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Friday, June 17, 2011

Bartlett: T-Paw Is Wrong -- Tax Cuts Don’t Pay for Themselves

Bruce Bartlett (The Fiscal Times), No, Gov. Pawlenty, Tax Cuts Don’t Pay for Themselves:

Former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, supports a balanced budget amendment to the Constitution but also wants an $8 trillion tax cut. He rationalizes this contradiction by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13:

“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100% percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”

In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65%. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24%. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15%. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.

The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6% of GDP in 1981 to 18.4% of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.

This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. ...

Republicans also assert that the tax cuts of the George W. Bush years paid for themselves. On July 13, 2010, Senate Minority Leader Mitch McConnell said that there was no net revenue loss from any of the Bush tax cuts ... This is a view not shared by economists who worked for Bush. ... For the record, the CBO recently concluded that the Bush tax cuts reduced federal revenues $2.8 trillion between 2002 and 2011.

In short, there is no evidence whatsoever supporting Gov. Pawlenty’s view of the Reagan tax cuts or Sen. McConnell’s view of the Bush tax cuts. They didn’t pay for themselves and there is no reason to think that further tax cuts will, either. Republican economist Alan Greenspan confirmed this fact last year on “Meet the Press.” Asked whether he thought that tax cuts pay for themselves, as Republican leaders had said, Greenspan replied, simply, “They do not.”

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Comments

"The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6% of GDP in 1981 to 18.4% of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies."

But isn't part of the argument that high tax rates put downward pressure on the GDP?

Posted by: Mark | Jun 17, 2011 3:48:14 PM

No one can tell what will happen since there is no clear way of determining what the Federal Revenues will be absent a tax cut, for sure.

What we do know is that Keynesian economics are failures and everything that Obama has done re the economy has been an abject failure. Only an insane person will support government spending to increase Federal Revenues. Let's cut spending to the bone! That hasn't been tried before!

Posted by: Shotgun | Jun 17, 2011 6:05:01 PM

I also disagree that the only metric that matters is revenues as a share of the GNP. I offer this thought experiment:

If the tax rate was zero, and the GNP grew, that would be a productive economy, a good thing, as workers would be moving to the more productive private sector of the economy. If the tax share of the GNP was 100% and the GNP stayed the same, that would be an unproductive economy, a bad thing, as workers would be in the less productive public sector of the economy.

I submit that it would be a good thing if the government did no more than stay the same for a few years,and the GNP grew, as it did under Reagan. That way there would be more production. Since tax rate cuts did that prevously, one may think that tax rate cuts may do it again. Since the business tax rates for the US are nearly the highest in the world, that would perhaps be a good place to cut.

I further submit that it would be a better thing if the 'basis' for computation was 2006, before the big spenders of the Pelosi congress took the reins. That would mean cutting the total government spending to 2006 levels. A very good thing.

Posted by: DonM | Jun 17, 2011 6:25:31 PM

Sorry, I'm not smart enough to decipher that table at the link. There seems, tho', to have been a great difference in how the economy performed annually during that period: 2002-2011. Can anyone tell me how much of the overall decrease in revenues may be attibutable to the financial crisis beginning in 2008?

It seems quite unfair to blame the Bush tax cuts for a revenue decrease that may be the result of a general economic trauma. Yes, lower rates obviously had an impact, but this statement leaves one thinking that the cuts were the ONLY cause of decreased revenues during that period.

Posted by: ColoComment | Jun 17, 2011 8:59:14 PM

Another "unbiased" analysis.

Posted by: mike livingston | Jun 18, 2011 9:32:12 AM