The Wall Street Journal: Beyond Parody
This would be hilarious if it wasn't such a depressing testament to the sorry state of our political discourse. In an op-ed in today's Wall Street Journal entitled "Inconvenient Tax Truths," columnist Pete Du Pont writes:
What Du Pont is asserting here is the exact opposite of an inconvenient truth. It's a convenient lie, one that Republicans have relied on to get elected for quite some time. But don't take my word for it. Here's conservative Ramesh Ponnuru of the National Review:
What I really find astounding about arguments like Du Pont's, though, is the allegation that Democrats are somehow emotionally and ideologically invested in the idea of increasing taxes, that they see it as some sort of end in itself. How crazy is that? Why would any politician advocate something as unpopular as a tax increase unless they thought it was necessary? Republicans have shamelessly hammered Democrats on this issue over the years, winning many an election. If lowering taxes really did increase revenue, Democrats would gladly join the Republicans in slashing them. It would be a political no-brainer.
But tax cuts don't pay for themselves, so Democrats are left with the unenviable job of pointing out that people like Pete Du Pont are nothing but charlatans and snake-oil salesmen who are telling people what they want to hear. And that's bad enough without the Pete Du Pont's of the world pretending that they are brave truth-tellers who come bearing "inconvenient truths."
Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.Now there's some courageous truth-telling. It's like writing: "here's the inconvenient truth, folks: you can have your cake and eat it too!" or "here's the inconvenient truth, folks: the best way to lose weight is to eat whatever you want all the time."
Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.
These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.
What Du Pont is asserting here is the exact opposite of an inconvenient truth. It's a convenient lie, one that Republicans have relied on to get elected for quite some time. But don't take my word for it. Here's conservative Ramesh Ponnuru of the National Review:
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.Yes, indeed. Pete Du Pont is totally clueless or he is lying (I suspect the latter). The increased revenues and deficit reduction that he's talking about are the result of the overall growth of the economy, and as every reputable economist knows, the economy would have grown regardless of whether taxes were cut. Whether some portion of that growth is attributable to Bush's tax cuts is debatable, but what's not debatable is that revenues would have been higher but for Bush's tax cuts. Not even the Bush administration's own in-house economists believe that his tax cuts paid for themselves.
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."
What I really find astounding about arguments like Du Pont's, though, is the allegation that Democrats are somehow emotionally and ideologically invested in the idea of increasing taxes, that they see it as some sort of end in itself. How crazy is that? Why would any politician advocate something as unpopular as a tax increase unless they thought it was necessary? Republicans have shamelessly hammered Democrats on this issue over the years, winning many an election. If lowering taxes really did increase revenue, Democrats would gladly join the Republicans in slashing them. It would be a political no-brainer.
But tax cuts don't pay for themselves, so Democrats are left with the unenviable job of pointing out that people like Pete Du Pont are nothing but charlatans and snake-oil salesmen who are telling people what they want to hear. And that's bad enough without the Pete Du Pont's of the world pretending that they are brave truth-tellers who come bearing "inconvenient truths."
posted by A.L. at 10:49 AM
14 Comments:
Thanks. It's hard to find the time to do the gritty research to show up every one of these lies, and this lie is big enough that all boats will rise from the displacement of it sinking into the waters of Lethe.
Set forth below is the comment that I made to a similar post a week or so ago.
My reaction to this post was covered nicely by Neutral so I will try not to rehash his points. Essentially, the conservative/supply side position on tax cuts is that they reduce the cost of economic activity and therefore have the effect of expanding the economy and thus the tax base and tax revenues. This doesn't mean that the government will get more overall revenue as the result of a tax cut, only that there is a revenue-increasing as well as a revenue-decreasing effect. Laffer holds (correctly, IMO) that at some tax levels the former will be (considerably) larger than the latter, but does not claim that all tax cuts fall into this category.
No doubt you can find political/polemical rhetoric which suggests that all tax cuts are good/cost free, regardless of the tax rates in question or any other circumstances. However, if one actually believed this, one would have to argue for zero taxes, which, as far as I know, no one (even Ron Paul) actually does.
If your point is that Republican/conservative politicians are (choose your word) careless/deceptive/irresponsible in their rhetoric about economic issues, then I suggest you compare what their adversaries have to say. On the issue of tax cuts, the Democrats routinely suggest that there was no benefit at all from the Bush tax cuts (at least with regard to the cut in the top marginal rates). My favorite line is when they say that these were giveways to people who didn't even want them (see, Bush loves the rich so much that he will force them to take tax cuts they don't want).
