The Laffer Curve, Part II: Reviewing the Evidence
This video reviews real-world evidence showing that changes in marginal tax rates can have a significant impact on taxable income, thus leading to substantial amounts of revenue feedback. In a few cases, tax-rate reductions even “pay for themselves,” though the key lesson is the more modest point that pro-growth changes in tax policy will have a positive impact on economic performance and that good tax cuts therefore do not “cost” the government much in terms of foregone tax revenue.
This video is second installment of a three-part series. Part I reviews theoretical relationship between tax rates, taxable income, and tax revenue. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: www.freedomandprosperity.org.
On the Arkansas Times Blog the person using the username “Couldn’t be better” commented on what I said by responding, “Saline, where are all the jobs that Bush promised in 2001 and 2003. Still waiting for the trinkle down…”
Bush tax cuts work? This is a series of posts aimed at answering that question.
By Curtis Dubay
September 6, 2011
Abstract: Despite evidence to the contrary, President Obama and his supporters insist that a tax increase will not impede economic recovery. They claim that the Clinton tax hikes spurred the boom of the 1990s and that the subsequent Bush tax cuts hurt the economy. Members of Congress must reject this faulty notion—and reject the President’s call for burdening Americans with higher taxes and an even slower economy.
President Barack Obama and his allies in Congress and elsewhere continue to press for tax increases, whether as part of a deal to raise the government’s debt ceiling, or for any other reason. Even though common sense would dictate not raising taxes in the face of a badly weakened economy and almost non-existent job growth, the President and his supporters argue that tax hikes will not imperil the still-nascent recovery because the economy grew during the 1990s after President Bill Clinton raised taxes. The inference being that today’s economy could also absorb the blow of tax hikes and grow despite them. They also argue the converse: that the tax cuts passed during President George W. Bush’s tenure slowed growth and cost jobs.
This cursory and errant analysis of recent history has serious implications for policymaking today. If Congress raises taxes based on the faulty notion that tax hikes have no ill effects on economic growth, it will impede the still-struggling recovery and keep millions of Americans on the unemployment rolls far too long.
Bush Tax Cuts Promoted Strong Growth
Liberals also like to argue that the Bush tax relief hurt the economy and cost jobs. Again, the evidence runs to the contrary.
Unlike President Clinton, who entered office with a strong economic wind at his back, President Bush came into office on the precipice of a recession caused by the bursting of the “dot-com” bubble. President Bush entered office in January 2001; the recession began in March.
In addition to the recession, the peaceful conditions President Clinton enjoyed reversed course. The terrorist attacks of 9/11 brought on the beginning of the war on terrorism. There was no growth-enhancing advancement comparable to the tech boom to further boost the economy; energy prices were creeping up. Instead of swimming with the current, the economy was now fighting squarely against it to achieve even modest growth.
Faced with this new reality, President Bush pushed for tax cuts to revive the economy and set it on a stronger foundation for economic growth.
In June 2001, President Bush signed into law the first wave of tax cuts. The relief included reductions of marginal income tax rates and tax relief for families, for example, doubling the child tax credit from $500 to $1,000. To reduce the budgetary impact, Congress phased in the tax cuts over several years.
Since the tax cuts were slow to go into effect, they were slow to help the economy. In fact, the economy continued to lose jobs after the tax cuts even though the recession officially ended in November 2001.
Realizing the error of its ways, in May 2003 Congress accelerated the tax cuts to make them effective immediately. In addition to reducing marginal income tax rates, Congress also lowered the tax rates on capital gains and dividends.
It was at this point that economic growth took off. From May 2003 until December 2007 (when the recession caused by the global financial meltdown occurred) the economy created 8.1 million jobs, or 145,000 a month. By comparison, after the beginning of the 2001 recession and before the 2003 tax cuts, the economy was losing 103,000 jobs a month.
Those opposed to the tax relief argue that it blew a hole in the budget and dramatically increased deficits. Again, a look at the numbers disproves that argument. While receipts were below the historical level of 18 percent of GDP in 2003 as a result of the sluggish economy, they rebounded to above their historical norm by 2006 and grew further above their historical level in 2007. They clearly would have continued growing thereafter had it not been for the housing bust and global recession.
Tax revenue rebounded quickly because the tax cuts encouraged economic growth by increasing the incentives to work, save, invest, and take on new risk. These are the basic elements of economic growth. When those activities increase, tax revenues increase because more Americans work and earn more money. From 2003 to 2007, the number of tax filers rose by 9.6 percent, and taxable income, by 44 percent. By contrast, in the last four years of the previous expansion, from 1997 to 2001, these numbers grew by 6.4 percent and 23.6 percent, respectively. With income and taxpayers growing at such a fast clip it is not hard to see why tax revenue did not suffer from the tax cuts.
To be clear: The Bush tax cuts did not pay for themselves. Revenues, on balance, are lower as a result of the Bush tax relief. However, the Bush tax cuts did accelerate the recovery markedly, and they did, and still do, create the possibility of a permanently stronger economy which, in turn, means the net revenue cost of the Bush tax cuts is far less than the traditional static score implies.
In 2008, the last full year of the Bush presidency, the economy entered a severe recession brought on by the global financial meltdown. The 2001 and 2003 tax relief packages had made the economy more resilient against economic shocks, but no tax policy can protect an economy against the storm that struck that year. The tax cuts certainly did not contribute in any way to recession, nor can anyone credibly claim that these policies had something to do with the financial implosion that was global in origin and impact.
Even with a recession at the beginning of his presidency and another severe recession at the end, the economy still created more than 1 million net jobs during President Bush’s tenure. The tax cuts he pushed Congress to pass are a major reason for that job growth.