Does Lowering Tax Rates Increase Tax Receipts Collected?

[buckshot24]

I had too much time on my hands so I created a spreadsheet going back to 1934. I normalized all revenue numbers to the value of the 1934 dollar.

I used data from here for the revenue and expenditures.

I have made a google doc so people can see what I have done. If I have made any mistakes I welcome the corrections.

I have also used budgets for each year adjusted to 1934 dollars as well. Thought it would be constructive to see the expenditures during this period.

Reagan in 1981.

Top tax rate dropped from 70% to 50% a 28% cut phased in over 3 years.

1977 $78,172.24
1978 $72,637.28
1979 $73,391.89
1980 $74,925.10
1981 $75,783.63
1982 $82,728.26
1983 $82,620.92
1984 $77,008.66
1985 $82,526.11
1986 $89,193.41
1987 $90,160.74
1988 $96,214.53
1989 $97,685.10
1990 $101,034.81

(in millions of 1934 dollars)

You can see that tax revenues (in adjusted dollars) went up the year after Reagan's 1981 cuts then it drops two straight years. Perhaps as inflation stabilized 84 revenue decreases as everything in the economy costs less therefore lower. I recently watched an interview where Milton Friedman was talking about inflation dropping faster than they were anticipating in this time period leading to lower tax receipts.

In any case there is a clear upward movement in total revenue (in adjusted dollars) even as tax rates are going down.

Lets look at 1964 where Johnson signed into law an across the board tax cut where the top bracket went from 91% to 65% along with a 52% to 47% corporate tax cut.

1963 $46,377.47
1964 $48,392.46
1965 $49,413.35
1966 $53,725.78
1967 $59,458.97
1968 $58,614.57
1969 $67,900.12

Again, no loss of revenue but an increase of revenue (in terms of 1934 dollars) of 40% from 64 to 69.

Now W Bush

1998 $129,002.05
1999 $137,628.01
2000 $141,303.12
2001 $152,283.17
2002 $147,375.10
2003 $134,120.14
2004 $125,627.60
2005 $128,175.94
2006 $142,213.75
2007 $154,533.44
2008 $158,765.45
2009 $156,577.89
2010 $128,477.72
2011 $127,958.09

Here we see a lot weaker case (at least in the short term) for cutting taxes raising revenue. Bush had two tax cut bills passed in 2001 and 2003. The top rate was dropped from 39.6% to 35%. There is no doubt that inflation adjusted revenues dropped after the acts were enacted. Although by 2006 things seemed to be picking up until the record year of 2008. However we did have a negative inflation rate that year.

Obviously not all tax cuts can raise more revenue and it looks like Bush's tax cut took the longest of the three to see a positive effect.

There is always the argument that if Bush wouldn't have enacted his two major tax acts that revenues would have been even higher in 2006-2008 but I'm not sure how you could support that argument since we don't have a time machine.

Anyway take a look at the spread sheet and tell me what you think.

 

[Arkaign]

Good on you to think about this fairly evenly. I know we all have our preconceived ideals regarding various things.

One thing that cannot be ignored is the growth in GDP year over year. Higher GDP is the norm, even if not every single year, and that can skew tax results, making tax cuts or tax hikes both appear to be more effective than they are.

Honestly I sort of wish people would stop jacking with the tax system at some point and start focusing on spending less. That means stopping the expansion of social programs (sorry Dems), and curtailing the 100x overkill military spending (sorry Repubs).

I think put capital gains back, put glass steagal back, eliminate oil speculation/trading by anyone not actually taking physical delivery, put tax rates somewhere in the middle of clinton/reagan rates, put more means testing into social programs, and you're most of the way to fixed.

 

[buckshot24]

One thing that cannot be ignored is the growth in GDP year over year. Higher GDP is the norm, even if not every single year, and that can skew tax results, making tax cuts or tax hikes both appear to be more effective than they are.

But if GDP goes up or goes down couldn't that be part of the effect of tax policy?

Honestly I sort of wish people would stop jacking with the tax system at some point and start focusing on spending less. That means stopping the expansion of social programs (sorry Dems), and curtailing the 100x overkill military spending (sorry Repubs).

I do think we could get rid of some of our bases around the world to cut expenditures there.

I think put capital gains back, put glass steagal back, eliminate oil speculation/trading by anyone not actually taking physical delivery, put tax rates somewhere in the middle of clinton/reagan rates, put more means testing into social programs, and you're most of the way to fixed.

Reagan lowered tax rates to 28% at the high end and Clinton had them at 39.6% Bush had them at 35% which is just about in the middle or are you saying lower than 35%? 33.8% would be right in the middle.

 

[Arkaign]

Yeap, around 33% is okay with me if Capital gains was back at Reagan era rates. As part of the 28% deal you're talking about, Reagan raised CG from 20% to 28%. This to me is more helpful in balancing the budget when you consider that many of the mega wealthy have little to no standard income anyway.

