Thursday, July 15, 2010

Question for Supply Siders - Bush Tax Cuts

This following comment was made in response to someone's inquiry on I thought it'd be a quick piece, but I suppose it inadvertently warped into something blog worthy:

Question for Supply Siders- Why didn’t Bush’s tax cuts bring in more revenue? We’ve heard this would be the case (Laffer Curve) but it appears to have failed in practice. Any thoughts?

First of all, keep in mind that the Bush Tax Cuts were of the *income* type. It did increase revenues (as brought in by the income tax). Over the long run that is.

Over the short term up until around 2003, TOTAL tax revenue appeared to be dropping. It may be argued however that this is more attributable to the short recession due from the internet bubble bursting and 9/11. That's were the confusion comes from. Total government revenue (when you consider every type of government revenue source) dropped, but the income tax was bringing in more money than it was before.

The laffer effect is not always immediately apparent or applicable. Increased revenue from a tax cut can sometimes take awhile, if not at all. Around minute four of this video helps make such a point (

So be sensitive to how the data is presented. One could say that Reagan's tax cuts dropped revenue as well, if you make a graph that covers only the first year after his opening cuts in '82 This ignores that his cuts were slowly implemented, and that recovery was still occuring, but a a graph "proving" that they failed could be made if you look at his policy in the short term. This video illustrates for me however the empirical case that there was still positive feedback from when considering all entire eight years of his presidency. Other cases of the effect, as well as caveats are also explored (

Speaking of caveats allow me to reiterate: Not every tax cut "pays for itself." Again, what type of tax we're discussing is very important. Sometimes the cut will simply boost private sector growth without boosting state coffers (and sometimes that boost may be relatively small anyway). Reducing taxes, yet boosting spending on the excuse that the government will automatically be seeing more money from that private sector growth this ill advised.

Nonetheless as a broad-brushed concept, its generally agreed that a "low" tax rate will work better than a "high" tax rate. No one be they left or right, argues that government coffers would be better off were rates returned to upwards of 70% (a la pre-Reagan years). The gray area of what defines a "low" tax rate and whether it affects people's behavior is where the partisanship still lies.

Hence, why everything would far less confusing if we'd only simplify to something like a flat/fair tax. Effects would then be far more transparent.

~David Morris~

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