West Virginia sales tax on food lower today
Tax Carnival #20: Stars and Taxes Forever!

No apparent economic boost from tax cuts

"I certainly would not claim that tax cuts pay for themselves."
-- Edward Lazear, Chair of the Council of Economic Advisers

That comment is an observation on the supply-side argument that tax cuts mean more government revenue because lower rates encourage people to work more, thereby raising their income and the accompanying taxes.

Yeah, I know after every tax cut in my life, I've asked my bosses to pile on the work.

My anecdotal employment/tax experiences aside, a recent article in the Christian Science Monitor examines why we're still waiting for the economic boost expected from the Bush tax cuts.

In addition to citing Lazear, the man who currently heads the panel charged with providing the prez with objective economic analysis and advice on a wide range of domestic and international economic policy issues, the newspaper picked the brains of folks across the political spectrum.

Waiting for the tax benefits: One of the experts was economist Paul Kasriel of Northern Trust Co. in Chicago. Kasriel says he still can't detect the promised big boost in national output, investment and savings from the GOP's latest supply-side tax cuts.

With a recession under way when the first round began in 2001, the tax cuts -- lower marginal rates on income and  the added cuts for capital gains -- were  an attempt to get the economy moving ahead.

Maybe the economy would have performed worse if taxes hadn't been cut, said Kasriel. But so far, gross domestic product growth in the current recovery has been the slowest of any expansion since 1961, slightly slower even than the record-long expansion that began in 1991.

Oh, by the way, notes the Monitor, during the expansion period, Dubya's dad and Bill Clinton raised taxes.

But wait, there's more: True tax-cut believers, however, call for patience.

J.D. Foster, an economist at the conservative Heritage Foundation, says in the article that the most important supply-side tax cuts on capital gains and dividends didn't go into effect until 2003. They just need time to work through the whole system.

The obvious questions: How much more time? And do we have it?

Comments

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Jim Howard

The stock market is at an all time high, employment is at all time high, revenue to the government is at all time high, and even with the war, the hurricanes, and no opposition to any spending measure from the President or the Congress the deficit is falling far faster than President Bush's most optimistic predictions, the dire forcasts of increasing deficts made in the past few years have been totally discredited.

The numbers don't lie. Lower taxes = more economic growth and more income to the goverment.

Let's try a thought experiment. Suppose the goverment imposed a 100% tax on income, as they do in North Korea. What would income to the goverment from taxes be?

Unless the Army is sent out to enslave the people (as they do in North Korea) income to the goverment will be zero.

Now suppose we set the income tax rate at zero percent.

All the 'taxpayers' will happily go to work, but our poor goverment will get no income from income tax.

Somewhere between 0% and 100% is a point where revenues to the goverment maximize. All indications are that this rate is about 15%. We don't know for sure because it has been many decades since taxes were anywhere near the point of maximum revenue.

Kennedy in 1961, Reagan in 1980, and Bush in 2003 all significantly increased revenue to the goverment by decreasing taxes.

Mark C. Hughes

I have spent nearly thirty years as a real estate broker preaching from my soap box that the best strategy is to hold onto your real estate and transfer it to your kids because your initial cost basis goes away and your children benefit from inheriting it at its current market value. However, with the outstanding public debt at $8,826,566,665,887.12 and growing, Congress is taking a hard look at the elimination of the step up in cost basis as a viable means to generate more revenue to pay down our debt, not offer tax cuts. Has my favorite strategy been compromised? I think so.
I have humbly stepped off my comfortable position on my soap box and asked, “there has to be another way”. After exhaustive research, I have concluded that is not in my best interest to hold onto this (essentially) tax cut when we transfer our estate to our children. I believe it will be taxed and I believe we all need to prepare for that by looking at alternative strategies of tax deferral to avoid the inevitable tax, not tax cut. mark@virtuositypro.com

Edward J. Dodson

The reason the tax cuts have not resulted in real economic growth is simple. The beneficiaries have every incentive to "invest" their increased disposable income in speculative activities rather than in job-creating investment in capital goods.

Tax reform ought to reward "earned" income from labor and investment in capital goods rather than passive, "unearned" income derived from financial investments or investment in land.

What to do?

At the federal and state levels, income taxes should be converted into graduated flat taxes, exempting all individual incomes up to the national and state median. Above this level, increasing rates should be applied to higher ranges of income. The rates and ranges should be adjusted annually to balance budgetary needs.

At the local level, property taxes should be replaced with an annual tax on location (i.e., land) values equal to the annual potential rental value of locations. All property improvements ought to be exempt from the tax base. This would reward investment in new construction and renovation. It would push land owners to develop the land held to its highest and best use. Land speculation would not longer be profitable, thus removing a major component of inflation from the economy.

Finally, we should deal with the runaway national debt by replacing all government bonds as they mature with fully amortizing bonds that return both principal and interest to investors. The amount required to service this debt would be calculated as part of the balanced budget process.

For additional thoughts on tax policy, I recommend a paper written in the 1970s by economist Arthur Becker, "Full Employment Without Inflation."

JW

First, I have seen no tax cut under W. I have seen taxes increase. Gasoline prices have more than doubled. Regulation, another form of taxation, has increased. Taxation is a euphemism for theft and government is a synonym for organized crime. Cutting theft and parasitism based on the forcible redistribution of wealth is good in its own right. If it hurts government in the process, so much the better.

starving actor

Even if there was no benefit to the government from lowering taxes on us who work, so what? The thieving fascist traitor murder pig democrats do not need any of our money.
They are too whipped up on self-importance to be allowed to attempt logic in spending the public dollar. Our government needs to contain spending to protecting the USA and the american taxpayer. Close the god damned border already- catch and document and certify non criminality of all illegally present people- then ship the crims out, and kill the terrorists. THEN i will consider the first penny of tax as valid.

TC

Why do tax cuts need to produce more money for the government to be considered a boost? Seems like keeping an economy humming and putting more money into the taxpayer's pockets is a pretty nice boost in its own right.
A year or so ago, I recall reading about a study that said on average, tax cuts replace 85% of the revenue they reduced in a few years. So the net effect of a 1 dollar cut is only 15 cents on the governments revenue (on average). So a billion dollar tax cut actually only reduced government revenue by 150 million (on average). And quite frankly, I don't think that is too shabby. The politicos can stand and take credit for one number, a nice big one,and the bean counters can be happy knowing the real net effect is only one-sixth of that (on average). And if you pick the right taxes, you may not have any real loss of revenue at all.

Kevin Tremblay

Tax cuts won't pay for themselves? Does that matter to me? All I know is that I want to pay less money every April 15th for the right to live here when other people are getting the benefits. I see (quoting a radio voice) the socialization of cost (taxpayers footing the bill) and a privatization of profit (contractors, illegals, entitlement people)... So, if I keep more of what I make, I am happy. Oh, medical coverage is also a tax on those who earn money -we foot the bill for both those who pay and those who don't and it isn't the doctors getting wealthy.

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