Ex-Gov. du Pont claimed "[t]ax rate reductions increase tax revenues" -- several Bush administration economists disagree

››› ››› MATT GERTZ

In his OpinionJournal.com column, former Delaware Gov. Pete du Pont wrote that "[t]ax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends." However, several former and current Bush administration economists have stated that tax cuts, including those passed under Bush, produce a net decrease in revenue.

In his October 30 Wall Street Journal OpinionJournal.com column, former Delaware Gov. Pete du Pont (R) asserted: "Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends." He cited this as an "economic truth[] that America's liberal leadership finds too inconvenient to support." In fact, several former and current Bush administration economists have stated that tax cuts, including those passed under Bush, produce a net decrease in revenue. And during his confirmation hearing, Treasury Secretary Henry M. Paulson testified: "As a general rule, I don't believe that tax cuts pay for themselves."

In a June 25 article, The Christian Science Monitor reported that "even top Bush economic advisers now reject" the theory that cutting taxes increases tax revenues, and quoted Council of Economic Advisers chairman Edward Lazear as saying: "I certainly would not claim that tax cuts pay for themselves." Indeed, during his September 26, 2006, testimony before the Senate Budget Committee, Lazear said:

LAZEAR: Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data presented above do not support this claim. Tax revenues in 2006 appear to have recovered to the level seen at this point in previous business cycles, but this does not make up for the lost revenue during 2003, 2004, and 2005. The tax cuts were a positive step and have contributed to the enhanced economic growth, additional jobs, higher real disposable income, and the low unemployment rates that we currently see today. Our goal is not to maximize the size of government, but to provide revenues to make sure that we can operate those programs that society deems necessary, while at the same time allowing the private sector to take full advantage of its growth potential.

Similarly, in an October 17, 2006, article, The Washington Post quoted Alan D. Viard, a former Council of Economic Advisers senior economist during the Bush administration, asserting that "[f]ederal revenue is lower today than it would have been without the [Bush] tax cuts. There's really no dispute among economists about that." The Post also reported that "[a]n analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts." From the Post article:

Bush hailed the dwindling deficit as a direct result of "pro-growth economic policies," particularly huge tax cuts enacted during his first term. "Tax relief fuels economic growth. And growth -- when the economy grows, more tax revenues come to Washington. And that's what's happened," Bush said.

Economists said Bush was claiming credit where little is due. The economy has grown and tax receipts have risen at historic rates over the past two years, but the Bush tax cuts played a small role in that process, they said, and cost the Treasury more in lost taxes than it gained from the resulting economic stimulus.

"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."

Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion. An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.

Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said.

But, he said, "we do think good tax policy can lead to important economic benefits. ... The size of the tax base is larger than it would have been without the tax relief."

During his June 26, 2006, confirmation hearing before the Senate Finance Committee, Paulson said: "As a general rule, I don't believe that tax cuts pay for themselves." The financial information website MarketWatch reported this statement as "echoing the opinion of most economists." Paulson added: "But I have clearly seen -- and I think some of those people you've quoted would say the same thing -- I've seen that tax cuts change behavior. There's no doubt." From the hearing:

SEN. KENT CONRAD (D-ND): Let me just, before I ask you directly what your view is, show you the historical record here, what we have seen since 2000 in terms of the real revenues of the country.

Real revenues in 2000 were over $2 trillion and then we had the massive tax cuts in 2001. We were told that that would generate more revenue; at least some made that claim.

We can see what happens in the real world. We didn't get more revenue. And we had more large tax cuts in 2003. Again, we were told we'd get more revenue and, again, what we saw in the real world is it didn't happen.

I'd ask you, what is your view? Do you believe that tax cuts pay for themselves?

PAULSON: Senator, no. As a general rule, I don't believe that tax cuts pay for themselves.

But I have clearly seen -- and I think some of those people you've quoted would say the same thing -- I've seen that tax cuts change behavior. There's no doubt.

And there's no doubt, I can remember very clearly what it was like running a Wall Street firm in 2001. The bubble had burst. We were in a recession. We'd had the terrorist attack September 11th. And I watched the tax cuts add to consumer confidence, investor confidence, market confidence, CEO confidence, and I watched it change behavior. So there's no doubt about that.

Further, in the 2005 paper, "Dynamic Scoring: A Back-Of-The-Envelope Guide," N. Gregory Mankiw, Harvard University economics professor and former chairman of the Council of Economic Advisers during the Bush administration, writes: "Most economists ... believe that taxes influence national income but doubt that the growth effects are large enough to make tax cuts self-financing." Similarly, in a May 31, 2006, Wall Street Journal op-ed (subscription required) -- also posted on Mankiw's blog -- discussing Paulson's nomination, Mankiw wrote: "Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion credible for most tax hikes, and I doubt Mr. Paulson does either." Mankiw is currently advising the presidential campaign of Republican Mitt Romney.

Similarly, in his April 27, 2006, testimony before the Joint Economic Committee, Federal Reserve chairman Ben Bernanke asserted that "to the extent the tax cuts produce greater efficiency or greater growth, they will partially offset the losses in revenues":

SEN. JACK REED (D-RI): Thank you, Mr. Chairman. Thank you for your testimony today. And just in line with the question about the effect of tax cuts, the former chairman of the Council of Economic Advisors, Greg Mankiw, wrote in his macroeconomic textbook that there is no credible evidence that tax cuts pay for themselves and that an economist[] who makes such a claim is -- quote -- "a snake oil salesman who is trying to sell a miracle cure." Do you agree with that?

BERNANKE: I don't think that as a general rule tax cuts pay for themselves. What I have argued instead is that to the extent the tax cuts produce greater efficiency or greater growth, they will partially offset the losses in revenues. The degree to which that offset occurs depends on how well-designed the tax cut is.

In a January 3 "New Year's Plea," to "anyone in the [Bush] Administration who may read this blog," Andrew Samwick, an economics professor at Dartmouth College and former chief economist to the Council of Economic Advisers during the Bush administration, wrote:

You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.

From du Pont's October 30 OpinionJournal.com column:

Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.

Finally, another inconvenient truth is that there have been 49 consecutive months of job growth as a result of the economic expansion induced by President Bush's 2003 tax rate reductions.

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Economy, Taxes
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Wall Street Journal
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Pete du Pont
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