Tax cuts don't pay for themselves

[The Sponge]

A bracing heresy: Tax cuts don't pay for themselves
By Chris Satullo
Source: Philadelphia Inquirer Section: CURRENTS - EDITORIAL | Page D05 | Edition: CITY-D | Memo: Center Square
In politics, when theory becomes theology, there's the devil to pay.

For the Republicans who've run Washington for most of the last decade, the One True Faith actually has little to do with anything Dr. James Dobson talks about.
The faith boils down to two words: Cut taxes.

For the true believer, this is the answer to all of life's little twists. Economy slumping? Cut taxes. Economy humming? Cut taxes. America at peace? Cut taxes. America under attack? Cut taxes.

Faith, the Bible tells us, "is assurance of things hoped for, a conviction of things not seen."

The tax-cutter's faith demands apostolic certitude about a hopeful assertion: "Tax cuts pay for themselves."

In other words, the economic growth that tax cuts spur will, in short order, replace any lost revenue.

Talk about a conviction of things not seen.

Onetime maverick Sen. John McCain vowed his fidelity to the creed during a Republican candidates' debate last month: "The fact is the [Bush] tax cuts have dramatically increased revenues."

You can almost hear the implied corollary: Just like Reagan's cuts in the '80s. You hear similar claims all over the Republican firmament.

Here's the fascinating thing: Federal budget numbers and tax history don't support this rhetoric at all.
In fact, they debunk it soundly, for the Bush era and the mythic Reagan one.

One thing Bush defenders say is true: Federal tax revenues have perked up dramatically in the last year. This has spurred triumphal rhetoric among people desperate for good news to brag on.
The details: In 2000, Bill Clinton's last year in office, federal income tax revenues were $1.212 trillion - $1 trillion and change from personal income taxes, $207 billion from corporate.

After the Bush tax cuts, combined income tax revenues dipped below $1 trillion in 2002 through 2004, fueling frightening, China-financed federal deficits. The years 2001-2003 saw the first consecutive three-year revenue decline since the Depression.
In '05, revenues crept back up to 2000 levels (in non-inflation-adjusted dollars). In 2006, they finally moved beyond 2000 receipts, up to $1.398 trillion, thanks to a huge leap in corporate tax revenues. That suggests where most of this economy's rewards have flowed.

See?, the tax-cut faithful crow. We told you. Tax cuts pay for themselves.

Not really. The claim is theology, not economics, and riddled with faulty arithmetic.

First, to prove that claim, it's not enough to show that current revenues now top the 2000 number. They would have to top the figure that the old tax rates would generate now, given inflation (however modest), rises in the Gross Domestic Product, and growth in the number of taxpayers.

To argue that, you'd have to posit that every last penny of increase in GDP over the last six years was due to tax cuts. So, regular business cycles had nothing to do with it? Technology and productivity? Massive deficit spending?

In fact, only glib Republican politicians, and their followers, seem to believe tax cuts pay for themselves. Serious conservative economists, even ones fond of tax cuts as a policy, don't claim that.

For example, N. Gregory Mankiw, former chair of President Bush's Council of Economic Advisers, calculates that the "replacement effect" of tax cuts ranges from 17 percent to 50 percent, depending on the type of tax.

Understand, I don't deny for a second that tax cuts can spur growth. They often do. When a tax burden is truly uncompetitive, the revenue rebound from a well-targeted cut can be stunning. Just look at the impact of Philadelphia's smart real-estate tax abatement for new construction, which produced a surge in real-estate-transfer taxes.

But federal tax rates just aren't that burdensome. And federal taxes aren't as easy for businesses to escape as Philly is. So federal tax cuts don't spur enough growth to replace all the lost revenue.

The resulting gap, supply-side economists instruct, should be closed through budget cuts. Easy for them to say. Here's what elected officials discover when they try to enact cuts that large: The American public really, really wants government to do most of the things government does. They don't want austerity.

Trapped by their delusions, Republican governments have fallen back on a bad remedy: deficit spending.

Bush did it. So did Reagan. The difference is Reagan recognized the problem and altered course. This is where the gap between myth - Reagan cut taxes and the economy boomed - and reality crops up. In 1982, Reagan heeded the howls of his budget director, David Stockman, about deficits. He walked back some of his tax cuts. In inflation-adjusted terms, it was a bigger hike than Bill Clinton got passed in 1993. Reagan then approved a major increase in payroll taxes to stabilize Social Security.
So, you see, the fabled Reagan economic boom actually picked up steam after two very large tax increases. A similar expansion occurred after the Clinton tax package.

The real fiscal lessons of the last 25 years are these: Tax cuts based on theology produce deficits. Tax hikes based on genuine public needs don't prevent economic growth.

