Tax Rates and Tax Revenue

Supply-side economics is a dead, rotting corpse of a theory; yet despite the odoriferous off-gassing, the right refuses to give it a proper burial. Even Greg Mankiw, former Chairman of Bush’s Council of Economic Advisors, described it as the work of "charlatans and cranks" (in his textbook Principles of Economics).

My friend Deanna recently raised this stinking corpse in a post arguing against Barak Obama’s tax proposals. The Right’s justification for lower tax rates on high incomes, is basically the supply-side rationalization that lower marginal tax rates spur investment which then creates growth that pays for the tax cuts. Deanna adds an additional argument that raising tax rates on the wealthy will also reduce investment. The implication being that rich people will only invest if bribed. I disagree.

Deanna mixes up tax effect changes to overall revenue with income distributions and then spiced things up with revisionist history. In our recent history, tax cuts have reduced both the amount of tax revenue collected and the subsequent growth in tax revenue that followed. Here are a few statistics.

• Reagan’s “Economic Recovery Tax Act of 1981”
• Reduced Federal revenues by more than $575B (constant 1992 $) during the next four years.
• Resulted in Federal revenue growth (constant dollars) of 2.1% per year for the remainder of the Reagan term (1.7% for the combined Reagan-Bush terms). For comparison, the growth rate during Carter’s term averaged 5.9% per year.
• G.W. Bush’s “Economic Growth and Tax Relief Reconciliation Act of 2001”
• Reduced Federal revenues by nearly $170B (constant 1992 $ - around $350 in current dollars) during the next four years.
• G.W. Bush’s “Jobs and Growth Tax Relief Reconciliation Act of 2003”
• Reduced Federal revenues by more than $390B (constant 1992 $ - around $490 in current dollars) during the next four years.
• Federal revenues grew at a rate of 0.9% per year (so far) for the Bush years. Even if we ignore the troubled year 2001 and instead start with 2002, the growth rate still averaged only 1.8% per year

Compare that with the Clinton years, which started with a tax rate hike: 

• Revenues increased almost $170B (constant 1992 $) higher during the next four years.
• Federal revenue growth averaged 5.9% per year during the Clinton Presidency.
  

The Right's faith in supply-side tax cuts is wrong and misplaced. Tax cuts do not pay for themselves; nor do they generate faster growth in Federal revenue streams.

Source: The Tax Policy Center (http://www.taxpolicycenter.org/taxfacts/index.cfm)