What Happens…?

by Dave Schuler on December 2, 2012

Menzie Chinn projects that, if the “Bush tax cuts” are allowed to elapse in full, it means no growth in 2013 relative to 2012. Sounds about right to me. He goes on to say:

I much prefer the President’s proposal (described here), which includes letting the rates rise on the top bracket (as I outlined in this post). But EGTRRA and JGTRRA (aka the Bush tax cuts) have constrained our fiscal policy for a decade, and as Jeff Frieden and I discussed in Lost Decades, contributed to the financial crisis of 2008. With ever greater impact on tax revenues going forward, these provisions should end (although I would prefer to delay rate increases on middle incomes).

I would very much like to see a one paragraph quantitative statement of how much the tax cuts have constrained federal spending. What would it have been without them?

I certainly don’t see it. It’s possible we’d have less debt on the balance sheet but I haven’t seen a great deal of spending restraint by either party over the last decade.

{ 11 comments… read them below or add one }

jan December 2, 2012 at 10:48 am

When I read this thread I thought of this graph seen yesterday, The Bush tax cut issue in one chart, put out by Reason.

steve December 2, 2012 at 12:16 pm

@jan- This is a constant problem with those who think tax cuts raise revenue. They cut taxes, then 3 or 4 years later revenue is back to where it was before taxes were cut. That proves success to them. They totally forget about the debt run up until revenue returns. They also forget that, yes, when the economy is strong GDP growth will eventually return revenue back to pre-cut levels, but when the business cycle turns, revenue plummets again. Debt rockets, like as shown in the graph you cite.

But, maybe I am wrong. Let’s try it out by cutting tax rates to zero. Should net us lots of revenue if you guys are correct.

Steve

jan December 2, 2012 at 3:17 pm

But, maybe I am wrong. Let’s try it out by cutting tax rates to zero. Should net us lots of revenue if you guys are correct.

No one has suggested cutting tax rates to zero. But, placing the majority of the tax burder on the relatively few high earners is not a viable long term plan either.

Basically, we spend too much. We waste too much of what we take in and spend. And, our system of taxation is deeply flawed and needs reform. Just making it more progressive is not the single panacea needed, IMO.

Andy December 2, 2012 at 6:29 pm

Steve,

Or maybe we could try putting taxes at 100% – think of all the revenue we’d get!

More seriously, the tax system has a lot of moving parts, and marginal rates are but one part. Adjust one part doesn’t necessarily result in linear or even predictable results.

steve December 2, 2012 at 6:48 pm

“No one has suggested cutting tax rates to zero. But, placing the majority of the tax burder on the relatively few high earners is not a viable long term plan either.”

How do we avoid this if most of the income is controlled by relatively few high earners?

Steve

Dave Schuler December 2, 2012 at 6:53 pm

How do we avoid this if most of the income is controlled by relatively few high earners?

In the most recent study I could find, the top quintile (i.e. 20%) of income earners earned just over 50% of the household income. The top quintile is, roughly, anybody with a household income of $80,000 or more.

jan December 2, 2012 at 7:16 pm

Steve and Dave,

Here is a short IBD piece, with more charts, dealing with the Bush tax cuts and how they did not cause deficits, as Obama repeatedly said during this past sad campaign. Rather they helped to cut the deficits through stronger economic growth — the thesis of the Romney plan panned by Obama and the MSM.

After President Bush in late May 2003 signed the largest tax cut since President Reagan — including dropping the top marginal rate to 35% from 39.6% — government receipts from individual income taxes rose from $793.7 billion to a peak of $1.16 trillion in 2007, when the mortgage crisis began, a 47% jump.

Stronger economic growth expanded the tax base and brought in so much revenue that Bush more than halved the deficit over that period. The budget gap plunged to $160.7 billion from $377.6 billion, according to the president’s report.

Obama’s economic report shows that the average deficit-to-GDP ratio during the entire Bush administration — 2001 to 2009 — was 2%, which is well below the 50-year average of 3%.

