think that if you wanted to support your answer you'd have to look at past tax receipts since the cuts went into effect. Saying that they are going to increase over the next three years by X percent doesn't even fit with the argument you make a few sentences later when you say:
QUOTE(carlitoswhey)
Tax cuts at least to some extent stimulated the economy and led to the recovery that is increasing the tax base.
In other words you don't know what effect they are having so why would looking at some CBO report for the future make sense when you can't even evaluate the present or the past.
And for the record, the one thing that would really reduce the deficit is for Bush to stop spending money like a gambling addict on the first of the month.
Great post AM. It is pretty obvious that tax receipts have not increased yet. The 2004-2008 numbers are going to be interesting. Tax cuts have a long term economic benefit, and I'd like to see how those numbers move. But I have to agree with the principal of Carlito's statement. A better economy should naturally lead to a higher GDP and more tax reciepts. It looks like GDP grew 2.1% in 2001 and 3% in 2002, so the economy seems to be picking up steam. How much of that is due to tax cuts is anyone's guess.
But I have to agree with the principal of Carlito's statement. A better economy should naturally lead to a higher GDP and more tax reciepts. It looks like GDP grew 2.1% in 2001 and 3% in 2002, so the economy seems to be picking up steam. How much of that is due to tax cuts is anyone's guess.
JLMA,
Yep, GDP rose because productivity kept rising; however, the tax receipts fell because unemployment rose during that time. What was happening?
More out of fewer workers, that's what. But fewer workers mean less tax income.
The next few years will be telling. It's simply a myth that cutting taxes automatically leads to tax receipt growth, and that myth came from the Reagan years when tax cuts seemed to lead to tax receipt growth. Right -- and the high tech growth during the 1980s had nothing to do with this? I think not. High tech absorbed the laid off rust belt workers, and so there you go.
Productivity growth directly leads to GDP growth, but these figures show that GDP growth does not lead to tax receipt growth if unemployment goes high.
What will be telling over the next few years is whether employment rises and thus leads to increased tax revenue. Unemployed folks pay very little in taxes, and if the top rates are lowered -- there's no magic to this.
JLMA,
Yep, GDP rose because productivity kept rising; however, the tax receipts fell because unemployment rose during that time. What was happening?
More out of fewer workers, that's what. But fewer workers mean less tax income.
The next few years will be telling. It's simply a myth that cutting taxes automatically leads to tax receipt growth, and that myth came from the Reagan years when tax cuts seemed to lead to tax receipt growth. Right -- and the high tech growth during the 1980s had nothing to do with this? I think not. High tech absorbed the laid off rust belt workers, and so there you go.
Productivity growth directly leads to GDP growth, but these figures show that GDP growth does not lead to tax receipt growth if unemployment goes high.
What will be telling over the next few years is whether employment rises and thus leads to increased tax revenue. Unemployed folks pay very little in taxes, and if the top rates are lowered -- there's no magic to this.
BLS shows unemployment to be 5.4% for Feb. (BLS statistics) That's still a historical low, compared to 6-9% unemployment in the 80s. Unemploment was lower than 5.4 only from 1996 to 2001, and before that in 1973.
The obvious response to this is the question, "what sort of jobs?" (Anyone else feel like cutting the BLS data?)
I'm not sure if I've ever seen conclusive proof that Bush's tax cuts stimulated us out of the recession early or if we would have recovered anyway.
Looking at the chart in the first link you posted, AM, it looks like Bush's tax cuts restored tax levels closer to the historical fraction of GDP, ~17-18% (eyball average), down from 20-21% in the late 90s. That seems resonable. I'm left to wonder how they climbed.
Could an argument be made that those extra taxes collected during the bubble reduced savings?
Checking the historical savings rate, we see a decline from 11.1% in May of 1985 to 7% in Nov 1992, to 4% in Jan 1999, falling and hovering around 2% since. So there is no direct correlation with the tax rate. And the savings rate hasn't increased since the tax cuts, so the extra money must have gone into consumption.
From Census income statistics, we can show that real income grew for all household income brackets until 2001. In 2003, gains in real income were realized down to top 40% of households. It remains to be seen if the recovery has reached everyone.
Looking at the last time real income levels moved down, starting in 1990, it took only 3 years for the top 20% to surpass their real income prior to the recession, but 5 years for the lowest 40% to recover. We have to wait for the 2005 data, then, to see if the recovery has reached everyone. (It only goes up to 2003.) In 1979, we had to wait 5 years and 9 years respectively for real income to recover.
