Yes, federal revenues have been increasing since 2003, but, needless to say (or one would think), this coincidence hardly establishes causation. While some talk show blowhards, politicians and editorial page / op-ed writers persist in contending that the Bush tax cuts have had a net positive impact on revenues, the strong, broad consensus among economists -- including conservative economists and Bush's own current and former top economists -- is to the contrary: The Bush tax cuts have had a net negative impact on revenues (i.e., revenues would have been higher, and would be higher today, if the Bush tax cuts had not taken place).
Views of Major Economists (most conservative, none “liberal”) on the Net Impact of the Bush Tax Cuts on Revenues
(Quotes of articles or statements are in italics. Bolding is mine.) Some variations in format, such as larger type size when a name is first mentioned, are intentional, and others are due to the fact that I'm html-challenged.
IMPORTANT NOTE: These views regarding the net negative impact on revenues do not even take into account the negative budgetary impact of added interest expense caused by higher deficits.
The Washington Post, October 17, 2006:
"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."
Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion. An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.
Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said. http://www.washingtonpost.com/wp-dyn/content/article/2006/10/16/AR2006101601121_pf.html
Gregory Mankiw, former Chairman of George W. Bush’s Council of Economic Advisors, 2003-2005. Economics professor at Harvard. Below is a description by Matt Nesvisky of the National Bureau of Economic Research of NBER working paper by Gregory Mankiw and Matthew Weinzierl, December 2004:
some observers have suggested that tax cuts can generate so much economic growth that they may more than pay for themselves. Most economists are doubtful about either such extreme. The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing.
Mankiw and Weinzierl…find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. http://www.nber.org/digest/jul05/w11000.html
In the actual report described above by Nesvisky, Mankiw and Weinzierl state in the introduction:
To what extent does a tax cut pay for itself? This question arises regularly for
economists working at government agencies in charge of estimating tax revenues.
Traditional revenue estimation, called static scoring, assumes no feedback from
taxes to national income. The other extreme, illustrated by the renowned
Laffer curve, suggests that tax cuts can generate so much economic growth
that they completely (or even more than completely) pay for themselves. Most
economists are skeptical of both polar cases. They believe that taxes influence
national income but doubt that the growth effects are large enough to make tax
cuts self-financing.
http://post.economics.harvard.edu/faculty/mankiw/papers/dynamicscoring_05-0407.pdf
Mankiw on his blog, 5/31/06: Some supply-siders like to claim that the distortionary effect of taxes is so
large that increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion
credible for most tax hikes. http://gregmankiw.blogspot.com/2006/05/must-read.html
Mankiw on his blog, 3/11/07:
Senator McCain tells the National Review :
"Tax cuts, starting with Kennedy, as we all know, increase revenues."
I doubt that, in fact, Senator McCain believes we are on the wrong side of the Laffer curve. But unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party. http://gregmankiw.blogspot.com/2007/03/mccain-on-laffer-curve.html
Mankiw on his blog, 7/2/07:
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.
The book made clear that the critique applied to a particular reason to favor the tax cuts, not necessarily to the policy of cutting taxes. There are many reasons a person might favor tax cuts besides the belief that tax cuts are self-financing… there is a big difference between rejecting a policy and rejecting one argument made by some proponents of the policy.
…My other work has remained consistent with this view. In a paper on dynamic scoring , written while I was working at the White House,
…
even if I had changed my mind on this issue and somehow decided that broad-based tax cuts were self-financing, I would not feel bad about it. But the truth is, I haven't changed my mind.
http://gregmankiw.blogspot.com/2007/07/on-charlatons-and-cranks.html
Andrew Samwick, Chief Economist on Staff of Bush's Council of Economic Advisers, 2003-2004
January 03, 2007
To anyone in the Administration who may read this blog, I have one small wish for the new year. Please stop your boss from writing or saying the following:
"It is also a fact that our tax cuts have fueled robust economic growth and record revenues."
