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It Is Not Freaky for Growth to Follow Tax Cuts
Financial Times ^ | August 23, 2005 | Amity Shlaes

Posted on 08/23/2005 8:11:11 PM PDT by RWR8189

Better than expected. That is the headline being given to the progress of the US economy. Last year the deficit was a humiliating 3.6 per cent of gross domestic product. The deficit this year, new numbers suggest, will be 2.7 per cent of GDP - acceptable. The difference? Extra revenues. It seems federal revenues for this year will be $85bn (47bn Pounds) higher than anyone was predicting as recently as March. Growth, too, may be stronger than expected, remaining above 3 per cent. Unemployment? Some forecasters now believe it will dive deep into the mid-4 per cent range.

These data are all impressive but perhaps most impressive are the inflows. The extra dollars are far too few to match the challenge of Washington's long-term obligations - programmes such as Social Security and Medicare. But they just about offset the $6bn a month the US spends in Iraq. We are on our way to having guns and butter, after all.

Yet few are asking what caused the cash flow. To read the papers, you would think that the fact that the Treasury is now swimming in revenue is like a cool August day at the shore after a number of hot ones: just another pleasant surprise.

But there should be no surprise. For the inflows are the direct result of the Bush administration's commitment to a concept: individuals respond to incentives. Not merely targeted ones - a break, say, for a specific group of manufacturers - but overall incentives for enterprise. The administration deduced from this concept that cuts in taxes on capital and work would inspire citizens and businesses to transact more. The Bush team then proceeded to make those cuts amid jeers about incurring deficits.

Three decades ago, mainstream economists laughed off similar programmes as the error of a marginal group, the supply-siders. If we want to be charitable we may say that the mainstreamers' contempt was understandable. The dominant philosophy of the period, Keynesianism, emphasised government spending as the best tool for growth. What is more, most adults in the US, France, Germany and Britain had more experience with increasing tax rates than with cutting them. Since that time, however, the US and other countries have conducted successful experiments with tax cuts. Yet the tax theory and even the underlying principle of incentives are still too often treated as strange or untested in continental Europe, Britain , or even the US. Recently, Steve Levitt, an economist publishing a book largely about incentives, felt the need to give it a self-deprecating title: Freakonomics. Perhaps, therefore, it is worthwhile to review the record.

The Bush White House and Congress flattened the steep stair-step progressive rate structure of the income tax, lowering the top marginal rate. They cut the tax on dividends to 15 per cent from 39.6 per cent; 15 per cent became the new (lower) top rate for capital gains. They likewise created a one-time amnesty programme for companies repatriating profits. Corporate tax revenues this year increased 42 per cent upon the year before. No one can be certain yet which change meant most to business; the full analysis of returns takes two years. But as Stephen Entin of Washington's Institute for Research on the Economics of Taxation notes, we know that the new money relates to non-wage income - profits of small businesses, dividends, capit al gains. Taxable income increased the most where tax cuts were most dramatic.

Earlier, President Bill Clinton and Robert Rubin, his Treasury secretary, also cut the capital gains tax. The business activity and extra revenues helped create the surprise of that era, a federal budget surplus. Yet earlier, in 1978 and 1981, the US slashed its capital gains rate twice, moving from 35 per cent (or sometimes higher) to 20 per cent. With each cut, the inflows jumped, and "the magnitude of the response clearly shocked some of the staff" recalls Mr Entin, then at the Treasury. What those involved would recall forever was a wistful feeling - a new awareness of the likelihood of economic growth forgone in the 1970s, the period of higher rates.

Other nations have had similar experiences, including both the rush of success and the wistful retrospection. Britain and Ireland saw relative growth and tax revenues increase following rate cuts. Russia saw revenues increase after implementing its flat tax, and not all of it came from oil price increases. Romania, Estonia, Hong Kong - all have seen compelling growth under flat tax regimes. Flat-tax advocate Steve Forbes has totted up the evidence in a new book*. Yet more is available, in the UK, from the think-tank Reform. Having observed the trend among eastern neighbours, Angela Merkel of Germany's Christian Democratic Union last week named a tax cutter, Paul Kirchhof, to her campaign team.

Growth and revenues after tax cuts are no fluke. They are not freaky or ancillary. Low rates are the key to the progress of a market economy. Radical tax reform deserves mainstream respect. As for flat tax regimes, it is time to acknowledge that they are not merely a limited remedy for tax havens or small or desperate nations. When large nations cut taxes, we do not have to hope for a good result. We can expect one.

* Flat Tax Revolution (Regnery)

© 2005 Financial Times

 


TOPICS: Business/Economy; Editorial; Government; News/Current Events; Politics/Elections
KEYWORDS: bushboom; economicgrowth; flattax; taxcuts; taxes; taxpolicy; taxreform

1 posted on 08/23/2005 8:11:14 PM PDT by RWR8189
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To: lepton

bookmark bump


2 posted on 08/23/2005 8:19:16 PM PDT by lepton ("It is useless to attempt to reason a man out of a thing he was never reasoned into"--Jonathan Swift)
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To: RWR8189

The idea surely is not new -- Reagan proved it beyond any doubt -- which of course, our fine socialists claim never happened, and that Al "Clinton" Capone was the cause of our good economy (by RAISING TAXES and doing nothing else) --

Socialists don't care about the economy. They only care about controlling as much of your wealth they can. NOTHING else matters -- just ask Clinton or the 9/11 Commission, about Atta,...his presence did not matter either. Of course the ghosts of 3000 dead Americans would not agree...


3 posted on 08/23/2005 8:19:31 PM PDT by EagleUSA
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To: RWR8189

Bookmark for tomorrow.


4 posted on 08/23/2005 8:25:44 PM PDT by tsmith130
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To: RWR8189; ancient_geezer; Taxman; pigdog; Principled; EternalVigilance; PhilWill; kevkrom; ...
President Bush and Congress can spur greater economic growth by overhauling the current system with the Fair Tax. Bills HR25 and S25. It is estimated the gross domestic product (GDP) would increase by an estimated 10.5 percent in the first year alone. The FairTax as proposed raises the economy’s capital stock by 42 percent, its labor supply by four percent, its output by 12 percent, and its real wage rate by eight percent. See more benefits and information at fairtax.org
5 posted on 08/23/2005 8:27:43 PM PDT by Man50D
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To: RWR8189
If I remember correctly, the lion's share of the Bush tax cuts won't go into effect until after Bush is back in Crawford.

Unemployment? Some forecasters now believe it will dive deep into the mid-4 per cent range.

The effect of Americans having to work 2-3 jobs to make ends meet?

Let's see, Bush is fighting a politically correct war; refusing to address the flood of illegal trespassers; is speechless on the current gas prices and his numbers are in the toilet. Hmmm,'06 should be real exciting.

6 posted on 08/23/2005 8:54:12 PM PDT by Nephi (Globalism is incompatible with originalism.)
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To: Nephi

What is your solution on the gas price issue?


7 posted on 08/23/2005 9:12:01 PM PDT by Cobra64
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To: Nephi
The effect of Americans having to work 2-3 jobs to make ends meet?

How would this affect the unemployment rate?

And I'm afraid President Bush "speaking out" about high oil prices isn't going to make any difference.

The truth is that we have the strongest economy in the developed world, despite what whiners on FR say.

8 posted on 08/23/2005 9:13:40 PM PDT by RWR8189 ( Extremism in defense of liberty is no vice. Moderation in the pursuit of justice is no virtue.)
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To: Cobra64
What is your solution on the gas price issue?

Thanks for asking. I've written Tancredo and suggested he author a bill nationalizing fuel formulas so that refineries aren't bottlenecked with 40+ formulas required by various cities and states.

9 posted on 08/23/2005 9:40:28 PM PDT by Nephi (Globalism is incompatible with originalism.)
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To: RWR8189
The dominant philosophy of the period, Keynesianism, emphasised government spending as the best tool for growth.

And for the most part, GWB is a Keynesian. He's certainly fulfilled the government spending part. It was only the last phase of the tax cuts that included supply-side features. GWB saw that his relection chances were fading and caved in to the supply-siders in 2003.

10 posted on 08/23/2005 9:41:21 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: RWR8189
How would this affect the unemployment rate?

I get your point...you're right, my assumptions about Americans having to work 2-3 jobs wouldn't affect how unemployment numbers are calculated.

I agree, too, that we have the strongest economy in a socialist world, but that isn't saying much, which gets to my original point: What is the dollar amount of Bush's tax cuts that are fanning the flames of this ferocious economy? (I think it's 79B$ out of a 279B$ plan.)

And I'm afraid President Bush "speaking out" about high oil prices isn't going to make any difference.

Does he have any ideas? When was the last time he gave you the impression he was aware of gas prices and is doing something about them?

11 posted on 08/23/2005 9:55:06 PM PDT by Nephi (Globalism is incompatible with originalism.)
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To: Nephi
Thanks for asking. I've written Tancredo and suggested he author a bill nationalizing fuel formulas so that refineries aren't bottlenecked with 40+ formulas required by various cities and states.

That would help a lot. My wife just retired from Texaco a few years ago, and she said that it is a logistical refining and logistical nightmare 'steering' gasoline from various refineries to various states based upon the CAFE standards. Transportation cost go UP depending on what CAFE has to go to what state. Ergo, consumers pay for increased transportation costs. There are so many people, even here, who are clueless about the oil MARKET. From E&P, refining, distribution logistics, cost of doing business, state, federal and excise taxes. I could rant for hours, because my wife lived this business in Texaco for 30 years. Feel free to pass some of these notes on to the libs.

Regards, Mark Davis

12 posted on 08/23/2005 10:19:25 PM PDT by Cobra64
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To: RWR8189

A very hopeful straw in the wind. Thanks a lot for posting it.


13 posted on 08/23/2005 10:33:28 PM PDT by n-tres-ted (Remember November!)
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To: RWR8189; Taxman; pigdog; Principled; EternalVigilance; rwrcpa1; phil_will1; kevkrom; n-tres-ted; ...
A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:


14 posted on 08/24/2005 3:51:49 AM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: Nephi

Nationalization? Yeah...sounds real conservative to me....


15 posted on 08/24/2005 6:53:16 AM PDT by RockinRight (Democrats - Trying to make an a$$ out of America since 1933)
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To: RWR8189

Of course it's not freeky! It has worked EVERY SINGLE TIME it has been tried since the implementation of the communist inspired "Progressive" income tax!


16 posted on 08/24/2005 7:19:28 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: RockinRight

I think you missed the meaning of nationalization.

It's not that the government would take over the gasoline companies. It's that gasoline used in Miami could also be used in Chicago, Pittsburgh, or Seattle, or anywhere else. Right now there are specific formulas for different areas of the country. That luncacy.


17 posted on 08/24/2005 9:26:26 AM PDT by Badray
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