History and Tax Cuts

Thoma had too good of an article up yesterday for me to pass it up on tax cuts and recoveries. Key quotes…..

In 1982, with the economy in the second part of its double-dip recession, Reagan signed a tax increase, meant to reduce the deficit. Here’s Bruce Bartlett, writing at Forbes.com:
According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) … took effect on Jan. 1, 1983.
During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. … Said Rep. Newt Gingrich, “I think it will make the economy sicker.” The Chamber of Commerce … said it had “no doubt that it will curb the economic recovery everyone wants.”
Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth.
A little more than a decade later, Mr. Gingrich made the same argument about Bill Clinton’s tax increase. But … the … late 1990s expansion was the fastest of any in the past forty years.
Mr. Clinton’s successor, George W. Bush, signed a large tax cut during his first year in office — as Mr. Reagan did. But Mr. Bush never signed a tax increase to reduce the deficit. And growth in the Bush years was slower than in the Reagan years or the Clinton years, even before the financial crisis hit.
The history seems to suggest that tax cuts are not the most reliable strategy for spurring growth, at least in the United States, where top income-tax rates are not sky high.

As I have noted many times, if you just look at our GDP over time, taxes do not seem to be the ultimate factor in its performance. When you look at tax rates around the world, more affluent countries have higher tax rates. Yes, I know, what is cause and what is effect? Still, if taxes destroy economies, we should see more repercussions from where they are higher. We should see our economy worsen when we raise taxes, but that is not what we see.

As is noted in Thoma’s comments section, tax cuts and increases do have effects, but these are temporary when they do occur. After a few years, people adapt to the new rates and life goes on. This is especially true at the high end of the income scale. The wealthy may gripe, but if a tax increase means they take home only $10 million a year instead of $ 11 million, they do not alter their spending or work to any measurable degree over the long term.

There is at least some theoretical reason to believe that there are times when tax increases will benefit the economy. First, we know that after WWII, we paid down a bigger debt than what we may soon have with tax rates much higher than we have now. There is also the expected effect on the bond market. Higher taxes being used to lower debt, should make the bond market happy and the attendant drop in asset prices could lead to, again, a temporary increase in economic activity.

As Bartlett has pointed out, maybe tax rates should not be the sole focus of the conservative movement. I think that we should rather be concentrating more on how taxes are actually spent. Are we getting our money’s worth? What should government be doing or not doing? If we decide some governmental activity is worthwhile, like invading and nation building, then pay for it. Drugs for the elderly? Pay for it. Health care reform? Just like its being planned, pay for it.