You 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. http://voxbaby.blogspot.com/2007/01/new-years-plea.html
Samwick interviewed (audio) 9/24/07 http://www.onpointradio.org/shows/2007/09/20070924_a_main.asp
Henry Paulson, Current Treasury Secretary for Pres. George W. Bush
Paulson during his confirmation hearings in 2006, per article in Market Watch (from Dow Jones): Paulson rejected notions that tax cuts pay for themselves…"As a general rule, I don't believe that tax cuts pay for themselves," Paulson said, echoing the opinion of most economists. Full article: http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7BB18C218C-3ED7-4514-898C-F7B2D24FAB43%7D&keyword=&print=true&dist=printTop
Paulson in written Q&A with Congressman Brad Sherman (D-CA), April 19, 2006:
Rep. Sherman: From both your written and oral testimony before the Committee, I interpret your position to be that tax cuts do not pay for themselves, and that they do indeed reduce revenues. Is that indeed your position?
Paulson: Tax cuts that reduce marginal tax rates will likely improve the efficiency of the economy and boost overall economic activity. Because they increase economic activity, cuts in marginal tax rates typically lead to revenue losses that are smaller than implied by so-called static analyses, which hold economic activity constant. However, under normal conditions, tax cuts do not wholly pay for themselves. http://www.house.gov/sherman/press_room_2006/pr_060419a.html
Paulson, 9/24/07:
Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax increases. http://ap.google.com/article/ALeqM5hxTCjTf4MLcD4tYVIWzVLvG-HkLA (Presumably Paulson is referring above to increasing tax rates, raising caps on income subject to FICA, or other tax rate increases, in effect. Key implication in the statement above is that tax rate increases would INCREASE revenues)
Edward Lazear, current Chairman of Bush’s Council of Economic Advisers
The Christian Science Monitor, June 25, 2007:
Another supply-side theory, now less popular, was voiced by Bush in February 2006: "You cut taxes, and the tax revenues increase." The theory is that with lower marginal tax rates, people work harder and longer, thereby raising their income – and paying more taxes on it. But even top Bush economic advisers now reject that thesis. "I certainly would not claim that tax cuts pay for themselves," Edward Lazear, the current chair of the Council of Economic Advisers, has stated. http://www.csmonitor.com/2007/0625/p15s01-cogn.html?page=2
Lazear, Testimony before the Senate Budget Committee “State of the Economy and the Budget”, September 28, 2006:
To determine the effect of tax cuts on revenue, we need to ask, “What would revenues have been absent these cuts?” This question can be answered by providing estimates of what revenue would have been had we not cut taxes...Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data [we have] presented above do not support this claim.
http://www.whitehouse.gov/cea/lazear20060928.html
President Bush’s Council of Economic Advisors (Chaired by supply-side economist Glenn Hubbard) concluded in its Economic Report of the President, 2003, that:
although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity. http://www.gpoaccess.gov/usbudget/fy04/pdf/2003_erp.pdf
BusinessWeek, FEBRUARY 17, 2003:
R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, estimates that as much as 40% of the cost of the Administration's proposal would be offset by higher economic growth.
http://www.businessweek.com/magazine/content/03_07/b3820001_mz001.htm?chan=search
Glenn Hubbard in THE WALL STREET JOURNAL, November 29, 2005:
Moderator, asks : On taxes, do either of you believe that a significant tax increase is either wise or inevitable either in President Bush's term or in the first term of his successor?
MR. HUBBARD writes: ... I think the administration is missing an important opportunity to talk with the American people about the enormous looming entitlement liabilities and the large implicit flow deficits (larger than the official deficit) that go with them. If we cannot bring these deficits (which conventional spending restraint and economic growth will not control) under control, we will have to raise taxes, with significant adverse consequences for economic growth. I do not believe that a significant tax increase is wise or inevitable. In the context of my earlier remarks, I say this because I believe we should and will scale back the growth in the entitlement programs that are the clear and present fiscal danger.
[The obvious implication in Hubbard’s statement above is that raising tax rates would have a POSITIVE net impact on revenues] http://online.wsj.com/article/SB113320203715608216.html
Ben Bernanke, Chairman of the Federal Reserve
Testimony before Congress, April 27, 2006: Chairman Bernanke: … The other comment I would make on your issues with respect to evenues I have addressed in a recent letter, and that concerns the issue of dynamic versus static scoring. To the extent that tax cuts, for example, promote economic activity, the loss in revenues arising from the tax cut will be less than implied by purely static analysis which holds economic activity constant.
