is only valid if we are on the right of the curve: something that most economists don’t believe holds true at present levels (though it’d be nice if it did). Cutting taxes, therefore, probably won’t raise revenues this time around (and we could probably raise taxes and get more net revenue).

Fostering the delusion that a) government is a good guarantor of one’s tax funds, and b) that government taking money from people is an “investment”, and not a forced transfer payment, shouldn’t be our goal.

that I generally agree with, thanks for the link. The long-term maximization point is farther to the left of the graph than the short-term maximization point, economists disagree about the right maximization point, taxation should be focused on funding legitimate functions of government (and not maximization), points on the left of the Laffer Curve can still have high marginal costs despite raising revenue, etc. To add a few, there are probably several points on the graph (and not just one) where revenues are “maximized” given a certain margin of error; different types of taxation and their relative deadweight losses imply that mixing up taxation types would have different effects, and Keynesian thought on taxes also provides some non-supply side basis for cutting taxes in a recession.

I would say that the economists who have posited the 20% range as the maximization point are engaging in wishful thinking. To paraphrase Bastiat, it’d be a happy coincidence if the morality of low taxation were coupled with the pragmatism of the maximization point; however, the evidence for what would, admittedly, be a very nice have your cake and eat it moment is quite lacking. President Bush’s tax cuts were largely sold on Keynesian grounds, and they delivered: they helped the economy get out of a recession caused by the Dot.com bubble and made worse by 9/11. It did not, however, increase revenues as expected by various supply siders under normal conditions, and they have essentially put forward “created or saved” rhetoric to explain the lack of projected revenues and GDP growth. Now, it’s always possible that those economists were over-confident, but still right (i.e, that even the languid growth experienced under Bush would have been even more languid, or not present, had the tax cuts not gone through). I just don’t see the evidence that I’d like to see favoring this, and I say this as someone who continues to support the Bush tax cut, and who thinks that it’s idiotic to think of repealing the tax cut in a recession. The evidence presented by the 70% crowd isn’t all there, but is much more convincing than that presented by the 20% crowd. All else (tax types, regulatory environment, macroeconomic conditions, etc) being equal, I’d peg maximization in the US at around 30% GDP. I would also say that legitimate government expenditures are somewhere less than 20%, and that taxation above that point is immoral, maximization aside.

Good discussion.

I’m saying that it didn’t increase revenues or GDP growth to the extent that was anticipated by proponents, and that would have been necessary to “pay” for the tax cut*.

*I find the implication that any private funds that slip through government fingers need to be accounted for an awful one, and only use the phrase because of its descriptive utility.

http://www.cbpp.org/cms/?fa=view&id=165

The case is a bit (but not very) overstated. It is, however, generally accurate. I like the Bush tax cuts based both on their Keynesian recession-killing effects (which we need now more than ever) and simply because they let people keep more of their own money.

A cap gains tax cut, interestingly enough, might potentially pay for itself during normal times.

The numbers there work just fine.

As tot he Keynesian aspect of the tax cuts, the story of post-WWII tax cuts in the US is, essentially, that they are promoted either on Keynesian or supply-side grounds. The Keynesian argument is that the government will lose money on tax cuts, but that in a recession, that is an acceptable loss in exchange for getting the economy out of its doldrums and back to normalcy (and that they should be paid back in economic good times). This was the arguement that was used to promote JFK’s tax cut. Supply siders argue that tax cuts, particularly income and cap gains tax cuts, pay for themselves through GDP growth both in normal times and recessions, and that they are thus a win-win both because they increase government revenues and let people keep more of their money. The Reagan tax cuts and those passed by the 1994 Republican Congress were passed under these auspices. The 2001 Bush tax cut were passed in the midst of a recession that followed the popping of the Dot.com bubble, and which was made worse by 9/11. It was unique in that it were supported by some Keynesians (the most notable one being Greg Mankiw, Bush’s Chief Economic Advisor at the time), and by supply siders (Art Laffer and that crew), for different reasons. In this instance, the Keynesians were right about the recession-killing effect of the tax cuts, but the supply-siders were wrong about the revenue generating effects of the tax cuts. As Bush’s economic policy grew more Keynesian, his economic team focused on extolling the virtues of his tax policy from a Keynesian perspective.