An even better comparison would be the rhetoric on the minimum wage. Do supporters of a minimum wage increase generally acknowledge that there is a cost (eg, lost jobs, harm to small businesses, higher prices) as well as a benefit from the increase? Or does their rhetoric suggest that an increase in the minimum wage is just a benefit to the poorest workers, with no one actually bearing any cost? I would respectfully submit that the gap between political rhetoric and economic reality (at least as measured by the views of most economists) is rather wider here than in the examples cited in the post.
No doubt you can find political/polemical rhetoric which suggests that all tax cuts are good/cost free
Yeah, it's in the op-ed I'm quoting in this post. Du Pont is flat out misstating the facts and claiming that Bush's tax cuts caused reductions in the deficit and increased federal revenues. That's not true. Revenues are less than they would have been absent the tax cuts and the deficit is greater than it would have been. No reputable economist thinks otherwise. Du Pont is either a fool or a liar.
As for Democrats denying the supposed benefits of Bush's tax cuts, I think that's perfectly fair given the empirical data. Many, if not most, economists believe that the Laffer effect is neglible to non-existant at U.S. taxation levels. The belief that Bush's tax cuts have spurred growth that would not otherwise have happened is largely faith-based. It might be true, but there's very little empirical evidence to back it up.
Finally, I'll concede that Democratic rhetoric on the minimum wage issue lacks nuance and invariably fails to address arguments that there are off-setting costs. But most Republicans themselves over-simplify the analysis here. Economists are divided over whether modest increases in the minimum wage inevitably lead to less employment. Recent empirical studies have shown that minimum wage increases did not result in lay offs or less employment. For more, see here.
The argument that cutting taxes increses revenue, in the face of overwhelming evidence to the contrary, always makes me imagine someone who insists a dime must be worth less than a nickel "because it's smaller."
You reasonably reply, "But a dime buys twice as much as a nickel. It's worth ten cents, not five."
"But the dime is smaller, see?" Hides the dime under the nickel. "It is completely hidden by the nickel; it must be worth less!"
You sigh. "Look, if I give you a dime, you give me two nickels, so the dime must be worth more."
"You idiot! See how small the dime is? See how big the nickel is? the nickel must be worth more. you liberals are such morons...."
"...as every reputable economist knows, the economy would have grown regardless of whether taxes were cut." I suppose this means that every economist who knows differently is disreputable. Very persuasive.
On the question of whether a tax cut can result in an increase in revenue, shall we discuss some particulars (even if they are inconvenient)?
How about the Taxpayer Relief Act of 1997, which lowered the top statutory rate on long-term capital gains to 20% from 28%, effective in May 1997. Federal receipts from the capital gains tax grew to $84 billion in 1998 from $54 billion in 1996, according the Congressional Budget Office. The Tax Foundation has slightly different data that show a similar trend — capital gains tax receipts growing to $89 billion in 1998 from $66 billion in 1996.
And when the tax rate was cut again, to 15% from 20%, effective in May 2003, government revenues from the tax soared to $73 billion in 2004 from $49 billion in 2002, according to the Tax Foundation.
The sensible view holds that whether a particular tax cut results in an increase in revenue depends on the tax, depends on the cut, and depends on the circumstances prevailing when the cut occurs. Every reputable economist agrees.
And I wouldn't impute the views of Pete du Pont, for whom I hold no brief, to the Wall Street Journal, any more than I would impute the views of David Brooks to the New York Times.
AL, I am going to give up arguing with you about the polemical points. If you want to describe conservative rhetoric as stupid and dishonest, while liberal rhetoric just "lacks nuance," go ahead. But you aren't likely to persuade anyone who doesn't already agree with you.
On a substantive point, you seem to be claiming that many, if not most, economists believe that there is no economic benefit from tax cuts. This is a surprise to me, so I was wondering if you can refer me to a source to substantiate that claim.
On a substantive point, you seem to be claiming that many, if not most, economists believe that there is no economic benefit from tax cuts.
