Fox Business host Stuart Varney used statements made by Congressman Paul Ryan during the vice presidential debate to revive the right-wing media myth that tax cuts enacted under President Reagan and others led to increased economic growth and federal revenue. But economists say that cutting tax rates for the wealthy does not spur growth and that tax cuts decrease federal revenue.
Fox Business Host: Tax Cuts Result In Economic Growth And Increased Revenue
Fox's Varney Uses Vice Presidential Debate To Push Myth That Tax Cuts Result In “An Increase In Money Flowing To The Treasury.” Fox Business host Stuart Varney aired a clip of Vice President Joe Biden saying that Ryan could not pay for the tax plan he has proposed without raising taxes on the middle class. Ryan responded by suggesting that tax cuts had repeatedly led to economic growth. Varney commented that “Biden was factually wrong” when he said tax cuts don't grow the economy. Varney continued: “JFK, Ronald Reagan, George W. Bush -- all of them cut tax rates, and the end result was an increase in money flowing to the Treasury. Revenues went up when tax rates went down.”
VARNEY: The central question on the economic side of the debate is which tax policy will grow the economy and cut the deficit. Paul Ryan was very clear -- he said, look, you cut tax rates, and that gives you growth. Listen to this exchange.
[begin video clip]
RYAN: You can cut tax rates by 20 percent and still preserve these important preferences for middle-class taxpayers --
BIDEN: Not mathematically possible.
RYAN: It is mathematically possible. It's been done before. It's precisely what we're proposing.
BIDEN: It has never been done before.
RYAN: It's been done a couple of times, actually.
BIDEN: It has never been done before.
RYAN: Jack Kennedy lowered tax rates, increased growth. Ronald Reagan --
BIDEN: Oh, now you're Jack Kennedy?
RYAN: Ronald Reagan --
[end video clip]
VARNEY: Well, that was an interruption. That was also a put-down. And Vice President Biden was factually wrong. JFK, Ronald Reagan, George W. Bush -- all of them cut tax rates, and the end result was in increase in money flowing to the Treasury. Revenues went up when tax rates went down. Joe Biden was wrong. [Fox News, America's Newsroom, 10/12/12]
But It Was Interest Rate Cuts, Not Tax Cuts, That Led To Reagan Growth
CBO: “Lower Interest Rates After Mid-1982 Permitted The Recovery To Begin.” An August 1983 CBO report concluded: “Lower interest rates after mid-1982 permitted the recovery to begin” :
The Economy At Mid-1983
Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983. [Congressional Budget Office, 8/1/83]
Even An Economist Who Worked For Reagan Suggested Interest Rate Cuts Drove The Economic Recovery. Michael Mussa, a member of Reagan's Council of Economic Advisers, wrote in an essay for American Economic Policy in the 1980s that when the Federal Reserve cut the discount rate a half percentage point on July 20, 1982, it signaled “the beginning of what would become a four-and-a-half-year period of quite rapid monetary expansion. During this period, interest rates, both short and long term, would be driven significantly lower, and the U.S. economy would substantially recover from the devastation of both inflation and recession.” [American Economic Policy in the 1980s, 1995]
Likewise, The Kennedy Tax Cuts Were Paired With Increased Spending And Lower Interest Rates
Economist Ed Lotterman: Kennedy's Tax Cuts Were Paired With Big Increases In Spending And Lower Interest Rates. Economist Edward Lotterman pointed out that Congress enacted the Kennedy tax cuts at a time of low deficits. Furthermore, the Kennedy tax cuts were paired with lower interest rates from the Federal Reserve as well as increased spending:
The upshot was that Kennedy entered office with the nation's finances in good shape. Yes, the debt-GDP ratio would fall further until it hit its low point of 32.6 percent at the end of the Carter administration. But with a deficit of only 0.6 percent of GDP for the 1961 fiscal year in which JFK took the oath of office, there was room for additional spending or for tax cuts.
Individual income tax revenues stumbled for one year, but then continued up. Corporate tax revenues rose, without interruption, along with the economy.
But other things were happening. The federal government was spending a lot of money on interstate highway construction, military hardware, the space race and education. Much of this -- especially infrastructure, science, engineering and education -- boosted productivity for the overall economy. And the Federal Reserve let the money supply grow faster than it had in the 1950s. These factors all helped foster fast-growing output and, hence, growing tax revenues. [Bismarck Tribune, 10/10/10]
Study: Tax Cuts For Wealthy Do Not Create Economic Growth
Congressional Research Service: Cutting Top Tax Rates Leads To Income Inequality, Not Economic Growth. A Congressional Research Service study released in September analyzed policies affecting the top tax rates since 1945, and found no “conclusive evidence” that reducing the top tax rates leads to additional economic growth. The study did find that tax rate cuts increased income inequality:
Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie).
