Bush Tax Cuts Sucked

But did they work?

Short answer: No.

Long answer: No.

Someone who will go unnamed repeatedly tried to convince me, and others, that Bush’s tax cuts increased revenue; this was bullshit, was known then and known now even more so. There are still people who say that tax cuts pay for themselves yet that’s absolutely false under most circumstances.

image9

Matthew Yglesias: “Since the economy usually grows and inflation is usually positive, tax revenue in Year N+1 almost always exceeds revenue in Year N, but the Bush tax cuts did exactly what you would think tax cuts would do and deflected the country to a permanently lower revenue path.”

It’s a bit important to understand what exactly happened. Tax revenue during the Bush years went up but only by tend; it never actually came back to trend.

Karl Smith explains what really happened:

1. Data is from the Federal Reserve. It is seasonally adjusted quarterly real federal receipts.

2. The terrorist attacks, dot-com bubble etc, might explain a decline in the tax base what they don’t explain is why revenues never recover. (though more on that later)

3. It’s particularly telling that after an adjustment the new revenue curve tracks the old revenue curve at a lower level. Precisely what one would expect if you were taking a smaller fraction of the same pot.

In short, unless you think the economy was permanently damaged, all the way up until 2008, from the dot-com bubble in 2001 then you should expect tax receipts to return to the baseline.

After all they are pretty smooth in the wake of the larger early 90s recessions. You should also note that there is no huge boom from the housing bubble. No, for the most part federal receipts track the long run trend growth in the economy.

Lastly, the core argument here is that supply side didn’t work. Are you really going to tell me that the mildest recession in post-war history was so bad that it lead to persistent underperformance of revenue even though in a counterfactual world revenue would have surged above trend growth?

That is, Sept 11th was a big deal emotionally but it couldn’t even begin to explain a fraction of the economic effect.

The US economy is like really, really big. Probably bigger than anything the human mind is designed to conceive. We regularly use number’s in the trillions to describe its blips in its yearly behavior.

However, the issue here is that suppose the Bush tax cuts had no effect at all on long term revenue. For example, increases in tax rates were exactly balanced by increases in GDP or decreases in tax avoidance.

So then we might think the decline in revenues was caused by Sep 11th or the Dot-Com burst. In that case we would expect to see a drop in revenues followed by a return to trend as the economy recovers. At a minimum we should expect post dip revenue to grow faster as the economy tries to return to trend.

We don’t see that. We see a permanently lower trend.

Given that this is exactly what you would expect from reducing the percentage of the economy which taxed, I think its pretty strong evidence that this is what happened.

In short, the claim that the Bush tax cuts had such strong secondary effects of boosting GDP and tax compliance that they outweighed the primary effect of reducing taxable income is a complex one. Generally, in science we would expect someone to assemble a strong empirical case for such a claim.

When the empirics match the much simpler, more basic, more parsimonious explanation, that’s pretty damning for the complex claim.

In other words, the answer is no. In order for the Bush tax cuts to have worked (the argument is that tax cuts increases economic growth which would lead to a faster growth of revenue even if beginning at a lower trend), we should have seen a return to trend. That didn’t happen.

Having said that, it’s not always the case that tax cuts don’t work.

federal-government-revenue-in-billions-by-major-source-1965e280932008

So look there were various dips in revenue sense 1965, corresponding mostly to recessions.

Indeed, one of the interesting points, made on the slide which proceeds the now infamous one is that you can make a much stronger case for the Reagan tax cuts which resulted in a revenue dip but it looks like we had almost a return to trend. Not quite but close.

However, one of these dips is not like the others? Which is it? I’ll give you a hint, it is associated with the mildest recession in the post-war period. It’s also associated with the Bush tax cuts.

See how unlike the past there is not even a hint of a return to trend?

And, by the way, conservatives don’t care about the deficit so who fucking cares?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: