The NYT’s Ross Douthat flags a very important article by Kevin Williamson in National Review debunking the myth that tax cuts increase revenue, an article of faith among George W. Bush and other prominent Republicans that even Bush’s own economists didn’t believe. Williamson describes this point of view as “magical thinking”:
What does Representative Gohmert [a Texas Republican] think about taxes? After 9/11, he argues, the United States was headed for a serious recession, even a depression, but tax cuts saved the day — and increased government revenues in the process. “With a tax cut, then another tax cut, we stimulated the economy, and record revenue like never before in American history flowed into the United States Treasury,” he said in a speech before the House. “As it turned out, the tax cuts helped create more revenue for the Treasury, not destroy revenue for the Treasury.” That last bit is fantasy. There is no evidence that the tax cuts on net produced more revenue than the Treasury would have realized without them. That claim could be true — if we were to credit most or all of the economic growth during the period in question to tax cuts, but that is an awfully big claim, one that no serious economist would be likely to entertain. It’s a just-so story, a bedtime fairy tale Republicans tell themselves to shake off fear of the deficit bogeyman. It’s whistling past the fiscal graveyard. But this kind of talk is distressingly unremarkable in Republican political circles.
And such magical thinking is not the exclusive domain of back-benchers from the hinterlands. The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time….
It is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30 percent of the revenue losses. That’s on the high side of the current consensus, but it’s not preposterous. There is, however, a world of difference between tax cuts that only lose only 70 cents on the dollar and tax cuts that pay back 100 cents on the dollar and then some.
There is considerable debate among economists and federal legume-quantifiers about how large supply-side revenue effects are. The Congressional Budget Office did a study in 2005 of the effects of a theoretical 10 percent cut in income-tax rates. It ran a couple of different versions of the study, under different sets of economic assumptions. The conclusion the CBO came to was that the growth effects of such a tax cut could be expected to offset between 1 percent and 22 percent of the revenue loss in the first five years. In the second five years, the CBO calculated, feedback effects of tax-rate reductions might actually add 5 percent to the revenue loss — or offset as much as 32 percent of it. That’s a big deal, and something that conservative budget engineers should keep in mind. But the question of whether the CBO accounts for tax cuts at 100 cents on the dollar, 99 cents on the dollar, or 68 cents on the dollar is hardly the stuff that a broad-based political movement is going to put at the center of its campaigns.
Read the whole article for more, including an extended critique of the specific claim that recent capital gains tax cuts increased revenue. Williamson and National Review deserve credit for publishing this important article — let’s hope it has wide influence within the movement.
[Note: Williamson does make one significant mistake. In this statement, he wrongly suggests federal spending almost doubled under Reagan using figures that are not adjusted for inflation: “In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion.” However, using constant (FY 2000) dollars, spending actually rose from $1.175 trillion to $1.499 trillion between 1980 and 1989 — a more modest increase of 28%. Outlays were also flat as a percentage of GDP during this period (21.7% in 1980, 21.2% in 1989). See Tables 1.2 and 1.3 in the historical tables from the President’s budget.]