[skip to later in Q&A session]
Senator Reed: Thank you, Mr. Chairman. Thank you for your testimony today. And just in line with the question about the effect of tax cuts, the former chairman of the Council of Economic Advisors, Greg Mankiw, wrote in his macroeconomic textbook that there is no credible evidence that tax cuts pay for themselves and that an economists who makes such a claim is--quote--``a snake oil salesman who is trying to sell a miracle cure.'' Do you agree with that?
Chairman Bernanke. I don't think that as a general rule tax cuts pay for themselves. http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_senate_hearings&docid=f:29738.wais
Bernanke testimony before Congress, Janurary, 2007:
The general view is tax cuts don't pay for themselves. http://online.wsj.com/article/SB116913177480880296.html?mod=home_whats_news_us
Alan Greenspan
Greenspan at House Budget Committee hearing, 9/8/04:
[Rep. Jeb] Hensarling [R-TX]: … the latest reports I see from Treasury indicate that revenue is actually upsince we passed the latest round of tax relief…seemingly suggesting that at least in this particular case, that maybe tax relief did help ignite an economic recovery that has added revenues to the Treasury and actually helped become part of the deficit solution as opposed to part of the deficitproblem. So my first question is, have you seen these reports from Treasury, and do you concur thatrevenues are up now over what they were a year ago?
Mr. Greenspan: Well, Congressman, I think the general conclusion about the fact that revenues arelower than they would otherwise be without the tax cut, but higher because of the tax cut, is bestdescribed by saying that a tax cut will immediately lose revenue, and then to the extent that it increaseseconomic activity and generates a larger revenue base will gain some of it back. It is very rare, andvery few economists believe that you can cut taxes and you will get the same amount of revenues. But it is also the case that if you cut taxes, you will not lose all the revenue that is implicit in the so-called static analysis. http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_house_hearings&docid=f:95792.wais
Greenspan, September, 2007:
[The following is my own commentary.] Alan Greenspan has expressed regret that his comments were used to support the Bush tax cuts. The inherent implication must be that he believes that those tax cuts have had a net negative impact on revenues and will continue to do so if extended (or at least that the combined effect of revenue impact and additional interest expense has had a negative budgetary impact and will continue to do so). Otherwise, there would be no reason to be regretful.
From The Economist magazine:
Jan 12th 2006:
A surprising rise in tax revenue last year has pushed this chutzpah even further. Mr Bush last week implied that the supply-side fantasy might hold after all: tax cuts do pay for themselves. “There's a mindset in Washington that says, you cut the taxes, we're going to have less money to spend,” he noted contemptuously, before claiming that recent experience suggested otherwise.
…Even by the standards of political boosterism, this is extraordinary. No serious economist believes Mr Bush's tax cuts will pay for themselves. A recent study from the Congressional Budget Office suggested that, after ten years, up to one-third of the cost of a 10% cut in income taxes can be recouped from higher economic growth. That fraction may be higher for cuts in taxes on capital alone. But it is nowhere near 100%. http://economist.com/world/na/displaystory.cfm?story_id=E1_VPRJGQV
July 12, 2006
All told, Mr Bush’s tax policy may have played a modest role in boosting a temporary revenue surge. But that is very different from suggesting, as the White House does, that tax cuts were the main cause or that they permanently pay for themselves. Most serious economists have long laughed at the idea that Mr Bush’s tax cuts raise revenue. Now, it seems, the president’s own boffins agree. Deep in the Mid-Session Review is a claim that the Bush tax cuts could eventually raise the level of GDP by 0.7%, a relatively modest effect, and one that itself depends on the tax cuts being financed by lower spending. http://economist.com/agenda/displaystory.cfm?story_id=E1_STVJTRP
Below is the executive summary of the Congressional Budget Office report mentioned above by The Economist (Jan 12 article). Note: this analysis does factor in the additional debt service caused by revenue loss and the resulting higher debt levels.
