The Myth of Tax Cuts and Growing the Economy

VARNEY: The central question on the economic side of the debate is which tax policy will grow the economy and cut the deficit. Paul Ryan was very clear -- he said, look, you cut tax rates, and that gives you growth. Listen to this exchange.
[begin video clip]
RYAN: You can cut tax rates by 20 percent and still preserve these important preferences for middle-class taxpayers --
BIDEN: Not mathematically possible.
RYAN: It is mathematically possible. It's been done before. It's precisely what we're proposing.
BIDEN: It has never been done before.
RYAN: It's been done a couple of times, actually.
BIDEN: It has never been done before.
RYAN: Jack Kennedy lowered tax rates, increased growth. Ronald Reagan --
BIDEN: Oh, now you're Jack Kennedy?
RYAN: Ronald Reagan --
[end video clip]
VARNEY: Well, that was an interruption. That was also a put-down. And Vice President Biden was factually wrong. JFK, Ronald Reagan, George W. Bush -- all of them cut tax rates, and the end result was in increase in money flowing to the Treasury. Revenues went up when tax rates went down. Joe Biden was wrong. [Fox News, America's Newsroom, 10/12/12]

The Economy At Mid-1983
Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983. [Congressional Budget Office, 8/1/83]



The upshot was that Kennedy entered office with the nation's finances in good shape. Yes, the debt-GDP ratio would fall further until it hit its low point of 32.6 percent at the end of the Carter administration. But with a deficit of only 0.6 percent of GDP for the 1961 fiscal year in which JFK took the oath of office, there was room for additional spending or for tax cuts.
[...]
Individual income tax revenues stumbled for one year, but then continued up. Corporate tax revenues rose, without interruption, along with the economy.
But other things were happening. The federal government was spending a lot of money on interstate highway construction, military hardware, the space race and education. Much of this -- especially infrastructure, science, engineering and education -- boosted productivity for the overall economy. And the Federal Reserve let the money supply grow faster than it had in the 1950s. These factors all helped foster fast-growing output and, hence, growing tax revenues. [Bismarck Tribune, 10/10/10]


Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie).
[...]
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. [Congressional Research Service, 9/14/12]

I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.
[...]
My other work has remained consistent with this view. In a paper on dynamic scoring, written while I was working at the White House, Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger--about 50 percent--but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the the [sic] same thing. [Greg Mankiw, 7/2/07]

You [in the Bush administration] are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. [Vox Baby, 1/3/07]




http://mediamatters.org/research/2012/10/12/fox-uses-vp-debate-to-revive-myth-that-tax-rate/190590

Mother Jones on the myth of Tax Cuts and Economy Growth

http://www.motherjones.com/politics/2011/10/charts-economic-myths-jobs-deficit-taxes