So while in the past three years you can show that revenues collected have not grown, you can't compared them to what they would be without the tax cuts because we just don't know what GDP would be without the tax stimulus. I would argue that by restoring tax rates from 20% of GDP to 17%, closer to the historical rate, Bush removed what was an increasing load on the economy. Also, we should not be overanxious for a quick recovery, because historically it takes some time for income levels to recover, especially for the lower income brackets.
PS Of course, the lowest income brackets don't pay much in the way of net taxes, thanks to earned income credits and other benefits, so their recovery should have little effect on tax revenue... although we would expect it to have an effect on government expenditures.
The obvious response to this is the question, "what sort of jobs?" (Anyone else feel like cutting the BLS data?)
I'm not sure if I've ever seen conclusive proof that Bush's tax cuts stimulated us out of the recession early or if we would have recovered anyway.
Looking at the chart in the first link you posted, AM, it looks like Bush's tax cuts restored tax levels closer to the historical fraction of GDP, ~17-18% (eyball average), down from 20-21% in the late 90s. That seems resonable. I'm left to wonder how they climbed.
Could an argument be made that those extra taxes collected during the bubble reduced savings?
Checking the historical savings rate, we see a decline from 11.1% in May of 1985 to 7% in Nov 1992, to 4% in Jan 1999, falling and hovering around 2% since. So there is no direct correlation with the tax rate. And the savings rate hasn't increased since the tax cuts, so the extra money must have gone into consumption.
From Census income statistics, we can show that real income grew for all household income brackets until 2001. In 2003, gains in real income were realized down to top 40% of households. It remains to be seen if the recovery has reached everyone.
Looking at the last time real income levels moved down, starting in 1990, it took only 3 years for the top 20% to surpass their real income prior to the recession, but 5 years for the lowest 40% to recover. We have to wait for the 2005 data, then, to see if the recovery has reached everyone. (It only goes up to 2003.) In 1979, we had to wait 5 years and 9 years respectively for real income to recover.
So while in the past three years you can show that revenues collected have not grown, you can't compared them to what they would be without the tax cuts because we just don't know what GDP would be without the tax stimulus. I would argue that by restoring tax rates from 20% of GDP to 17%, closer to the historical rate, Bush removed what was an increasing load on the economy. Also, we should not be overanxious for a quick recovery, because historically it takes some time for income levels to recover, especially for the lower income brackets.
PS Of course, the lowest income brackets don't pay much in the way of net taxes, thanks to earned income credits and other benefits, so their recovery should have little effect on tax revenue... although we would expect it to have an effect on government expenditures.
QUOTE
Could an argument be made that those extra taxes collected during the bubble reduced savings?
Hey Pudrik,
Oh sure, an argument can be made along this line. I just don't think it's a very good argument, being as money saved is either pre-tax in 401k and other retirement accounts, or that tax has already been paid on the saved money. Taking it out and spending it does nothing for federal tax receipts, except as corporate profit taxes, which of course are well loop-holed.
The extra taxes collected during the high tech expansion from about 1993 to 1998 were due to an extraordinarily high employment rate for well-paid high tech workers. Basically, if you could make a coherent sentence, you got a job. I was in total amazement at how many clueless people, many from the military on their retirement from that at colonel levels, got good middle management jobs on the assumption that being a wing commander equates to running a data center.
That works about as well as a data center manager moving into being a wing commander. Crashing planes cost money and so do crashing systems. Must be okay, hey?
I won't recount all the stats about the massive layoffs in high tech, starting around 1998 and continuing through to today (the DOL is simply not reporting them any longer -- but being close to this, I know it's still going on), but this means that people accustomed to making $50,000 to $120,000 a year find themselves down to $12,000 or so on unemployment, and when that runs out, $0.00 income.
At best, a new job is found with an *average* reduction in pay at around 20%. I wonder what the *mean* reduction is? I would not be surprised if it is a lot higher.
One could argue, even convincingly, that taking say a 40% cut to move to a job in the midwest from one in San Francisco or New York isn't a reduction due to the much lower cost of living. However, this does not help federal tax receipts.
When the high tech bubble burst, tax revenues were bound to go down. This hit squarely on the middle and upper-middle classes.
I'm not sure why savings went down during this time. Was stock market speculating counted in the savings figures? Everyone wanted to make a million in the 1990s off the venture-funded startups. I imagine second mortgages were popular to feed this, along with 401k raids -- but I simply don't know.
Also, be careful about going by straight unemployment percentages. This discounts those who fall off the radar scope by going back to school, giving up and staying at home, and those who simply aren't counted but factored in as having exhausted unemployment comp. Oh, and former contract employees are also factored in. I don't think the old formulas work any longer; they could very well be giving us low numbers that don't reflect reality.
Eh, gives a warm and fuzzy to those who need to think everything's going just fine. I strongly suspect this to be a fool's paradise.
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