[extropy-chat] Do tax cuts really increase tax revenues?

[BillK]

On Tue, 8 Mar 2005 14:14:09 -0800 (PST), Mike Lorrey wrote:
> Actually, Alan Greenspan knows otherwise. He happens to know when you
> cut tax rates that tax revinues rise. Always.

Is this common assumption correct in the real world? 
I know President Bush uses this as a justification for his tax cuts. 
And this is classic Keynesian supply-side economics. 

I did a bit of searching and many economists seem to disagree. 
(But then economists always disagree with each other). :)  

There is an element of truth in that if tax rates are prohibitively
high, then a reduction could be expected to increase tax revenues. But
tax rates in the real world are rarely prohibitively high. It is
obvious that 90% taxation decreases the incentive to earn. But down at
the normal level of around 20-25% changes have little effect.

The Cato Institute for example:
Supply Tax Cuts and the Truth About the Reagan Economic Record
<http://www.cato.org/pubs/pas/pa-261.html>

Also:
The Economic Report of the President contradicts President Bush and
other top officials.
<http://www.spinsanity.org/columns/20030213.html>

Steve Kangas has an interesting (US) analysis at:
<http://www.huppi.com/kangaroo/L-taxcollections.htm>

Snippets from Steve's report:

Summary
There is no evidence whatsoever that tax cuts increase tax
collections. Almost always, tax cuts have seen tax collections fall in
the following years; tax hikes have seen tax collections rise in the
following years. Which is about what you would expect!

Before reviewing the statistics revealing the relationship between tax
cuts and tax collections, we should review a few important concepts.

First, the economy grows in the long run, as both our population
expands and productive technology improves. Our tax base, of course,
grows along with the economy, so if the tax rate remains the same --
say, 18 percent -- then absolute tax collections grow as the economy
grows.

Second, when comparing tax collections across the years, it is
important to distinguish between current and constant dollars.
Comparing tax collections in current dollars is deceptive, because
inflation gives a false picture of tax growth. Economists use constant
dollars instead, which account for inflation.

Third, tax collections generally fall during a recession, and rise
during a recovery. That is because during a recession, there are more
unemployed people who do not pay taxes. During a recovery, tax
collections increase as more people go to work. Since World War II,
we've had only seven years in which the economy shrank, so growth is
the norm for both our economy and our tax base.

Since World War II, federal tax receipts have fluctuated within a few
points of 18 percent of the Gross Domestic Product. Because they have
been so stable, tax collections have regularly grown with the economy.
Almost always, the only drops in tax collections have been during
recession years; otherwise, tax collections have expanded in the years
that the rest of the economy expanded.

There are a few notable exceptions to the above rule: those periods
following large tax cuts. After Reagan's income tax cuts took effect
in 1982, real income tax collections took a long fall, despite the
fact our economy continued to grow.

--------------------

Steve quotes tables of figures and references other reports, so he has
some evidence for his point of view.

BillK