“Congressional budget-scoring rules are conservative about anticipated growth from tax cuts because economists disagree over how much they spur the economy.”
October 3, 2012
I don’t know about you, but I found last night’s presidential debate fascinating. Not because “my guy won,” but rather because of the way Jim Lerner kept challenging each candidate to spell out the differences between their respective positions.
I was particularly pleased with the debate about whether or not Romney’s tax plan would add $5 trillion to the deficit because it gets to the central issue underlying the debate in America about tax policy and growth.
You see, the official way Congress and the President determine how much revenue is gained or lost by a tax increase or decrease is calculated by the Congressional Budget Office (CBO) and the task is known as "Revenue Scoring.
Economist generally cite the CBO policy of using something called “static analysis” to figure out the relationship between a proposed tax cut (or hike) and the amount of taxes actually collect as being flawed economically. Technically, this means that the government assumes that a tax hike or cut will have no effect on economic growth. This is patently false and the history of tax cuts proves it.
Several times last night, Romney looked Obama and the country in the eyes several times last night and said “I won't put in place a tax cut that adds to the deficit.” How can this be, how can Romney say he’ll cut taxes without adding to the deficit?
Well, history proves that Romney’s claim is, in fact, true! Over the past 50 years, four US presidents have done exactly what Romney is proposing – cutting taxes to spurn growth – and in all cases, tax collections soared. In fact, when Bill Clinton slashed capital gains taxes in 1997, he actually created a short term surplus.
The four presidents who have cut taxes during a recession and grown tax collections turn out to be a perfect bipartisan mix – two democrats and two republicans.
Let’s look at the numbers…
The Kennedy Tax Cut: In 1963, President Kennedy pushed through an across-the-board tax rate reduction that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent.
Source: Heritage Foundation
In 2011, the US took in about $1.25 trillion in income taxes. If the economy responded the same way it did in 1963, that number would jump by $787 billion or nearly $8 trillion over the 10 year period Obama is using to come up with his phony baloney $5 trillion price tag.
The Reagan Tax Cut
In 1981, President Reagan pushed through an across the board tax cut that was quite similar to the one proposed by Romeny. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989.
Source: Heritage Foundation
Again, projecting those results against 2011 tax revenue, this would boost tax collections by a whopping $675 billion/year or $6.8 trillion over 10 years.
The Clinton Tax Cut
Obama and most democrats love to talk about the Clinton tax hike on 1993 and point to it as the cause of the short-term surplus on 2000. If we look at the numbers, we can see this was not true.
First of all, Clinton did not do what Obama is proposing – he did not raise taxes during a recession. The recession of 1991 was long over when Clinton pushed through his tax hike. That said, the economic results from his tax hike were rather pale.
Real GDP growth averaged 3.2%, respectable relative to today’s economy, but disappointing compared to the four years following the first year of the recovery from the 1982 recession, when growth averaged 3.7%
Employment growth was also a respectable 2 million a year, but nowhere near the 23 million that were created over the course of Clinton’s entire 8 year term. Meanwhile, real hourly wages continued to stagnate, rising only 2 cents to 7.43 an hour in 1996 from $7.41 in 1992. No real gains for the middle class there.
Federal government receipts did increase $90 billion, but again, the economy was coming out of a recession and growing 3 times as fast as it is in 2012.
Then, in 1997, Clinton signed a tax cut in the ever-so-critical capital gains tax rate to 20% from 28%. Keep in mind, Clinton did the exact opposite of what Obama is proposing under the so-called “Buffett Rule,” which, in effect, raises the capital gain tax rate by 100%!
What happened? Between the end of 1996 and the end of 2000 economic growth accelerated a full percentage point to 4.2% a year. Employment growth nudged higher, to 2.1 million jobs per year as the unemployment rate fell to 4.0% from 5.4%.
As the tax rate on capital gains came down, real wages made their biggest advance since the implementation of the Reagan tax rate reductions in the mid-1980s. Real average hourly earnings were (in 1982 dollars) $7.43 in 1996, $7.55 in 1997, $7.75 in 1998, $7.86 in 1999, and $7.89 in 2000.
Millions of Americans shared in the prosperity as the value of their 401(k)s climbed along with the stock market, which saw the price of the S&P 500 index rise 78%.
Revenue growth accelerated an astounding 59%, increasing on average $143 billion a year. Combined with continued restraint on government spending, that produced a $198 billion budget surplus in 2000.
A 59% increase in 2011 tax revenue would increase tax revenue by $737 billion or $7.4 trillion over 10 years, not the $5 trillion deficit that Obama keeps citing.
The Bush Tax Cut
This brings us to the contemporary granddaddy of all tax cuts – the much maligned Bush Tax cuts.
In 2003, Bush cut income taxes across the board as well as the dividend and capital gains rate, and the economy responded. In two years, stocks rose 20 percent. In three years, $15 trillion of new wealth was created. The U.S. economy added 8 million new jobs from mid-2003 to early 2007, and the median household increased its wealth by $20,000 in real terms.
But the real jolt for tax-cutting opponents was that the 03 Bush tax cuts also generated a massive increase in federal tax receipts. From 2004 to 2007, federal tax revenues increased by $785 billion, the largest four-year increase in American history. According to the Treasury Department, individual and corporate income tax receipts were up 40 percent in the three years following the Bush tax cuts. And (bonus) the rich paid an even higher percentage of the total tax burden than they had at any time in at least the previous 40 years. If the Bush tax cuts were a handout for the rich, how come they ended up paying 40% more than they did under Clinton's tax plan?
Source: The Washington Times
Projecting this growth on 2011 tax revenue would result in a $500 billion a year increase in tax revenue or $5 trillion over 10 years – exactly the opposite of what Obama claimed last night!
Okay, here’s the bottom line. If you believe the historically unproven theory that raising or lower taxes has no effect on the economy, you’ll probably believe Obama’s claim that Romney’s tax cut will hurt the economy resulting in reduced tax revenue – even though this has never happened in history!
But, if you believe that history is the best predictor of the future, you’ll look at the nations bipartisan tax cut track record and notice that no tax cut has ever reduced tax revenue. And over the past 50 years, 4 presidents have cut taxes and seen an average tax revenue increase of $675 trillion/year!
So, before you vote consider who to believe, the actual economic history of the both democrat and republican presidents, or a man who has demonstrated that he’ll say just about anything to get re-elected.
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