If you want DTB you can paste up the Katrina,war, 9/11 crap but im not sure how that will help Reagan's budgets.

 

[Chadman]

I would also assume that tax cuts for a select few probably don't pay for an elective war, either. But I'm sure that's a misnomer, too. I probably just don't understand that the rich folks are now happily paying for the tanks and body armor with all the money they are keeping for themselves as they are making an ever-increasing amount of money every year - AFTER taxes.

 

[DOGS THAT BARK]

Tax breaks for select few?--inform of please of which tax bracket didn't get tax break--

Only people I know that didn't or those that don't pay any--and some of them got refunds:shrug:

No--- but,well-,if opinionated spin---just the facts please.
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Thats what I thought

 

[djv]

I think the artical is good an speaks to common sence.
Tax breaks for who real does not matter.

 

[Chadman]

Tax breaks for select few?--inform of please of which tax bracket didn't get tax break--

Only people I know that didn't or those that don't pay any--and some of them got refunds:shrug:

No--- but,well-,if opinionated spin---just the facts please.
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Thats what I thought

I'll assume you will still accept an explanation of what I meant, even tho you asked for information and then said nobody responded - in the same post. Very effective arguing technique...very Dubbya-in-a-press-conference-like. Here's something that might interest everyone BUT you that backs up my point. As I have pointed out several times in this forum, the very wealthy have much more opportunities to benefit from the Bush plans, due to the fact they have so much more money - plain and simple. I think you know that, but of course will never allow it as a valid point. But...what the heck:

Big Gain for Rich Seen in Tax Cuts for Investments

By DAVID CAY JOHNSTON
Published: April 5, 2006
Multimedia

The first data to document the effect of President Bush's tax cuts for investment income show that they have significantly lowered the tax burden on the richest Americans, reducing taxes on incomes of more than $10 million by an average of about $500,000.

An analysis of Internal Revenue Service data by The New York Times found that the benefit of the lower taxes on investments was far more concentrated on the very wealthiest Americans than the benefits of Mr. Bush's two previous tax cuts: on wages and other noninvestment income.

When Congress cut investment taxes three years ago, it was clear that the highest-income Americans would gain the most, because they had the most money in investments. But the size of the cuts and what share goes to each income group have not been known.

As Congress debates whether to make the Bush tax cuts permanent, The Times analyzed I.R.S. figures for 2003, the latest year available and the first that reflected the tax cuts for income from dividends and from the sale of stock and other assets, known as capital gains.

The analysis found the following:

?Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.

?These taxpayers, whose average income was $26 million, paid about the same share of their income in income taxes as those making $200,000 to $500,000 because of the lowered rates on investment income.

?Americans with annual incomes of $1 million or more, about one-tenth of 1 percent all taxpayers, reaped 43 percent of all the savings on investment taxes in 2003. The savings for these taxpayers averaged about $41,400 each. By comparison, these same Americans received less than 10 percent of the savings from the other Bush tax cuts, which applied primarily to wages, though that share is expected to grow in coming years.

?The savings from the investment tax cuts are expected to be larger in subsequent years because of gains in the stock market.

The Times showed the new numbers to people on various sides of the debate over tax cuts. Stephen J. Entin, president of the Institute for Research on the Economics of Taxation, a Washington organization, and other supporters of the cuts said they did not go far enough because the more money the wealthiest had to invest, the more would go to investments that produce jobs. For investment income, Mr. Entin said, "the proper tax rate would be zero."

Opponents say the cuts are too generous to those who already have plenty. Representative Charles B. Rangel of New York, the senior Democrat on the House Ways and Means Committee, said after seeing the new figures that "these tax cuts are beyond irresponsible" when "we're in a war; we haven't fixed Social Security or Medicare; we've got record deficits."

Because of the tax cuts, even the merely rich, making hundreds of thousands of dollars a year, are falling behind the very wealthiest, particularly because another provision, the alternative minimum tax, now costs many of them thousands and even tens of thousands of dollars a year in lost deductions.

About 3.5 million taxpayers filing their returns for last year are being hit by the alternative tax. But that figure will balloon this year to at least 19 million taxpayers, making as little as about $30,000, unless Congress restores a law that limited its effects until now, according to the Tax Policy Center in Washington, a joint project of the Brookings Institution and the Urban Institute, whose estimates the White House has declared reasonable.

The tax cut analysis was based on estimates from a computer model developed by Citizens for Tax Justice, which asserts that the tax system unfairly favors the rich. The group's estimates are considered reliable by advocates on differing sides of the tax debate. The Times, which also did its own analysis, asked the group to use the model to produce additional data on the effect of the investment tax cuts on various income groups. The analyses show that more than 70 percent of the tax savings on investment income went to the top 2 percent, about 2.6 million taxpayers.

