Tax Cuts Work

Deficits rise only because governments keep spending too much

It happened again. Tax receipts soared in the United States after the recent tax cuts.

Although it will take a while for the full effect of the 2017 tax reform to kick in, U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8 percent compared with the same time period in 2017. Individual income tax collections had big gains for a second-straight quarter with a 12.8 percent increase to $107.4 billion in 2018’s first quarter.

But the evidence of the positive impact on growth, jobs, and wages of lower corporate taxes has been published in many studies over time. The example of more than 200 cases in 21 countries shows that tax cuts and expenditure reductions are much more effective in boosting growth and prosperity than increasing government spending.

Multiple studies conclude that in more than 170 cases, the impact of tax cuts has been much more positive for growth.

In Denial

However, some commentators continue to deny the positive impact of tax cuts using the argument that deficits rise.

The fallacy that “deficits rise” has nothing to do with tax cuts, but with increases in government spending on top of the tax cuts.

The deficit excuse is very simple. It says taxes should not be cut because governments will spend all revenues, even if these increase, and more. But this excuse is wrong.

The mistake of pointing at deficits as proof that tax cuts don’t work is debunked by looking at the proposals of the same economists that argue against tax cuts. Economist Paul Krugman is one example. He argued against tax cuts in his New York Times article “Time to Borrow” after the Obama administration increased debt by $10 trillion. These demand-side economists defend deficit spending, yet consider tax cuts as negative … because deficits may increase. Only Keynesian economists manage to pull off such mindbending logic.

Deficits need not rise or exist at all if governments spend in line with revenue growth. And the evidence points to rising revenues from lower taxes and higher growth.

Deficit Spending

While analyzing the deficits of the G-20 economies during the past 15 years, we found that more than 80 percent come from higher spending. Even in the 2008–2010 crisis, European government deficits were explained more by the “stimulus” plans and government spending increases than any loss of revenues.

Spain, for example, lost 40 billion euros of tax revenues from the bursting of the real estate bubble but deficits rose by 300 billion euros, driven by stimulus and automatic “stabilizers.” The European Union spent almost 1.5 percent of its GDP on stimuli and increased taxes, sending deficits and debt to GDP to all-time highs. The United States increased taxes by $1.5 trillion under the Obama administration but the average deficit was 5 percent of GDP. The final tally was a $10 trillion increase in national debt.

During the Obama administration and the massive expansionary monetary policies of three rounds of quantitative easing (QE) and ultra-low interest rates, economic growth on average was only 1.4 percent and 2.1 percent if we exclude the crash year of 2009. That compares to an average of 3.5 percent during the Reagan administration, 3.9 percent during Clinton’s, and 2.1 percent during Bush Jr.’s.

Positive Effects

The evidence of the positive effects of tax cuts on jobs and growth is clear.

The 2018 “Economic Report of the President” shows that tax cuts generated more federal revenues even after adjusting for inflation and population growth.

President John F. Kennedy’s major tax cut, which included chopping the top marginal rate to 70 percent from 91 percent, became law in early 1964. The economy grew at an average 5.5 percent, and unemployment fell to 3.8 percent. In turn, the annual deficit shrank to $1 billion from $7 billion as individual income-tax receipts nearly doubled.

President Ronald Reagan cut the top personal rate from 70 percent all the way down to 28 percent. Between 1982, when the first round of Reagan’s across-the-board tax cuts went into effect, and 1990, when President George H.W. Bush broke his no-new-taxes pledge, individual tax receipts jumped 57 percent to $467 billion.

And even President Bill Clinton’s budget surpluses didn’t materialize until after the president in 1997 signed a GOP tax bill that cut the capital-gains rate to 20 percent from 28 percent. Tax receipts from capital gains soared as capital investment more than tripled. Between 1996 and 2000, “the increase in capital gains revenues accounted for a little over 20 percent of the total increase in federal revenues,” former Treasury official Bruce Bartlett said. For the first time, individual tax receipts hit $1 trillion.

After President George W. Bush in 2003 signed the largest tax cut since Reagan—including dropping the top marginal rate to 35 percent from 39.6 percent—government receipts from individual income taxes rose from $794 billion to a peak of $1.2 trillion in 2007, when the mortgage crisis began—a jump of 47 percent.

Stronger economic growth expanded the tax base and brought in so much revenue that Bush more than halved the deficit over that period.

There are plenty more examples globally. Professor Juan Manuel Lopez-Zafra from CUNEF in Madrid points to a few:

• Russia introduced a 13 percent flat tax in 2001. Revenues rose 25 percent in 2002, and a further 24 percent and 15 percent in 2003 and 2004 respectively. Revenues rose 80 percent in three years. Russia is a country where government …read more

  From:: The Korelin Economic Report