Nothing is perfect, but I think a balanced approach (moderate taxes, lowered spending in many areas unpopular with both parties, etc) could be helpful.

As for GDP going up or down, yes of course tax rates can have some play in there, but it's very very hard to nail down, as there are so many other factors (fuel prices, foreign markets, wars, deficit spending that can inflate GDP somewhat, etc, etc). It all comes down to common sense.

I hear nonsense from extremists from both sides.

For one thing, tax too much, and things do become oppressive, particularly for those making only enough to maintain a mediocre experience. Some people seem to think that taxes can be raised massively on many and this not do some damage to consumer spending, which causes of course a domino effect in the economy.

On the other hand, I listen to Rush and Hannity frequently (I agree with little, but there's not much out there in intelligent conservative radio so whatever), and there's this idiotic extreme idea that somehow 35-39% tax rate on the high income brackets is "punishing" success, and "this makes it pointless to even try to earn more money". That's just absurd. For one thing, the rates apply seperately at each level of someone's income. For the first 15k, you pay that rate, for the next XX, you pay that rate, etc. So say you have someone paying the 28% rate, but they could make an extra 200k by getting promoted to X position, but that extra 200k is going to be taxed at say 37.5%. Are they going to turn down the 200k? Why the hell should they? Their previous baseline will be taxed at the same rate, and even 62.5% of the 200k is a lot of coin. I'm not saying that anyone loves paying taxes, but the argument that it will make people not even try is stupid beyond belief.

 

[Anarchist420]

The top marginal income tax rate really has no effect on govt receipts because the market determines income. It's not like a property tax where the govt decides the value and the rate. The govt only decides the marginal rate they want to tax income tax at and then that income can be moved around.

The reasons tax receipts went up was because GDP got higher and GDP only got higher because of more govt expenditures.

We need a gradual, if not sharp short-term decrease in GDP and the only way to achieve that would be to reduce military, welfare, and bureaucracy spending to collectively 1/3 of what they currently are... the military and bureaucracy (5 or 6 cabinet departments) should have a sharper reduction than the welfare spending. At the same time, there need to be more loopholes and exemptions, a 15% or less maximum corporate tax rate, and a repeal of all of the following:
all import quotas, the whole harmonized tariff schedule (the HTS costs too much to enforce both for startups and for the tax payer), SOX (SOX has reduced tax revenue), DoddFrank, ACA, all CG taxes, legal tender, and the NationalFirearmsAct.

 

[NTMBK]

There's one major flaw in those calculations, Buckshot- you're not taking into account widening of the taxbase due to an increasing population. What do the numbers look like when adjusted by growth of working age population?

 

[ivwshane]

REMOVED STUPID STATEMENT

But I have heard that higher rates slow growth and there is no evidence of that.

Without looking at the numbers I'd have to ask, in the years where taxes were lowered and revenues increased was there also an increase in government spending (there is always an increase but was it a significant increase)? I don't know if there is a correlation, I'm just asking.

 

[Matt1970]

You will find similar results for Capital Gains.

 

[shira]

The CBO performed an analysis on this question in December of 2005, estimating the effects of a 10% cut in marginal tax rates. Their conclusion was that the best possible outcome was 68 cents of net loss in tax revenues for every dollar of tax cut.

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/69xx/doc6908/12-01-10percenttaxcut.pdf

This brief by the Congressional Budget Office (CBO) analyzes the macroeconomic effects of a simple tax policy: a 10 percent reduction in all federal tax rates on individual income. Because there is little consensus on exactly how tax cuts affect the economy, CBO based its analysis on a number of different sets of assumptions about how people respond to changes in tax policy, how open the economy is to flows of foreign capital, and how the revenue loss from the tax cut might eventually be offset. Under those various assumptions, CBO estimated effects on output ranging from increases of 0.5 percent to 0.8 percent over the first five years on average, and from a decrease of 0.1 percent to an increase of 1.1 percent over the second five years. The budgetary impact of the economic changes was estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.

In other words, for every dollar of tax lost because of the cut during the first five years subsequent to the cut, economic growth directly attributable to the tax cut would cause between 1 cent and 22 cents of of each $1 of tax loss to be regained - a net loss of between 78 and 99 cents in tax revenues for each $1 of tax cut. And during the second five years after the cut, the net effect would be between 68 cents and $1.05 in lost revenues for each dollar of tax cut.

The problem with your analysis is that you're looking simply at tax receipts, assuming that economic growth and contraction are driven solely by changes in marginal tax rates. Unfortunately, there are many other factors that affect the economy, and those effects dominate over tax-rate changes. That's what the CBO attempted to model.

