Some Tax Cut Truths – They DON’T Pay For Themselves.

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Just so we get some facts straight – Tax cut do not, and did not, even under the Reagan administration, pay for themselves. Bruce Bartlett writes:

Republicans claim to be deeply concerned about the budget deficit and the national debt, yet repeatedly demand additional large tax cuts. For example, former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, supports a balanced budget amendment to the Constitution but also wants an $8 trillion tax cut. He rationalizes this contradiction by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13:

“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”

In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.

These are facts, presented from the economists who WORKED FOR REAGAN on his budget policies during his administration. Here is Bartlett’s resume. He continues:

This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.

It was a good thing to lower the tax rate from 70 to 29 % (of course no one paid 70% anyway after deductions)… That was a 40% drop in the tax rate. Yes, something that large is going to have a positive net effect on business investment and job creation. But cutting the current tax rate a few measly percentage point??? Sorry guys, it’s just not enough to make any difference. Try something more radical like a flat tax, and maybe you’ll see some effect.

And consider this. Back in the early 80’s, we still built things here, and you had a lot of youngish baby boomers having families. The pump was primed for economic expansion. Today, there is an enormous glut of houses that are empty because the overheated housing market caused builder to overshoot the possible normal demand line for a normal economy. In other words, too many houses were built and, even if the economy improves tremendously from the point it’s at now, it will be a very long time before demand can catch up. More importantly, the amount of stock market investment opportunities are vastly greater now than they were in the early 80’s. It’s much easier to make your money grow by investing in the market, hedge funds and derivative, than it is to invest in business, where right now, there isn’t much short term or, for that matter, long term money making prospects. If more tax cuts are passed and a the well-to-do have a few more duckets on hand to spend, and it’s more profitable to invest your money into the stock market than it is to invest in business expansion, where do you think the business class will tend to put their money?

Don’t get me wrong – I’m not blasting the rich. I’m just pointing out a reality.

PS. On long-term business investment? If I had spare cash to throw around, I would invest in anything that has to do with hearing impairments. Given that the young of today are either sporting ear-buds connected to iPods turned to 11, or riding in cars where the stereo system is so tricked out that the poor auto is literally vibrating apart from the bass generated by the 30″ sub woofers, I think investing in hearing aid manufacturers and the like is a pretty safe bet!!! 🙂

2 Comments to “Some Tax Cut Truths – They DON’T Pay For Themselves.”

  1. By The Last Bass Player, June 22, 2011 @ 3:53 am

    Invest in hearing aid manufacturers…or possibly buy bigger speakers in our old age to compensate. If ‘twas our generation that started ASBOs, then by god we’ll finish it off with a fudging, sub-woofing, house-trembling party…. ?

    (in Britain, an ASBO is an anti-social behaviour order, handed out by the police willy-nilly to kids on street corners. Whether that means it is an order to be anti-social by playing your music loud, or whether it means it is a badge of dubious honour for the sly and louche youth of England is a question that has not yet been settled.)

  2. By The Last Bass Player, June 22, 2011 @ 3:58 am

    (the question mark at the end of the first paragraph was meant to be a smileyface 🙂 but ineffable technology has interpreted it as something else entirely. It is a point barely worth making, apologies.)

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