Not as an abstract matter. If the income tax rate is 99%, I think virtually every economist thinks that lowering it would result in higher productivity and more growth. In other words, it is uncontroversial that, at some level of taxation, the Laffer effect is relevant. I think that most economists, however, believe Laffer effects are negligible to non-existant at U.S. taxation levels (which are very low already). In other words, there's no compelling empirical evidence that we are on the right side of the Laffer curve as opposed to the left. There are some economists, however, who believe that we are at a place on the curve where lowering taxes would produce marginal increases in productivity and growth (though not enough to fully recoup the lost revenue from the cut). This group would include suppy-siders like Greg Mankiw. But, to my knowledge, no reputable economist believes we are at a place on the curve where cutting taxes will produce so much growth that it will offset all of the revenue lost by the cut. I don't feel like searching around right now through all the economics literature, but if you find something that suggests I'm wrong about this, please bring it to my attention.
neutral, be clear about what you're arguing. Are you asserting that the tax cuts you mention resulted in more revenue than would have existed had there been no tax cut? (i.e. that the tax cuts paid for themselves?). Or are you suggesting that some of the lost revenue from those tax cuts was offset by increased growth? If the latter, there are indeed some economists who would support you (though many who wouldn't). If the former, even the supply-side economists aren't with you.
The flaw in this argument is the assertion of causation. The economy grows most of the time regardless of what you do. As does inflation. So if you compare revenue numbers between date X and date Y, it will almost always be higher on date Y. This doesn't mean that event Z caused that growth. The actual empirical evidence that revenue increases are attributable to tax cuts is inconclusive at best.
Take for example the 1997 tax cut you mention. That happened to coincide with the explosive growth of the internet bubble and the stock market generally. There is no logical reason to believe that the increased revenues were caused by the tax cut, as opposed to other factors. Remember, Clinton passed a significant tax increase in 1993 and the economy grew like gangbusters. Most economists believe that marginal changes in tax rates have very little causative effect on growth. Other factors are far more important.
Paul Burcheit puts the finger on an important detail here:
We all believe that a growing economy is a good thing. Corporate successes make America strong, and international monetary policies have been designed to promote economic growth around the world.
But something is wrong. The income gap is growing faster in the United States than in any other developed nation. Between 1990 and 2000 in the U.S. worker pay and inflation remained approximately equal, while corporate profits rose 93% and CEO pay rose 571%. Meanwhile, the portion of federal revenue derived from corporate income tax has decreased from 33% in the 1950s to 11.9% in 2005, reaching a low of 7.4% in 2003.
Hundreds of companies have avoided taxes by relocating to tax havens such as Bermuda and the Cayman Islands. Eighty-two of our largest corporations paid no tax in at least one of the first three years of the Bush administration.
What meaning does it have to discuss tax rates when corporate America is simply avoiding all tax? No country can survive on taxes from wage and salary earners alone. More here. The US is heading for a Third World economy with a small financial elite and a massive underclass.
Thank you, A.L., for exhorting me to be clear about what I am arguing. I've managed to do OK without such exhortations up to now, but I can always use good advice.
My understanding of econometrics (acquired before I studied tax law) suggests to me that in almost every instance of the kind we are discussing, causation will be difficult if not impossible to prove.
I do believe that in the narrow cases of the reduction in capital gains tax rates, causation is probably present. At any moment, some of the people sitting on assets with capital gains are refraining from realizing those gains because of the tax they face. They seek alternative means (and there are many) of distributing those assets without being subject to that tax. Reduce the rate, and some number, at the margin, will decide to sell and pay. (Can you possibly dispute this?) If that is in fact the case, then all that remains is to determine whether the marginal number who sell, multiplied by the new rate, is enough to offset the loss to the treasury occasioned by the lower rate being applied to those who would have sold anyway. Very difficult to prove, but it does strike me that there has never, to my knowledge, been an instance where the rate was reduced without an increase in total revenue.
There is a much more general issue at play here on which you and I disagree. I think it is your view that it should be the goal of tax rates to provide the maximum possible revenue to the treasury. I emphatically do not agree, and frankly cannot understand the mindset of those who argue otherwise. One would think all people of good will would agree on one thing: that if higher revenue could be reaped with a lower rate, that rate should prevail. Conversely, if a higher rate would reduce revenue, it should not be enacted.
