Laffering all the Way to the Bank

An article titled "Laffering all the Way to the Bank" appeared in the National Review Online on April 30, 2004. It can be found online at http://www.nationalreview.com/nrof_buzzcharts/buzzcharts200404300829.asp. It contains a chart showing that federal tax receipts increased from $825 billion in the first half of fiscal year 2003 to $850 billion in the first half of fiscal year 2004. Following are the final two paragraphs of the article:

President Bush’s most recent tax cut proves that tax rates were, in fact, too high. This is demonstrated through the simple fact that the first half of fiscal year 2004 is showing higher tax revenues than the same period for fiscal year 2003. Between October 2003 and March 2004 (the first half of FY 2004), tax receipts were at more than $850 billion, which is $25.3 billion higher than receipts for the year-ago period.

This means that federal tax receipts went up rather than down after the Bush tax cuts of 2003. America has just passed the midpoint of fiscal 2003 and so far the data seems to be confirming the supply-side model. The Bush boom is big enough that it has already affected the budget.

Yet again, it amazes me that that the National Review would publish an article that that is so seriously flawed. First of all, the chart's scale is mislabeled. Since the title is "Federal Receipts in Billions of Dollars", the scale should go from 800 to 860, not 800,000 to 860,000. Secondly, the chart is misleading. A person's first impression would be that federal receipts doubled. In fact, they went up by about 3 percent. However, those are relatively minor issues. The major ones take a minimal amount of fact-checking to uncover. Following are the federal receipts for the first half of fiscal years 2001 through 2004 according to the Monthly Treasury Statement for March 2002, 2003, and 2004:

                  FEDERAL RECEIPTS (billions of dollars)

                                                 1st Half  1st Half  1st Half  1st Half
Budget Receipts                                   FY 2001   FY 2002   FY 2003   FY 2004
------------------------------------------------  -------   -------   -------   -------
Individual income taxes.........................  438.726   399.204   372.076   367.694
Corporation income taxes........................   79.963    78.334    44.566    67.320
Social insurance and retirement receipts:
  Employment and general retirement (off-budget)  243.284   246.372   252.815   256.814
  Employment and general retirement (on-budget)    76.056    76.238    75.327    75.574
  Unemployment insurance........................    8.152     7.619     8.056     9.484
  Other retirement..............................    2.426     2.281     2.303     2.272
Excise taxes....................................   32.575    30.569    31.361    32.549
Estate and gift taxes...........................   13.360    12.931    11.058    11.568
Customs duties..................................    9.822     8.919     9.631    10.013 
Miscellaneous receipts..........................   17.397    16.475    17.875    17.077
------------------------------------------------  -------   -------   -------   -------
Total Receipts..................................  921.760   878.943   825.067   850.364

Source: Monthly Treasury Statement, Table 3,
        March 2002, online at http://www.fms.treas.gov/mts/mts0302.pdf
        March 2003, online at http://www.fms.treas.gov/mts/mts0303.pdf
        March 2004, online at http://www.fms.treas.gov/mts/mts0304.pdf

The total receipts for 2003 and 2004 exactly match those given by the author, including the $25.3 billion difference. However, the above table also shows that receipts from individual income taxes went DOWN $4.4 billion from 2003 to 2004. In fact, receipts from individual income taxes have been dropping since 2001. In any case, Bush cut individual income taxes in 2003 and individual income tax revenues went down, not up as predicted by supply-siders.

Where did the $25.3 billion increase in total revenues come from? The table shows that it was chiefly due to a $22.8 billion increase in corporate income tax revenues. One might possible argue that this increase was somehow due to to the Bush tax cut. In fact, the table shows that the first half of 2003 was an unusally bad period for corporate tax revenues. Even after the $22.8 billion increase in those revenues in 2004, they were still below the same periods for 2001 and 2002. Hence, the relatively small 3 percent increase in total revenues from 2003 the 2004 was chiefly due to a recovery from an unusually bad period for corporate income tax revenues.

If informed of this mistake, will the author change his conclusion to "so far the data seems to contradict the supply-side model" and perhaps change the name of the article to "Laffering all the Way to the Bankruptcy"? Will the National Review run a correction? I may send them an email and see. My bet, of course, is that there will be no response and they will simply continue on as before, searching for data to back up their foregone conclusions.