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. [Congressional Research Service, 9/14/12]
Tax Cuts Also Do Not Increase Revenue
Bush CEA Chair Mankiw: Claim That Broad-Based Income Tax Cuts Increase Revenue Is Not “Credible.” Economist Greg Mankiw, who served as chair of the Bush Council of Economic Advisers (CEA), and who now serves as an economic advisor to GOP presidential nominee Mitt Romney, wrote on his blog on July 2, 2007, that those who told Reagan that income tax cuts would increase revenue were “charlatans and cranks:”
I used the phrase “charlatans and cranks” in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.
My other work has remained consistent with this view. In a paper on dynamic scoring, written while I was working at the White House, Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger--about 50 percent--but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the the [sic] same thing. [Greg Mankiw, 7/2/07]
Bush Economic Adviser Samwick: “Tax Cuts Have Not Fueled Record Revenues.” In a January 2007 blog post titled, “New Year's Plea,” Andrew Samwick, former chief economist for George W. Bush's Council on Economic Advisers, stated that tax cuts did not fuel “record revenue” during the Bush years:
You [in the Bush administration] 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. [Vox Baby, 1/3/07]
Bush Economic Adviser Viard: “Federal Revenue Is Lower Today Than It Would Have Been Without The Tax Cuts.” In an October 2006 article, The Washington Post reported that Alan Viard, a former Bush economic adviser, argued that federal revenue at the time was lower than it would've been without the Bush era tax cuts:
“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.” [The Washington Post, 10/17/06]
Reagan Chief Economist Feldstein: “It's Not That You Get More Revenue By Lowering Tax Rates, It Is That You Don't Lose As Much.” The New York Times reported on March 26, 2008, that Marcus Feldstein, the first chairman of Reagan's Council on Economic Advisers said that tax cuts do, in fact, decrease revenue taken in:
While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan's Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue -- but only by 3 to 5 percent.
“It is not that you get more revenue by lowering tax rates, it is that you don't lose as much,” he said. [The New York Times, 3/26/08]
Krugman: After Reagan's 1981 Tax Cuts, “Revenues Are Permanently Reduced Relative To What They Would Otherwise Have Been.” In a July 2010 post on his New York Times blog, Nobel Prize-winning economist Paul Krugman explained that revenue under Reagan and Bush both dropped because of the tax cuts passed during their presidencies:
[T]he revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.
This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been. [The New York Times, The Conscience of a Liberal, 7/15/10]
Clinton Economist Frankel: Reagan and Bush Tax Cuts “Contributed To Record U.S. Budget Deficits.” Harvard economist and former Clinton economic adviser Jeffrey Frankel wrote in 2008 that tax cuts reduce federal revenue “precisely as common sense would indicate” and that past tax cuts have directly “contributed to record U.S. budget deficits:”
The Laffer Proposition, while theoretically possible under certain conditions, does not apply to US income tax rates: a cut in those rates reduces revenue, precisely as common sense would indicate. As detailed in the paper, this was the outcome of the two big experiments of recent decades: the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03, both of which contributed to record US budget deficits. It is also the conclusion of more systematic scholarly studies based on more extensive data. Finally, it is the view of almost all professional economists, including the illustrious economic advisers to Presidents Reagan and Bush. So thorough is the discrediting of the Laffer Hypothesis, that many deny that these two presidents or their top officials could have ever believed such a thing. But abundant quotes suggest that they did. [Snake-Oil Tax Cuts, 9/8/08]
Bartlett: Revenue Has Been Historically Low Because “Taxes Were Cut In 2001, 2002, 2003, 2004 and 2006.” In a July 26, 2011, New York Times blog post, Bruce Bartlett, former policy adviser to Presidents Ronald Reagan and George H.W. Bush, explained that revenue recently collected by the government was lower than it had been since 1950 because of a series of the Bush tax cuts:
In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.
But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.
Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.
The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006. [The New York Times, 7/26/11]
EPI: Bush Tax Cuts “Added $2.6 Trillion To The Public Debt Over 2001-10.” In a September 26, 2011, article, Andrew Fieldhouse of the Economic Policy Institute (EPI) explained tax cuts decreased federal revenue and in turn “added $2.6 trillion to the public debt over 2001-10:”
A spending-cuts-only approach is regressive in that it forces the brunt of deficit reduction on the backs of poor and working families while ignoring a prime culprit of the budget deficit: the expensive, ineffective, and unfair Bush-era tax cuts. These top-heavy tax cuts added $2.6 trillion to the public debt over 2001-10 and will add $3.8 trillion to deficits over the next decade if fully continued. [Economic Policy Institute, 9/26/11]