Yes, economics is a science limited by the fact that we are, after all, humans with wills of our own, and are thus prone to creating chaotic, and not deterministic, systems. It is thus hubristic to assume that pinpoint accuracy is possible (“the fatal conceit” is a good concept to explore regarding information gathering and government). However, we have developed tools that allow us to analyze revenue with some rough approximation (as I noted, the Keynesian effects of the Bush tax cuts were actually right on the money), and with some sophistication beyond whether revenues went up or not. Every mathematically rigorous study done on tax receipts with and without the tax cuts, even using the premises of the supply-side models, estimates that the Bush tax cuts, at best, pay only a small portion of themselves off.

To be clear: I don’t think that a tax cut needs to pay for itself to be legitimate (I support the Bush tax cuts and their extension for the present, as well as some cap gains cuts): simply that the claim that the Bush tax cut did pay for itself is wrong based on the forecasts made by those who made that claim. To put it in mathematical logic, supply-siders asserted the following prior to enactment:

(government revenue with tax cut – government revenue without tax cut) > untaxed revenue

What ended up happening was that the number in the bubble was not a negative number (which some progressive economic illiterates opined would happen), but was not greater than the untaxed revenue (which was opined by some conservatives who weren’t economic illiterates, but who were nonetheless wrong).

The “weasel words” you note mean, “add the extra people born/added to the system since the tax cut, and match the value of the dollar today with the value of the dollar pre-tax cut, and you’ve finally reached the same revenues in 2006 as you did before the tax cut. That’s not nearly as fast as they would be growing w/out the tax cut, judging from earlier tax cuts/tax schemes.”

Regarding the second round of Bush tax cuts, the effect that you reference was the Keynesian stimulative effects of the tax cut.

Post-WWII recovery just means the periods after recessions that happened after WWII, such as growth after the recession handled by Reagan, Clinton’s early 90s recession, and other recoveries from economic woes that we had. They reference the recovery from the 2000-2001 recession that we suffered.

You’re right that the paper says nothing about which taxes to cut for efficiency, as its narrow goal was to refute the notion that the Bush tax cuts “pay for themselves”: I note the cap gains tax as a good one to cut. (Killing the corporate tax and instituting a VAT to recoup lost revenues is also not a bad idea, efficiency-wise.)

There are some aspects of the report which I find fault with (namely, they are wrong about the Clinton tax increases/Reagan tax cuts), but on the point of whether the Bush tax cuts paid for themselves, the report is a decent layman’s explanation of why the Bush tax cuts don’t pay for themselves (though it overstates its case at times).

This isn’t meant to offend, Jack, but you’re clearly not familiar with the debate and estimated projections made by the supply-siders.

BTW, they were broadly correct concerning the Reagan tax cuts paying for themselves and, to a lesser extent, the cuts made by the Republican Congress in the 90s.

Generally speaking, supply siders say that tax cuts will pay for themselves by generating X income post- tax cut. They say that X minus government income after tax over a protracted period of time (let’s call that Y) is equal or greater to immediately lost revenue (the debit/credit sense you mention). In the case of the Reagan tax cuts and Contract With America tax cuts, the calculations that they made were borne out: revenues were close to what they estimated. In the case of the Bush tax cuts, only the predictions made by Keynesian supporters were accurate; post-tax revenue estimates by the supply siders were wildly inaccurate. That is a fact. One can argue that despite the wrong predictions, revenues were just badly calculated by everybody and would have been even lower without the cuts, as some have done (this argument is similar to the one made by Obama supporters that unemployment would have been EVEN HIGHER!!!! without Stimulus II). One can also argue that the tax package failed to meet its revenue goals because it wasn’t large enough (again, similar to Krugman’s claims that the problem with Stimulus II was that it just wasn’t large enough). In the case of both Stimulus II and tax cuts, the evidence just isn’t there to support economic claims made by supporters: you either have to throw out the data and engage in the usual hand-wringing about how economics isn’t a real science, or you have to explain why the revenue claims made by supply siders were inaccurate, but their premises still valid (which hasn’t been done so far, though there have been some recent studies showing that they may have merit as Keynesian stimulus).

Neither I, nor any other economist, is claiming that tax cuts decreased revenues, simply that the opportunity cost of the tax cuts was higher than the marginal increase in revenues.