The latest version of this article can be found at http://home.netcom.com/~rdavis2/bowyer1.html.

The issues you raise are valid. However, you seem to be operating from the belief that "the supply-side model" is "contradicted" if tax receipts do not increase whenever tax rates are cut. That is not correct.

Conservatives get into this kind of trouble all the time because too often, in overselling the benefits of moving to the "other side of the Laffer curve" or whatever, they make it sound like the ultimate goal of all tax policy ought to be to MAXIMIZE TAX REVENUES. Which is ridiculous of course. (And, the LAST thing conservatives actually want to do.)

Then people like you come in and observe that tax revenues haven't really increased, let alone been maximized, and say "aha", supply side "doesn't work".

But think about it. The point is not *really* to maximize tax revenues. The point is, can we function as a society by having lower tax rates (which would be beneficial in other ways, not the least of which is that individuals control more of their money)?

Even though you have shown that personal income taxes didn't increase, at the same time what you have also shown that the result of Bush's "risky scheme" to "cut taxes for the rich", personal income tax revenues have only gone down by less than 2%. He's really breaking the bank all right! Our children and our children's children will be paying for his handouts to The Rich!! Right?

Or maybe not.

The thesis of the article is proven by you to be incorrect, but so would be conclusions like "so far the data seems to contradict the supply-side model" or "Laffering all the Way to the Bankruptcy".

I seem to recall, however, that there was a change in the way Subchapter S corporations could file (usually it is cheaper to recognize the revenue as personal income vs. corporate income).

This might have the effect of moving "personal taxes" into the "corporate taxes" column. Whether this would account for the differences I do not know, just pointing out something to consider.

That may well be. However, I found the following explanation for the increase in corporate tax revenues in the CBO Monthly Budget Review at ftp://ftp.cbo.gov/53xx/doc5363/04-2004-MBR.pdf. It states:

In the first half of fiscal year 2004, receipts rose by about $20 billion, or 2.5 percent, compared with the same period in fiscal year 2003. That growth can be attributed to an increase of almost $23 billion in net corporate receipts, which were boosted by a $14 billion decline in refunds, and to a $3 billion rise in social insurance (payroll) taxes.

Hence, about two thirds of the increase was due to a decrease in tax refunds. Anyhow, thanks for the additional information.

But think about it. The point is not *really* to maximize tax revenues. The point is, can we function as a society by having lower tax rates (which would be beneficial in other ways, not the least of which is that individuals control more of their money)?

In fact, I would be more than happy to see conservatives use the that defense of tax cuts. It presents a real choice between benefits for taxpayers versus benefits for whoever is benefitting from government spending. In short, it doesn't try to sell a free lunch.

However, the graph and table at http://home.att.net/~rdavis2/def05.html shows that receipts in 2004 are projected to fall to their lowest level (as a percent of GDP) since 1950. In general, I tend to favor keeping taxes and spending at the same percentage of GDP. But it should be the responsibility of anyone who cuts taxes (or raises spending) to cut spending (or raise taxes) to keep the budget generally in balance. As the graphs and table at http://home.att.net/~rdavis2/pro2005.html show, the debt is already projected to explode over the next several decades.

The thesis of the article is proven by you to be incorrect, but so would be conclusions like "so far the data seems to contradict the supply-side model" or "Laffering all the Way to the Bankruptcy".

I agree. I was purposely being equally unreasonable as the author in my conclusions.

As you've agreed to in another post, it's too early to make a judgment one way or another. However, I think the case for supply side tax cuts has already been made. We can look back to the Kennedy tax cuts and certainly the Reagan tax cuts to see that they work. Likewise, we can look at tax cuts that largely benefit the demand side to see that they don't work in the sense that they have no sustainable benefit when it comes to economic growth. We don't have to look back any further than GWB's first tax cut to see that.

Demand side cuts do give a one time boost to economic growth, but that's it. They don't do anything for successive years. Politicians love them because they have to keep coming up with a new cut or a new program every year, which makes it look like the politicians are actually doing something, and they love that kind of crap. It makes it easy to buy votes and campaign. Of course, year after year of that stuff eventually leads to fiscal collapse.

