Wednesday, October 31, 2007

The Economics of Tax Cuts

Pete DuPont in today's WSJ:

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history (see top chart above). In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006 (see bottom chart above).

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.


At 10/31/2007 2:23 PM, Anonymous Anonymous said...

So, from 1993 to 2000, when the effective average capital gains tax rate (liabilities divided by realizations) was anywhere from 20 to 25%, and still, capital gains tax receipts were increasing from 10% to 36% year over year -- that must have been due to the capital gains taxes being so *high* right? Maybe we should raise them back to their pre-2003 levels!

Seriously -- why doesn't DuPont (nor you, Mark, by extension) understand that correlation does not equal causation?

At 11/01/2007 8:25 AM, Anonymous Anonymous said...

shouldn't it be "has been proven" or "had been proved"? "has been proved" doesn't seem to make grammatical sense.

At 11/01/2007 8:48 AM, Anonymous Anonymous said...

anonymous --

"has been asserted" would be the correct choice.

DuPont and Perry have forgotten cum hoc ergo propter hoc as one of the classical logical fallacies.

At 11/01/2007 7:08 PM, Blogger juandos said...

So holymoly are you saying that the 2003 tax cuts didn't cause all the supposed upsides Dupont mentions in his commentary?

During the years you mention sir the debt still rose sharply...

The only logical fallacy I'm seeing (I'll admit that I'm not the sharpest knife in the drawer) here is for all the talks of deficit reduction, nothing regarding the national debt is being accomplished...

Is that a problem?

At 11/01/2007 9:18 PM, Anonymous Anonymous said...

juandos --

The figure you linked to shows that debt is rising faster since 2003 than it was during the years I cited!

Not to mention, the debt figures you cite include PDV of future obligations to Soc Sec and Medicare trust funds -- two places where income tax receipts DO NOT GO!

Were you trying to help me make my point?

At 11/02/2007 2:00 PM, Anonymous Anonymous said...

"In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007."

Actually, Mr. DuPont isn't counting the $180 billion borrowed from Social Security. When that's added, the deficit figure for 2007 is $343 billion. Or more than the average debt. (And, remember, this average is higher because of the huge supply-side deficits run up by Reagan).


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