Tax Policy

[Superman]

Gentlemen. Educate me. I keep hearing that tax revenues increase when tax rates are lowered. Sure, I understand the theory here. It's like lifting the control rods out of a nuclear reactor core. I get it. In theory. What I don't have is the practical. The proof. Show me tax revenues as a function of tax rates. Show me the correlation. The graph(s). If you can show this, you will have me as a 125% supporter. If I thought tax revenues would rise in response to tax rate reductions, I would become a MASSIVE supporter. Here is your chance.

But here is a caveat: I will pay much closer attention to data that comes from an independent source. Like the government. Please spare me the "gubmit is a bunch of lying communists" while showing me data from conservative think-tanks and entertainment sources like Fox and Limbaugh.

[cairns]

The WSJ had a good article on this yesterday but I don't have it.

Today they have a pretty good comparison of McCain and Obama on taxes. While I definitely prefer McCain's view you can look and see for yourself.

The WSJ has a conservative editorial page but has consistently come up slightly left of center on its news pages when judged by independent sources. Don't know if that's indepedent enough for you.

[Porsche-O-Phile]

Who cares about raising tax revenues. The answer to our problems is in cutting government spending, not maximizing what they take in, even if it is ultimately more "efficient".

[Seahawk]

Originally Posted by Porsche-O-Phile

Who cares about raising tax revenues. The answer to our problems is in cutting government spending, not maximizing what they take in, even if it is ultimately more "efficient".

Concur. Little NYT dity.

http://query.nytimes.com/gst/fullpage.html?res=9505E2D6163BF93BA2575AC0A9629482 60

Slate for the other perspective.

http://www.slate.com/id/2093947/

Read this, especially the part about where the tax burden shifted.

http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm

Some flat tax info, very well written.

http://mises.org/story/2112

[Jim Richards]

This figure from the House JEC Report shows a bigger percent increase in tax burden placed on the upper middle class (top 5% + 10%) than on the upper class (top 1%), IMO. You know what they say about statistics.

[Chas911]

http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-R3-Corporate-Income-Tax-Cuts-Boost.html[/URL]orporate-Income-Tax-Cuts-Boost.html

http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-R2-Federal-Government-Tax-Revenue.html[/URL]

[jyl]

Download data from

http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_tables_toc.xls

http://www.taxpolicycenter.org/taxfacts/Content/Excel/fed_receipt_sum_historical.xls

[the]

why does that chart list tax revenue "as a percentage of GDP?" That seems to make it fairly useless to the question posed in the first post.

[jyl]

For "the":



Note though that if you're going to use fed tax rev in dollars, you should adjust for the underlying growth in the population. Simply due to pop gro, GDP should grow and fed tax rev should grow. Doesn't make sense to give any tax policy the credit for fed tax rev gro that is simply due to babies being born.

[jyl]

Incidentally, the CAGR (compound average growth rate) of federal tax revenue in FY00 dollars, from 1979 to 2005, is 2.4%.

I am kind of surprised to see that - I'd always thought fed tax rev was growing in excess of GDP growth.

Edit: Never mind - the tax revenue data is in constant (real) dollars, so not comparable to GDP growth in nominal dollars.

[RoninLB]

New Evidence on Government and Growth
By KEITH MARSDEN
WSJ; June 16, 2008; Page A15

Mr. Marsden, a fellow of the Centre for Policy Studies in London, was previously an adviser at the World Bank and senior economist in the International Labour Organization.

In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics."

Reagan did succeed in lowering some taxes. But a Democrat-controlled Congress weakened their impact by raising government spending sharply, resulting in large budget deficits.

A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?

My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.

I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).

Most governments have reduced their top tax rates and spending-to-GDP ratios over the last decade or so, according to data published by the OECD, IMF and World Bank. But slimmer governments have done so at a faster pace, and to significantly lower levels. Their highest tax rate on personal income fell to a group average of 30% in 2006 from 36% in 1996. Top corporate rates were lowered to an average of 22% from 30%. Their average ratio of total government outlays to GDP fell to 31.6% in 2007, from an average peak level during the previous two decades of 40.4%

Investment growth jumped to an average annual rate of 5.9% in 2000-2005, from 3.8% over the previous decade. Exports have risen by 6.3% annually since 2000. The net result was a surge in economic growth. The IMF reports that GDP soared in the slimmer-government group at a 5.4% average annual rate from 1999-2008 (including its forecast for the current year), up from a 4.6% rate over the previous decade.