By contrast, few taxpayers with modest incomes benefited because most of them who own stocks held them in retirement accounts, which are not eligible for the investment income tax cuts. Money in these accounts is not taxed until withdrawal, when the higher rates on wages apply.

Those making less than $50,000 saved an average of $10 more because of the investment tax cuts, for a total of $435 in total income tax cuts, according to the computer model.

During last week's debate on whether to restore limits on the alternative minimum tax or make permanent the cuts in investment income taxes, House leaders chose as their spokesman Representative David L. Camp, a Michigan Republican. He said Republicans favored continuing investment tax cuts because that would help more people and would especially benefit those making less than $100,000.

"Nearly 60 percent of the taxpayers with incomes less than $100,000 had income from capital gains and dividends," he said on the House floor.

But I.R.S. data show that among the 90 percent of all taxpayers who made less than $100,000, dividend tax reductions benefited just one in seven and capital gains reductions one in 20.

Mr. Camp, who had said in an interview that his figures were correct, said Monday through a spokesman that he had been misinformed by the staff of the House Ways and Means Committee. But his office said he supported making the investment tax cuts permanent because cutting these rates was "good policy and good for our economy."

President Bush, in his budget, urged Congress to make permanent the reduced taxes on investment income. He also proposed limiting the effects of the alternative minimum tax through next year, saying a permanent solution "is best addressed within the context of fundamental tax reform."

The Congressional Budget Office estimated that making the investment tax cuts permanent would cost the government $197 billion over 10 years. But advocates of eliminating taxes on investments say there is no cost to the government because lowering taxes on such income encourages more investment, which should lead to more and higher-paying jobs. Taxes on wages from those jobs should more than offset the tax savings to investors, said Mr. Entin, an advocate of eliminating taxes on most investment income as a way of promoting economic growth.

However, the Congressional Research Service, an arm of Congress that analyzes issues, concluded in a January report that lower taxes on investment income may translate into lower savings because people need fewer investments to earn the same after-tax income. In another report, the research service showed how lower taxes on investment income can encourage investment outside the United States, creating jobs, but not for Americans.

The Center on Budget and Policy Priorities, which advocates for the poor, and several mainstream policy research organizations say the investment tax cuts will have insignificant positive effects and may even damage long-term economic growth by contributing to soaring budget deficits. In an era of budget deficits, "the net effect is a wash or may even be negative," said Robert Greenstein, the executive director of the center.

There have been three tax cuts for individuals under President Bush. The top tax rate on compensation was trimmed twice and is now 35 percent, from 39.6 percent when President Bush took office. Most compensation also faces a 1.45 percent Medicare tax, which is matched by the employer, making the effective federal tax rate on high earners 37.9 percent.

Then, the top rate for most investment income was reduced to 15 percent in 2003, from the 39.6 percent for dividends and 20 percent for profits on asset sales that were in effect when Mr. Bush took office.

A result is that the wealthiest Americans now pay much higher direct taxes on money they work for than on money that works for them.

 

[DOGS THAT BARK]

One more time--which tax bracket didn't get a tax cut---

now if you want go into amount of tax break AFTER you admit every taxpayor got a tax break--I'll be happy to go into that--but lets be fair and use % of income Not the ole liberal blog example of $ amount millionaire got back vs $ amount $50,000 wage earner got back--

To cut the spin before its starts lets go back to the 10 man parable and liberalism taxes

always love to bring this one back--so simple and revealing

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing. The fifth would pay $1. The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The ninth would pay $18. The tenth man (the richest) would pay $59. So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.


[T]he bar owner ... proceeded to work out the amounts each should pay [after the 20% reduction]. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

 

[Chadman]

One more time--which tax bracket didn't get a tax cut---

now if you want go into amount of tax break AFTER you admit every taxpayor got a tax break--I'll be happy to go into that--but lets be fair and use % of income Not the ole liberal blog example of $ amount millionaire got back vs $ amount $50,000 wage earner got back--

What do you need from me? Okay, all tax brackets got a tax cut. Is that what you want me to say? Okay...all tax brackets got a tax cut. I honestly don't know, but if you say all tax brackets got a tax cut, so be it. Can we move on?

Go ahead with the amount of tax break. The above illustrates how much more higher net earners can take advantage of compared to those who cannot afford to do - well - what a high income person can. And it illustrates how these people can cut their overall tax burden/outlay dramatically. And go ahead and highlight how much of the income the high earners make - percentage-wise, too. A lot of money flying around at those high levels that can be moved away from taxes and can allow the taxes to be reduced. Still find it very difficult to see how the system is so unfair to those who seem more able to take advantage of it?

Oxy-Moron, I think that's called...