You've also conveniently ignored the Clinton years, where significant growth in the economy (and in tax receipts) accompanied a tax-rate INCREASE. That skews the conclusion even further in the direction that tax cuts have a long-term negative effect on tax revenues.

 

[the DRIZZLE]

I'm not aware of anyone of importance saying higher tax rates leads to more revenue.

The Democrat position on the fiscal cliff is that we should return to the Clinton tax rates. Presumably that is because they believe it will increase revenue.

 

[ivwshane]

The Democrat position on the fiscal cliff is that we should return to the Clinton tax rates. Presumably that is because they believe it will increase revenue.

Wow! I'm an idiot.

Thanks

 

[charrison]

The Democrat position on the fiscal cliff is that we should return to the Clinton tax rates. Presumably that is because they believe it will increase revenue.

If we also returned to the clinton era economy, that might just be a good idea. However, growth currently is sluggish at best.

 

[Farang]

The CBO performed an analysis on this question in December of 2005, estimating the effects of a 10% cut in marginal tax rates. Their conclusion was that the best possible outcome was 68 cents of net loss in tax revenues for every dollar of tax cut.

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/69xx/doc6908/12-01-10percenttaxcut.pdf



In other words, for every dollar of tax lost because of the cut during the first five years subsequent to the cut, economic growth directly attributable to the tax cut would cause between 1 cent and 22 cents of of each $1 of tax loss to be regained - a net loss of between 78 and 99 cents in tax revenues for each $1 of tax cut. And during the second five years after the cut, the net effect would be between 68 cents and $1.05 in lost revenues for each dollar of tax cut.

The problem with your analysis is that you're looking simply at tax receipts, assuming that economic growth and contraction are driven solely by changes in marginal tax rates. Unfortunately, there are many other factors that affect the economy, and those effects dominate over tax-rate changes. That's what the CBO attempted to model.

You've also conveniently ignored the Clinton years, where significant growth in the economy (and in tax receipts) accompanied a tax-rate INCREASE. That skews the conclusion even further in the direction that tax cuts have a long-term negative effect on tax revenues.

This seems to roughly align with what I learned in Econ 101, re: the inefficiency of taxes. You lose some productivity from taxes, but it's hard to argue you lose more than you gain. It's just not perfectly efficient.

 

[Bowfinger]

This is old news. Federal tax revenues increase almost every year: after tax cuts, after tax increases, after taxes are left unchanged. As you noted, the most notable exception was after the Bush tax cuts, where revenues dropped for an unprecedented three years. Nonetheless, in general tax revenues increase year after year. This is simply because the United States and our economy continue to grow every year. The valid question is how much does a tax cut reduce the growth in tax revenue.

 

[Ausm]

Hey I will que you in...Your party LOST and your sugar Daddies rates are going up. I thought I would end the suspense .

40 percent of self-identified Republicans in the poll said they, too, support higher taxes on the wealthy

A majority of Americans support hiking taxes on the wealthy to avoid steep budget cuts and tax increases dubbed the "fiscal cliff," a poll indicates.

Though less than the 60 percent majority overall that supports higher taxes on those making $250,000 or more, 40 percent of self-identified Republicans in the poll said they, too, support higher taxes on the wealthy. That figure could offer potential wiggle room for GOP lawmakers who have pledged not to raise taxes but will face heavy pressure to do so by President Barack Obama, who campaigned and won on the pledge to charge rich people more, ABC News said Wednesday.

In addition to a majority of Americans' belief on taxes, two-thirds of respondents opposed raising the Medicare eligibility age from 65 to 67 as part of a fiscal cliff deal, an ABC News/Washington Post poll found.

Though Americans surveyed were largely in agreement on taxes for the wealthy and Medicare, there was a much greater split on the issue of eliminating tax deductions. By a 49 percent to 47 percent margin, respondents disagreed with the general proposition of eliminating tax deductions as a way to pay down the national debt.

The poll was conducted Nov. 21-25 and has a margin of error of 3.5 percentage points.

http://investing.businessweek.com/r...ACQUIREMEDIA||bridgesymbol||US;WPO&ticker=WPO

 

[buckshot24]

There's one major flaw in those calculations, Buckshot- you're not taking into account widening of the taxbase due to an increasing population. What do the numbers look like when adjusted by growth of working age population?

I'd be happy to include that, do you know where we can get those numbers?

I found this site but it only uses population and not working population plus it only goes to 98.

We can include a "fudge" column where we take the average population increase year over year and adjust tax revenue just to get an idea until we find better data.

I included that in the last column and it doesn't change the picture all too much. The Kennedy cuts still produced 31% more revenue when adjusted for inflation and population growth.

Although by doing that 2001 becomes the highest revenue year instead of 2008

 

[3chordcharlie]

Does Lowering Tax Rates Increase Tax Receipts Collected?