Over that same period, the bigger-government group was more timid in its tax reductions. Their highest individual rates declined to an average of 45% from 49%, and corporate rates to 29% from 35%. Furthermore, their average spending-to-GDP ratio only fell to 48.3% from a peak of 55.2%.

The bigger-government group therefore failed to gain any competitive advantages in global markets by generating or attracting larger investment funds. Their investment growth slowed to an average annual rate of 0.8% in 2000-2005, from 4.1% in 1990-2000. Their export growth rate almost halved to 3.1% annually in 2000-2005, down from 6.1% in 1990-2000. The bottom line is a drop in their average annual GDP growth rate to 2.1% in 1999-2008, from 2.3% over the previous decade.

Nor did they balance their books. They ran budgetary deficits averaging 1.1% of GDP in 2006, whereas slimmer governments generated an average surplus of 0.3% of GDP. Their net government debt averaged 39.2% of GDP in 2006, more than four times higher than the latter's. Interest payments on their debt took 2.3% of their GDP, compared with an average of just 0.5% in the slimmer-government group.

Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.

Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.

Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pacer since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.

Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups.

Other forces clearly helped to narrow income disparities in slimmer-government economies. These forces include wage-setting practices, saving habits, the availability of employer-funded pension schemes, and income sharing among extended families.

Both groups reduced the share of defense spending in GDP over the past decade. The slimmer-government average fell 0.1 points to 2.2% in 2005, but this level was 0.5 percentage points above the bigger-government average. The average share of armed forces personnel in the total labor force in the bigger-government group fell to 1.1% from 1.5% in 1995, whereas it grew to 1.7% from 1.5% in the slimmer-government group.

Information on public order and safety expenditures is incomplete. But for the 11 countries for which data are available, slimmer governments seem to take their responsibilities more seriously. They spent an average of 1.8% of GDP on these functions in 2006, compared with 1.5% by bigger governments.

The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.

[RoninLB]

A Supply-Side World
WSJ; January 7, 2008, p A12

Democrats in Congress remain committed to raising taxes on grounds that tax rates don't much matter to economic growth, and in any case they only help the rich. They may be the last public officials on the planet to believe this. In recent weeks alone, some of the unlikeliest political leaders have endorsed tax rate cuts in the name of making their economies better.

Start in Europe, where Socialist Party Prime Minister José Luis Rodríguez Zapatero pledged in December that if re-elected, "One of the first decisions I would take is to eliminate the wealth tax [up to 2.5%]," which he says is one of the highest in Europe and "punishes savings." Mr. Zapatero is no conservative. But he's joining the European march down the Laffer Curve on taxes, having already phased in reductions in Spain's corporate tax rate to 30% from 35% and its personal income tax rate to 43% from 45%.

Like France and Germany, Spain is cutting rates because of the tax competition from their European Union neighbors such as Ireland and East Europe. There are now at least 11 nations formerly behind the Iron Curtain with flat rate taxes of 25% or lower. On January 1, a new flat tax of 10% became law in Bulgaria, replacing its progressive rate structure and as far as we know the lowest such rate in the world. The newly elected Polish parliament is also planning to cut taxes, though an earlier flat-tax proposal earned a veto threat from the president.

And this just in: In the Middle East, Kuwait has decided to slash its corporate income tax on foreign companies to 15% from 55%. Finance Minister Mostafa al-Shemali argued for the cut, noting that Kuwait attracted less than $300 million in foreign investment last year, compared to some $18 billion in lower-tax Saudi Arabia (which has a religious tax but no corporate or income tax on Saudi nationals). "This law will encourage foreign investors to enter Kuwait," says Ahmed Baqer, head of the parliament's finance panel.

It's getting lonelier all the time at the top for America, which with a corporate tax rate of 35% is one of the few developed nations left with a rate of more than 30%. Economist Dan Mitchell tracks these trends for the Cato Institute, and he finds that 26 developed nations have cut either personal or corporate income tax rates since 2005. Since 1980, OECD nations have sliced their average personal income tax rate by 24 percentage points, to 40% from 64%. Corporate tax rates have fallen by more than 20 percentage points. Foreign leaders have learned that, in a world of easy global capital flows, high tax rates chase away investment and entrepreneurs.