Unfortunately, there are a number of people--purportedly of good will--who don't agree with that proposition at all, and I read what they write almost every day. They want a higher rate imposed on higher incomes because they want the people who earn those incomes to suffer, whether that suffering benefits anyone at all. I'm not in sympathy with such people, and I tend to wish them ill.
neutral,
With respect to your point about capital gains cuts, I fully agree. Reducing the capital gains rate can cause people to "cash in" so to speak, which can lead to a short-term increase in tax revenue. But that's essentially a one time shifting of revenue (increasing short term revenue at the expense of long term revenue). It's not growth. So I'm not sure why anyone would think that's a good thing.
As to your second point, I think you are engaged in a pretty big straw man. I've never met a single person, liberal or otherwise, who believes taxes should be raised on the rich solely to punish them. That's craziness. People just think rich people should bear a greater percentage of the tax burden than they currently do.
I don't think that the goal of our tax system should be to maximize revenue. I think the goal of our tax system should be to take in enough revenue to cover our costs. But since we don't come anywhere near doing that at the moment, I think it is reckless and irresponsible to take steps that reduce revenue (such as cutting taxes).
If I recall the story correctly Winston Churchill once asked Lady Astor if she would go to bed with him for a million pounds. She said she probably would. Churchill then asked her if she would do the same for a hundred pounds. She replied "Certainly not! What do you take me for?" Churchill answered back "Madam, we've already agreed upon what you are. We are only haggling about the price."
The same analogy applies here. If we accept that the State is legally and morally entitled to redistribute wealth from the rich to the poor through taxes in order to make for a happier, better functioning society, then that State is also entitled to carry out such tax redistributions in as vigorous fashion as it sees fit. Strictly speaking, there's nothing to say the State can't tax ALL earnings over $100,000 pa. Of course, most people would accept in principle that a "happier, better functioning society" would be unlikely to result from such a taxation program. The lazy would be encouraged, the hard workers or talented ones discouraged. But the underlying principle of the State's right to redistribute wealth, however difficult to implement, is a fundamental one.
Here's where the problem lies. When you scratch the surface of the Hard Right, Ultra Conservatives in the US, and the rest of the global elite, their real philosophy emerges -- they don't really accept the right of the State to redistribute wealth. They are offended by the idea that the State can take any of their money. They want the benefits of a developed society achieved through taxes (roads, civil servants, good education and health systems, technology, civilized society) but they don't want to pay for it. They want those benefits for free. They want to keep ALL of their money for themselves. They resent the rest of us. The ultra wealthy will conduct wars and even bring down society as long as they can keep it all. They deny the legitimacy of the State to tax and in doing so they deny the legitimacy of the State itself. But they will never admit it.
Every tax form should contain a box to tick yes or no: "Do you accept the right of the State to tax in order to redistribute wealth?"
Anyone who ticks "no" should have every dime taken off 'em. Pretty soon, everybody will get the message: we're in this together and the needless entrenchment of poverty represents a failed and barbaric State. It is a right of the State to redistribute wealth. The only questions are how and to what extent.
Neutral, I am generally in accord with what you just said, and I don't attribute to you the position that you correctly describe as craziness. But I read it more than you might think as I peruse the blogs. And I believe that the goal of our tax system should be to take in enough to come somewhat close to covering costs, though my concern is less on the absolute value of the deficit or debt than it is on those values as a percentage of GDP, which is after all the wherewithal by which the debt is serviced. And I think that the costs should not be incurred unless and until the revenue can be reasonably insured.
As for what Kenj is saying, I find it a bit loopy. I certainly acknowledge the power of the state to redistribute income, and don't know of anyone who doesn't. Most people I am aware of among the Hard Right, Ultraconservatives in the US (when did they become the elite?) are aware of the Sixteenth Amendment to the Constitution ("The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration"), and I am aware of no right-wing effort to repeal it in my lifetime. What I constantly question, and with very good reason, is the wisdom of the manner in which the state goes about its redistributive efforts, which often do far more harm than good. Why do you think Bill Clinton was so hot for welfare reform?
The "supply side" or "conservative" position is not that tax cuts provide incentive to work/invest, but that the only real capital is earnings, and that the economy will grow more, organically, the more it is allowed to reinvest its own earnings. And since the tax is on earnings the tax rate and tax base are interrelated - at some point a tax cut will, all other things being equal, produce higher tax revenue.
The proof in the pudding, then, is not just that revenue has gone up, nor is it that revenue has gone up at the fastest rate ever. Rather the proof in the pudding is that revenue has gone up FASTER than the CBO - which calculates all those "other things" - projected, and that it did so when the biggest "other thing" - the Fed - was RAISING interest rates.
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