Congressional Budget Office, Economic and Budget Issue Brief, “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates”, December 1, 2005:
Summary
Changes in tax policy can influence the economy, and those economic effects can in turn affect the federal budget. Although conventional estimates of the budgetary effect of tax policies incorporate a variety of behavioral effects, they are, nonetheless, based on a fixed economic baseline. For that reason, they do not include the budgetary impact of any possible macroeconomic effects of tax policies.
This brief by the Congressional Budget Office (CBO) analyzes the macroeconomic effects of a simple tax policy: a 10 percent reduction in all federal tax rates on individual income. Because there is little consensus on exactly how tax cuts affect the economy, CBO based its analysis on a number of different sets of assumptions about how people respond to changes in tax policy, how open the economy is to flows of foreign capital, and how the revenue loss from the tax cut might eventually be offset. Under those various assumptions, CBO estimated effects on output ranging from increases of 0.5 percent to 0.8 percent over the first five years on average, and from a decrease of 0.1 percent to an increase of 1.1 percent over the second five years. The budgetary impact of the economic changes was estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.
—Douglas Holtz-Eakin, Director http://www.cbo.gov/ftpdocs/69xx/doc6908/12-01-10PercentTaxCut.pdf
Bruce Bartlett Bruce Bartlett “is an economist associated with supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a treasury official under President George H.W. Bush.” (source: Wikipedia).
Bartlett, National Review Online (NRO Financial), March 5, 2003:
the Laffer Curve is correct in theory — it simply shows that at a 100% tax rate or a 0% tax rate no revenue is collected. Every economist knows that this is true. But of course, we are nowhere near a 100% tax rate...such that one could expect an across-the-board reduction in tax rates actually to raise revenue.
Bartlett, National Review, April 7, 2003
Supply-siders believe that a dynamic analysis of President Bush’s tax plan would show approximately...that the net revenue loss will be between 25% and 33% less than a static estimate would show.
Bartlett on Real Clear Politics, March 28, 2006:
Bush Tax Cuts Don't Pay For Themselves
How likely is it that the Laffer curve is causing revenues to rise, as opposed to normal operation of the business cycle? Not much, in my opinion.
First of all, the Laffer curve came to prominence during a period when the top tax rate on dividends was 70 percent, and the rate on long-term capital gains was 40 percent…However, when President Bush took office, the top rate on dividends was down to 39.6 percent, and the rate on long-term capital gains was just 20 percent -- far below the rates Ronald Reagan inherited. It is very implausible that these rates were in the "prohibitive" range of the Laffer curve, such that a rate reduction would raise revenue.
But even if we grant the theory, how likely is it that the recent rise in revenue owes anything to this effect? Again, not much.
The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President (pp. 57-58) says, "Although the economy grows in response to tax reductions ... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."
A study by the Congressional Budget Office in December 2005 found that a tax-rate cut would recoup at most 20 percent of the static revenue loss in the first five years.
…In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended. The case for extending them must be made on other grounds.
Heritage Foundation -- by Tracy Foertsch, Ph.D. and Ralph A. Rector, Ph.D
, February 15, 2007 (EGTRRA and JGTRRA refer to the 2001 and 2003 tax cuts, respectively)
Extending EGTRRA's and JGTRRA's expiring provisions has a positive effect on U.S. GDP, incomes, and employment over the 10-year budget period. It also generates substantial revenue feedbacks ($295.5 billion). Ignoring the macroeconomic effects of the extension plan on individual, non-corporate business, and corporate incomes puts federal tax revenues $991.9 billion below the CBO's projected baseline levels over 10 years. Taking the dynamic effects of the extensions into account reduces the estimated revenue loss to the Treasury to $696.4 billion over 10 years. (Footnote:These estimated changes in federal individual income tax revenues exclude net refundable credits.) http://www.heritage.org/Research/Taxes/wm1361.cfm
Martin Feldstein (former chairman of President Reagan's Council of Economic Advisers, professor of economics at Harvard and an adviser to the Bush 2000 campaign)
Originally published in the WALL STREET JOURNAL
Monday, December 6, 1999:
Bush's Tax Plan Makes Sense
…The revenue effect of specific tax changes is of course important if we are to avoid a return to budget deficits. Any sensible estimate of the effect of tax rate reductions on government revenue would take into account their favorable impact on work effort, skill development, risk-taking and other factors that increase taxable income… I estimate that such favorable feedback effects would offset about one-third of the traditionally estimated revenue loss from cutting the top tax rate to 33% from 39.6%.