Some of these tax-cutting nations -- such as Estonia, Ireland, Russia and Spain -- have seen revenues rise even as rates have fallen. This is what turns socialists into supply-siders in Spain, if regrettably not in the U.S.

[jyl]

And one more.



This looks at Federal tax revenue growth less US population growth. Addressing the issue mentioned above.

Population data from http://www.census.gov/compendia/statab/tables/08s0002.xls

[jyl]

Historical data for US corporate tax rate is harder to find. However, you want to consider the difference between the statutory rate (35% now), and the actual effective rate (appx 25% now). Many corporations pay far less than the statutory rate, due to various tax avoidance strategies. The 1986 tax reform act closed many loopholes but many others have since emerged.

The statutory rate is easy - it was lowered from 46% in 1987 (and prior years) to 40% in 1988 and 34% in 1989. It went to 35% in 1994, and has been there ever since.

The effective tax rate has changed a lot more, due to economic cycles and evolving tax avoidance strategy. In gneral, it has been going down. This is a chart.



Here is a discussion of that difference. http://www.cbpp.org/10-16-03tax.htm

[stevepaa]

maybe I don't see it, but I don't see any support for Laffer economics here.

[jyl]

I don't see support for the claim that lowering tax rates on individuals results in more federal tax revenue.

As for lowering tax rates on corporations, I don't have a view yet. Not looked at enough data.

[Seahawk]

Originally Posted by the

why does that chart list tax revenue "as a percentage of GDP?" That seems to make it fairly useless to the question posed in the first post.

It is.

Lowering marginal tax rates increases revenue to the treasury, and as a percentage of who pays the larger (and smaller) percentage of individual income tax, is fair. Please read the links I provided before. BTW, household tax rates mean dick because of our tax code...care to factor in deductions?

You guys need to look at the economy before the 16th amendment, when spending was more in line with the Constitutional guidelines. The great dodge you guys fail to get is withholding on your paychecks...you folks are the proverbial frog in the slowly heating water.

Also look at the flat tax data in Russia, et al.

[Superman]

Some of the graphs I see above are tantalizing. At a glance, I thought they support the notion that lower tax rates cause higher revenues. Seat-of-the-pants first glance. But then I noticed there are plenty of instances where higher tax rates caused (in the following period or two or three) higher tax revenues and visa versa. So....I think they don't answer the query.

To really answer the query would be fairly complex, but most definitely do-able. A correlation/regression analysis would identify the most powerful predictors, and would quantify their ability to predict revenues. Multicollinearity could be backed out. Sure, the tables of data to be used as variables would need to be cleaned up and of course here is the best opportunity for shenanigans. But it is nearly impossible that some economist, or group of economists, have done this analysis. Independently. Out of honest curiosity. If they have, and I think they have.....then we would know how tax rates affect revenues, and how forceful the relationship is. And we would see other relationships also.

I would find this interesting. And quite frankly, if there is a variable out there that does a good job of predicting revenues, and if that variable were as simple as verifying that tax rates have a strong negative correlation to tax revenues beginning in the following year (or current year for that matter), then this is a no-brainer for Congress. Any congress member, liberal or conservative.

Don't tell me that Democrats know this and their agenda is to hurt American families more than raise revenues. It would mean you are an idiot.

If this connection is verifiable, which I believe it is NOT.....but if it were, then we could easily get Congress to act.

[jyl]

"Effective tax rate" includes deductions.

Originally Posted by Seahawk

BTW, household tax rates mean dick because of our tax code...care to factor in deductions?

I've read so many pieces on various sides of the supply side tax debate. I've seldom seen an issue where so much talk leads to so little clarity. Its like debating religion or philosophy.

So personally, I'm at a point where I say (1) if it is so clear that lowering tax rates either does, or does not, increase government tax revenue, then I expect to see it quite plainly in the data, and (2) rather than believing anyone else's characterization, I'm going to download the data and calculate, chart, and study it myself and reach my own conclusions.

[Superman]

Exactly. John's got the spirit. John and I are situated similarly. If effective tax rates are negatively correlated to tax revenues.....then bring on the proof. If this is such a well-established economic principle, then I'm a little surprised I have waited nearly all day now and still have not seen the stunning, conclusive proof.