During the Obama years, in contrast, the same deficit ratio has averaged 9.1%.

For an even more technical rendition, though various charts, Business Insider has put together this piece on Who pays taxes.

Throughout these various graphed fiscal summaries it pointedly indicates how Obama distorted the ‘math’ and economic pathway that would really accomplish more growth, a decreasing deficit, and an economy more poised for a real comeback.

steve December 2, 2012 at 9:06 pm

jan- The Bush tax cuts started in 2001. Please use real dollars, not nominal dollars. Look at how long it took for revenue to reach what it was under Clinton. Also remember that the population was growing during this period. Note that the Bush tax cuts are still in effect. Yes, if you cut taxes when the economy is growing, you will make up part of the loss of revenue from lower rates, but when the business cycle turns, you have huge deficits like we do now. What do you do then?

Last of all, IBD is a true hack site.

“Stronger economic growth expanded the tax base and brought in so much revenue that Bush more than halved the deficit over that period.”

What we got was the subprime bubble. We in no way got stronger economic growth. Then, if you still really believe that, you need to explain why they stopped working. Why did the economy absolutely crater in 2008 with those pro-growth Bush tax cuts still in effect?

Steve

jan December 2, 2012 at 9:51 pm

Steve,

Again, I am not marketing myself as a master economic whiz person. However, as I see it the Bush tax cuts, in 2008, had nothing to do with the gigantic effects of the housing market bursting. I mean, such cuts can only go so far to stabilize the market, can’t they?

Also, in the Fall of 2008 is when the market crashed. Then you had Obama’s election a few months later. Even then people were hesitant about Obama, given his left-leaning economic policies. In ’09 you had Obama calling for the Keynesian stimulus. He kept tinkering with the market by various bail-outs and freebies such as cash-for clunkers. Then you had the ACA slammed against people, all cascading onto a free market that was being hampered by DC social progressive policies. This is where uncertainty was being cultivated, along with only a temporary extension of the Bush tax cuts after the devastating ’10 midterms, where the economy was actually in better shape than it is today. Business can’t really do long-range planning on short term policies — and so the tax cuts really couldn’t do much to help future investments leading to economic growth and job expansion.

Economics is a package deal, where you not only have to put encouraging business policies in play, but also leaders in Washington who seem to understand and help with growing business. As I posted earlier, small business is depressed because of Obama’s reelection. This is not going to lend itself to people willing to risk money in what they see as a hostile DC environment — given the ACA monetary implications, a flood of new regulations hitting business, coupled with the plethora of tax increases that simply boggle the mind.

The bottom line is the climate that surrounds Obama’s fiscal policies is poison to business — hence tax cuts aren’t going to cut it, unless you also have other assurances in place to encourage people to invest and expand with some kind of confidence in the mix. So far, all Obama does is raise his fist and say “do it my way or else.” Even children don’t take kindly to such rhetoric and power-mongering.

steve December 3, 2012 at 8:24 am

“Again, I am not marketing myself as a master economic whiz person. However, as I see it the Bush tax cuts, in 2008, had nothing to do with the gigantic effects of the housing market bursting. I mean, such cuts can only go so far to stabilize the market, can’t they?”

Then you really believe the cuts gave us real growth in the 2000s? You dont have to be an econ wiz to realize that the growth in that period was an artifact created by he subprime bubble. At least the dotcom bubble gave us real internet architecture and software that increased productivity. You also need to deal with the fact that lowered tax rates mean larger deficits when the economy goes into recession.

Steve

Dave Schuler December 3, 2012 at 8:36 am

Then you really believe the cuts gave us real growth in the 2000s?

Just to recap what I think about the “Bush tax cuts”, I think that they gave a very small kick to consumer spending in 2002 and maybe 2003. After that, not much. That’s how I read the studies.

As I have frequently said, I think they were the wrong cuts at the wrong time. Consumer spending hadn’t decreased or, at least, hadn’t decreased sharply. Non-residential business investment, on the other hand, had been decreasing. What we needed was a spur to more business investment. We got a spur to more consumer spending.

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