In fact, I would be more than happy to see conservatives use the that defense of tax cuts.

You just did, I think ;-)

...receipts in 2004 are projected to fall to their lowest level (as a percent of GDP) since 1950. In general, I tend to favor keeping taxes and spending at the same percentage of GDP. But it should be the responsibility of anyone who cuts taxes (or raises spending) to cut spending (or raise taxes) to keep the budget generally in balance. As the graphs and table at http://home.att.net/~rdavis2/pro2005.html show, the debt is already projected to explode over the next several decades.

Aside from the fact that you're talking about projections (didn't projections under Clinton show that a gigantic surplus was going to materialize? I'm still waiting..), and that you neglected to mention that the same exact graph shows the quantity you have chosen to focus on climbing back on up to the mean after the 2004 low spike that you decided to single out for special importance for some reason, I must say that I have little patience for this kind of complaint when it makes no mention whatsoever that we are in a war.

You may be right about the Kennedy tax cut. If nothing else, the maximum tax rate of 90% that existed before that cut seems oppressive, at least by today's standard. However, I have to disagree on the Reagan tax cut. Following is short analysis of the Reagan tax cut. You can find a long analysis (and a short one of the Kennedy tax cut) at http://home.netcom.com/~rdavis2/taxcuts.html.

EFFECT OF REAGAN TAX CUT ON REVENUES - SHORT ANALYSIS

The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. At 99.6 percent, revenues did nearly double during the 80s. However, they had likewise doubled during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION! They went up 502.4% during the 40's, 134.5% during the 50's, 108.5% during the 60's, and 168.2% during the 70's. At 96.2 percent, they nearly doubled in the 90s as well. Hence, claiming that the Reagan tax cuts caused the doubling of revenues is like a rooster claiming credit for the dawn.

Furthermore, the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up only 91.3 percent during the 80's. Meanwhile, receipts from Social Insurance, which is directly affected by the FICA tax rate, went up 140.8 percent. This large increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 percent of payroll. Hence, the claim that the doubling of TOTAL revenues proves the effectiveness of tax cuts is including revenues which resulted from a tax hike to prove the effectiveness of a tax cut. This seems like the height of hypocrisy.

Hence, what evidence there is suggests there to be a correlation between lower taxes and LOWER revenues, not HIGHER revenues as suggested by supply-siders. There may well be valid arguments in favor of tax cuts. But higher tax revenues does not appear to be one of them.

Obviously, the hit on Reagan uses numbers that aren't adjusted for inflation. Further, Reagan took over at a time when inflation was at its worst since WWII. Supply Side tax cuts work because they promote economic growth year after year with very little or no inflation. I've read many supply siders who will tell you that revenue increases won't be there in the short run. Your quoted hit piece on Reagan also mentions the revenue increases in the 90's. Well, after Clinton's major loss in the '94 midterms, he largely approved of the supply side policies of the Republican Congress. He also was fairly good at restraining the growth of the federal government, and by the end of the decade was no longer running federal deficits. As to the 1930's, 1940's and 1950's, look at the percentage of GDP of federal taxes and you'll see why the economy was still able to grow and provide increased revenues.

Supply Side economics works. It's the only way to get sustainable economic growth and still have a chance to pay for an ever increasing, inefficient, and corrupt government. I think you are correct in your criticism of this particular NRO article, however it isn't representative of supply side economics as a whole. I have to wonder why you are devoting so much effort to it when there are much more critical economic issues.

Obviously, the hit on Reagan uses numbers that aren't adjusted for inflation.

My longer analysis at http://home.att.net/~rdavis2/taxcuts.html does correct for inflation. I'll post it in the next message. I do concede at the end of it that it's not possible to prove what effect the Reagan tax cuts had over the very long term. Like the old science-fiction story, the mere act of stepping on a butterfly may have profound effects on the very distant future. However, there is no evidence that the Reagan tax cuts permanently affected the GDP one way or the other. In the shorter-term, the overwhelming evidence is that the Reagan tax cuts decreased revenues from what they would have been otherwise. Hence, I see supply-side tax cuts as gambling recklessly with our children's future. However, I am willing to listen to any specific criticisms of my numbers or conclusions. As of yet, I have not really received any.

I think you are correct in your criticism of this particular NRO article, however it isn't representative of supply side economics as a whole. I have to wonder why you are devoting so much effort to it when there are much more critical economic issues.

I agree that the Bowyer article does not represent meaningful journalism. It strikes me as a fluff piece, just filling space until the author can hopefully think of something meaningful to write. However, it did make it to the pages of the National Review and there are people who will therefore believe it, thinking that the National Review actually checks the validity of its articles. They obviously do not. If everyone who is capable could fact-check just a few of the articles they read, we might be able to reduce the flood of erroneous articles that get printed by people of both political persuasions.

EFFECT OF REAGAN TAX CUT ON REVENUES AND GDP - LONG ANALYSIS

The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. The growth of receipts by source, outlays, and GDP over every 8-year period since 1940 is shown in the graph and tables at http://home.netcom.com/~rdavis2/recgrow.html. As can be seen in the first table, total receipts increased 75.84 percent from 1980 to 1988. However, this was the slowest 8-year growth rate since a 75.62 percent growth in total receipts from 1963 to 1971. Of course, these results are likely skewed by the high inflation that occurred during the 70's. Hence, it makes more sense to look at the "real" growth rates, that is, the growth rates corrected for inflation. The second table shows that the real growth rate from 1980 to 1988 was 20.72%. The 8-year growth rates increased in the following years to a high of 33.11% from 1983 to 1991. However, the real growth rate of total receipts reached higher highs of 38.15% in 1971 to 1979 and 57.02% from 1992 to 2000.

Another serious flaw in the doubling of revenues argument is that it looks at all revenues. The FICA tax rate increased from 6.13 percent in 1980 to 7.51 percent in 1988. To include an increase in revenues gained through a tax hike in order to argue in favor of tax cuts would be the height of hyprocrisy. Hence, we need to look only at revenues obtained from individual income taxes. According to the second table, the real growth in individual income tax receipts was 12.84% from 1980 to 1988 and 13.80% from 1981 to 1989. These were the lowest growth rates of any of the 55 8-year spans from 1940 to 2002 except for four. These four 8-year spans were 1952 to 1960 (9.12%), 1953 to 1961 (7.72%), 1968 to 1976 (11.61%), and 1969 to 1977 (3.28%). The highest real growth rate was 78.55% from 1992 to 2000, following the 1993 tax hike.

Hence, the evidence is that the Reagan tax cuts DECREASED revenues over what they would have been, at least over the short (8-year) term. The only remaining argument in favor of the Reagan tax cuts, at least from a revenue point of view, would seem to be that they permanently raised the level of the GDP, thus bringing in slightly higher revenues far into the future. According to the graph and second table, the GDP reached a high 8-year growth rate of 34.3% from 1982 to 1990. However, the GDP seems to have reaching a similar high about every ten years over the past several decades. It reached a high of 41.57% from 1958 to 1966, 29.20% from 1971 to 1979, and 32.58% from 1992 to 2000. Hence, these figures don't provide any strong evidence that the Reagan tax cuts permanently affected the GDP one way or the other.

What difference does it make to you? Your whole world seems to revolve around government revenues, otherwise known as money collected from productive individuals and corporations under the threat of imprisonment. The Reagan tax cuts were only half of the reason our GDP took off. The other half was Reagan's slashing of burdensome regulations, along with his promotion of innovation, and small business creation. I really don't care if you are convinced of that, seeing how you've now shown your true colors.

If by "true colors", you mean that I am not a born-again supply-sider, you're correct. However, I'm focusing on revenues only because that is the focus of the Bowyer article. If you look at my website, you'll see that I have at least as much information about federal spending as I do about federal revenues. In fact, I have the most information on the federal debt, deficits, and long-run budget projections and on the trade deficit. Hence, I have little patience for free-lunch theories that are being used as an excuse for forcing future taxpayers to pay for our current consumption. I have looked at the supply-side claims as closely as I can and I am unable to find any evidence that tax cuts pay for themselves. As I mentioned, the analysis is posted at http://home.att.net/~rdavis2/taxcuts.html. I am willing to listen to any supply-sider who can point out the errors in my numbers or my conclusions. Until then, I just have to believe what the numbers tell me.

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