Saturday, July 31, 2010

Tax Cuts, Tax Hikes, It's All Relative

The changes in the income tax rates that took effect in 2001 and 2003 are referred to as the "Bush tax cuts," and you'll find more than one million results for a Google search of the phrase "Bush tax cuts."  Certainly, compared to the "Clinton tax hikes" that took effect in 1993 and raised the top marginal income rate to 39.6%, the reductions of the top tax rate to 38.6% in 2002 and 35% in 2003 were "tax cuts" (see chart above). 

But if you go back further and compare the Bush tax rates to the highest marginal tax rates under Bush, Sr. (31%) and Reagan (28%), couldn't the Bush II tax rates more accurately be referred to as the "Bush tax hikes"?  Of course, the tax rates were much higher before 1988, here's the full history back to 1913 in the chart below.  Compared to most of the tax rates between the 1930s and the 1980s, couldn't the Clinton tax rates also accurately be referred to as the "Clinton tax cuts"?  


10 Comments:

At 8/01/2010 6:42 AM, Blogger Yorzhik said...

So where's the graph comparing tax revenue over the same time?

 
At 8/01/2010 1:11 PM, Blogger Jason said...

Thanks for putting the long-term graph. Great post. We are actually also having Bush Tax hikes next year - it was Bush that signed the law that raises taxes in 2011. The assumption was that he would cut spending so that there would be no way that any politician could justify not keeping the Bush tax cuts. Instead he almost doubled spending and now we have huge deficits.

 
At 8/01/2010 3:48 PM, Blogger morganovich said...

2 issues:

1. those historical tax rates are not entirely comparable. there used to be a great many more loopholes and foreign income was not taxed, so offshore holdings and holding companies were HUGE tax havens. a more accurate measure would be income tax collected as a % of GDP, which has been considerably less variable.

2. jason- don't forget that it is congress, not the president that controls the purse. when one speaks of the president promising to cut spending, it's important to realize that he does not have to power to do so. this is clearly laid out in the constitution. attempts to "starve the beast" by both reagan and bush when they managed to get tax cuts through were prevented by congressional, not executive decisions. it's actually congress that cuts taxes, but in both cases the republican congress that did so was then replaced by a democratic one that did not adjust spending to match.

i have little faith in the small governess/balanced budget credentials of either side, but it is useful to at least apportion blame in the right place.

 
At 8/02/2010 1:30 AM, Blogger t11s said...

From 1979 to 2005, total effective Federal tax rates have gone down around 5% for all income quintiles except the highest, which has seen about 2.5% decrease:

http://3.bp.blogspot.com/_djgssszshgM/R8rESIAaVeI/AAAAAAAAARs/aCvq98bbTpo/s1600-h/tax+rates+by+quintile.gif

At the same time, there is some evidence that state and local taxes have gone up. Sales taxes rose at least 2% in that time:

http://www.facebook.com/l.php?u=http%3A%2F%2Fwww.vertexinc.com%2FPressRoom%2Farchive%2F2004%2FCBSMarketwatch2904.pdf&h=98716

 
At 8/02/2010 10:01 AM, Blogger Ben Eng said...

Yorzhik,

Here is an article from today that discusses this topic.

http://online.wsj.com/article/SB10001424052748703977004575393882112674598.html

 
At 8/02/2010 11:47 AM, Blogger James Fraasch said...

Wait wait wait! You are neglecting the most important part of the tax hike in the 1990's. Yes the marginal rate went up, but it applied to far fewer people. The top marginal bracket was increased significantly. It went from $89150 in 1993 to $250,000 in 1994.

So, technically, yes the top marginal rate went up, but it applied to far fewer people.

James

 
At 8/02/2010 12:39 PM, Blogger Hydra said...

How about plotting the tax rate on one axis and the amount collected on the other?

 
At 8/02/2010 10:17 PM, Blogger juandos said...

"So, technically, yes the top marginal rate went up, but it applied to far fewer people"...

Punishing people for being successful...

Exactly what Art Laffer commented on in the WSJ piece...

 
At 8/03/2010 7:16 AM, Blogger James Fraasch said...

Juandos,

If you like Laffer, then you should read Jude Wanniski's "The Way the World Works".

In fact everyone should read that book.

It's a real nice study on the importance of the Laffer Curve among other things. There are example taken from around the world on this plus a discussion of different economic theories.

James

 
At 8/03/2010 8:18 AM, Blogger juandos said...

Thanks for the heads up James...

Note the following from Donald Luskin back in '05: "What Jude taught me most fundamentally about the way the world works is that markets and economies are moved by government policy — most prominently tax policy, monetary policy, regulatory policy and trade policy. I think he's right. If I had to abandon all my investment-analysis tools but one, the one I'd hang on to would be my ability to know what's going on in Washington"...

I'm going to have to get my hands on that book...

 

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