http://www.nber.org/feldstein/wj120699.html
Martin Feldstein, Testimony before Senate Budget Committee regarding President Bush’s 2001 Tax Cut Proposal, February 13, 2001:
The true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates. Studies of past tax rate reductions show that taxpayers respond to lower marginal tax rates in ways that increase their taxable income. They work more and harder and take more of their compensation in taxable form and less in fringe benefits. At the National Bureau of Economic Research we have used a large publicly available sample of anonymous tax returns to estimate how the actual revenue loss would compare to the official estimates that ignore this behavioral response. Our analysis shows that when the proposed Bush tax cuts are fully phased in the net revenue loss would be only about 65 percent of the officially estimated costs.
That implies, for example, that the revenue loss in 2010 that the Joint Committee on Taxation estimated as $233 billion would actually be only about $150 billion. If we apply that ratio to each year's revenue loss, the total revenue loss would be cut from $1.6 trillion to only about $1 trillion. Because of the timing of the tax cut and the taxpayers' lags in responding to it, I think a safer estimate of the total 10-year revenue loss would be about $1.2 trillion
Martin Feldstein in The Washington Post, April 30, 2003:
While any tax rate cut that could completely pay for itself would be unusual, studies of past tax reforms show that taxpayer behavior can offset a substantial portion of estimated revenue loss. http://www.nber.org/feldstein/washpost4302003.pdf
Martin Feldstein in Financial Times, July 19 2006:
Martin Feldstein, professor of economics at Harvard and former chairman of Ronald Reagan's presidential council of economic advisers, is perhaps the most respected advocate of supply-side effects. He says his work suggests that following an across-the-board income tax cut, behavioural changes such as a willingness to work harder in more demanding roles "cause you to recover about one-third of the revenue you would otherwise lose". Most others believe the effects are considerably smaller. http://www.ft.com/cms/s/0/1da9113a-16c3-11db-8b7b-0000779e2340.html
Martin Feldstein, interview, The Region (publication of the Federal Reserve Bank of Minneapolis), September, 2006:
Think about an across-the-board tax cut. Let's say you cut all tax rates by 10 percent, so that the 25 percent rate goes to 22 1/2 percent, 15 percent rate goes to 13 1/2 percent, and so on. That raises taxable incomes. The revenue cost of that tax cut is only about two-thirds of the so-called static result that you'd get if you didn't take behavior into account. http://www.minneapolisfed.org/pubs/region/06-09/Feldstein.cfm
Milton Friedman
Friedman in Wall Street Journal 1/19/2003
How can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes. Resulting deficits will be an effective--I would go so far as to say, the only effective--restraint on the spending propensities of the executive branch and the legislature. http://www.opinionjournal.com/editorial/feature.html?id=110002933
Friedman on the Bush tax cuts, 9/16/03:
"I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" … The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. " http://www.rightwingnews.com/interviews/friedman.php
Robert Barro January 06, 2004:
The reason I like the [Bush] tax cuts is twofold. One is that I think it improves the incentives for the longer run economic performance for growth. And secondly, that I favor a smaller size of the government and ... a way to accomplish that is to starve the government of revenue and I look at this as further going in that direction. http://www.hoover.org/multimedia/uk/2993196.html
Robert L. Bixby, Executive Director of The Concord Coalition, “a nonpartisan, grassroots organization dedicated to fiscal responsibility”. (Bixby does not have an economics degree. Per Concord’s website, “He frequently represents Concord's views on budget and entitlement reform policy at congressional hearings and in the national media.”) July 16, 2006:
“The idea that tax cuts have led to higher revenues is pernicious,” said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan research group that lobbies for fiscal discipline. “Tax revenues may be higher, but they are not higher than they would have been if the tax cuts hadn't occurred.” http://www.concordcoalition.org/news/article-storage/2006/nytimes--060716.htm
Charles Wheelan (Wheelan writes on economics, and is author of "Naked Economics" http://www.amazon.com/gp/product/0393324869/ref=sip_pdp_dp_0/002-7255213-9600866 
March 13, 2007:
The Biggest Economics Charlatans: The supply-siders who continue to insist, in the face of all evidence and academic opinion to the contrary, that a country like the United States can boost tax revenues by cutting taxes. Based on my past skepticism of the supply-siders, I know that I'll soon be bombarded by angry comments and emails pointing out government revenues went up after some favorite tax cut, such as the Reagan or Bush tax cuts. But that alone tells us nothing, as government revenues always trend up due to inflation and economic growth. The appropriate question is not whether government revenues were higher after the tax cut than before, but rather whether revenues are higher than they would have been in the absence of the tax cut. All credible evidence on this subject says that there are a lot of good things about tax cuts, but raising extra revenue is not one of them. http://finance.yahoo.com/expert/article/economist/26418
Wheelan, May 2, 2006:
Debunking One of the Worst Ideas in Economics
I'm going to write about what I consider to be the two worst economic ideas -- or at least ideas that pass as economics, though both have been thoroughly repudiated by nearly all credible thinkers…the most pernicious bad ideas in economics are those that have a ring of truth. They're hard to debunk because they have a certain intuitive appeal. As a result, they stick around, providing bogus intellectual cover for bad policy, year after year, decade after decade.
Laffer…supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves.…In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation…. But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There's no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on. Will it generate new economic activity? Probably. And that will generate some incremental tax revenue for the government. But remember, it also means that the government will be taking a smaller cut of all the economic activity that we already have.
Think about a simple numerical example: Assume you've got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion. Let's cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink. That's basically what happened with the large Reagan and George W. Bush tax cuts… In both cases, government revenue was lower than it would have been without the tax cuts.
Neither the Reagan nor the George W. Bush tax cuts were "self-financing," as the Laffer disciples like to argue…the bottom line from the Bush Administration itself is that tax cuts reduce Uncle Sam's take.
http://finance.yahoo.com/expert/article/economist/4065
Ramesh Ponnuru at The Corner (blog), National Review Online. October 17, 2007 (Ponnuru has no degree in economics, nor does it appear that he has worked as an economist, but he is commenting here on the concensus of economists)
Yesterday I noted that Bush's tax cuts had caused revenue to be lower than it would otherwise have been. A number of people have emailed me saying that I'm wrong: Revenues have been growing fast, and are higher than they were before the tax cuts took effect.
That shows that the tax cuts were compatible with rising revenues, not that they caused them. The tax cuts may have boosted our economic growth, but we would have had some growth without them. So the question is whether tax cuts boosted growth so much that they ended up raising money.
I can't think of any serious economist who thinks that happened. The 2003 Economic Report of the President said that "[a]lthough the economy grows in response to tax reductions... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity." Bush's own Treasury Department
has disavowed the view that Bush's tax cuts have raised revenue.Rob Portman and Ed Lazear, while serving in the Bush administration (as head of the OMB and the Council of Economic Advisers, respectively), said that the tax cuts had reduced federal revenue.
I'll give the last word to Alan Viard, an economist who worked at the White House before joining AEI. Last year, the Washington Post quoted him : "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."
http://corner.nationalreview.com/post/?q=ZjI2NjhlMjBjZjAzMDk0N2EyNjE4ZjIxZmExMDg4NDk =
Additional Reading
The Logic of the Laffer Curve: http://logicizer.townhall.com/g/c5ecb3cf-2712-4f5a-ad89-7ae03da99280
Washington Post on statements by politicians vs. economists: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/14/AR2006051400806.html
From non-partisan FactCheck.org http://www.factcheck.org/taxes/supply-side_spin.html
Financial Times: http://search.ft.com/ftArticle?queryText=%22tax+cuts%22+bush+revenues&aje=true&id=060718009178&ct=0&nclick_check=1
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