If tax rates are above the revenue-maximizing rate? Yes.

If they are below it? No.

The revenue-maximizing rate by most experimentation is shockingly high.

Fortunately maximizing revenue is not - and need not - be a goal of government. Paying for public policy efficiently and equitably is a goal though.

 

[buckshot24]

The problem with your analysis is that you're looking simply at tax receipts, assuming that economic growth and contraction are driven solely by changes in marginal tax rates. Unfortunately, there are many other factors that affect the economy, and those effects dominate over tax-rate changes. That's what the CBO attempted to model.

I wasn't really trying to exclude other factors its just that I can't account for everything. All I was trying to do is normalize tax receipts for inflation and see when they went up and when they went down. It's really a rough analysis.

You've also conveniently ignored the Clinton years, where significant growth in the economy (and in tax receipts) accompanied a tax-rate INCREASE. That skews the conclusion even further in the direction that tax cuts have a long-term negative effect on tax revenues.

I'm not disputing that raising tax rates can actually increase revenue, I'm sure it can. I was focusing on the times when rates were cut. I posted a spread sheet to all my data so we can look at any timeframe that you choose.

But lets look at the Clinton years.

Tax Revenue adjusted to 1934 dollars

1990 $101,034.81
1991 $100,910.72
1992 $100,128.82
1993 $100,589.02
1994 $103,701.54
1995 $109,975.01
1996 $114,758.60
1997 $120,534.69
1998 $129,002.05
1999 $137,628.01
2000 $141,303.12
2001 $152,283.17


Spending adjusted to 1934 Dollars

1990 $127,732
1991 $129,490
1992 $131,121
1993 $129,919
1994 $131,319
1995 $132,447
1996 $132,475
1997 $132,817
1998 $134,984
1999 $136,038
2000 $138,326
2001 $140,076

During the Clinton years taxes may have gone up but spending was held in check. Spending increased by only 7.8% in terms of 1934 dollars during Clinton's presidency. Was that because of Clinton's leadership or the Republican house? I think partly both, can you imagine Obama saying "the era of big government is over"?

 

[buckshot24]

If tax rates are above the revenue-maximizing rate? Yes.

If they are below it? No.

The revenue-maximizing rate by most experimentation is shockingly high.

What do you think that number is?

Fortunately maximizing revenue is not - and need not - be a goal of government. Paying for public policy efficiently and equitably is a goal though.

This is absolutely right on the money. I didn't mean to imply otherwise if I did.

 

[fskimospy]

I am unaware of any credible body that believes tax cuts increase revenues. (at least when we're talking about the sort of tax rates that the US has)

There is overwhelming evidence on this topic and the answer is simple: no.

 

[fskimospy]

What do you think that number is?

If I'm not mistaken economists think that it's somewhere around 75%.

 

[buckshot24]

I am unaware of any credible body that believes tax cuts increase revenues. (at least when we're talking about the sort of tax rates that the US has)

There is overwhelming evidence on this topic and the answer is simple: no.

I present some data that suggest otherwise. Why did Revenues increase after 3 prominent tax cuts were enacted.

 

[fskimospy]

I present some data that suggest otherwise. Why did Revenues increase after 3 prominent tax cuts were enacted.

You really didn't. You presented excel spreadsheets that only account for absolute revenues, which leave so much out as to not be useful. You realize that someone already linked you a CBO study on the matter which was a far more detailed analysis, one that directly contradicts your point, right?

EDIT: If you would like to offer more credible evidence to the contrary I think maybe you should look for economists or other authoritative sources that have in fact examined this very question. (please no Heritage Foundation links) EDIT2: Oh, and your question is also not the right question. The question is not if revenues increased the next year, it's if they increased to the same level that they would have without the tax cut.

The answer to that is no.

 

[Moonbeam]

I think researching things is great if you are open to understanding and not looking to confirm a preexisting bias.

 

[buckshot24]

You really didn't. You presented excel spreadsheets that only account for absolute revenues, which leave so much out as to not be useful.

If the point is to raise revenue then isn't it useful to see what revenues actually were when tax cuts were enacted?

You realize that someone already linked you a CBO study on the matter which was a far more detailed analysis, one that directly contradicts your point, right?

My point is that even when we drastically lower rates revenue increased. CBO didn't contradict that at all. If Revenues stay the same (in terms of inflation adjusted dollars) we should prefer the lower taxes.

EDIT: If you would like to offer more credible evidence to the contrary I think maybe you should look for economists or other authoritative sources that have in fact examined this very question. (please no Heritage Foundation links) EDIT2: Oh, and your question is also not the right question. The question is not if revenues increased the next year, it's if they increased to the same level that they would have without the tax cut.

I won't be getting into that sort of thing as we'd be talking about how dumb and bias each "authority" is. I find that very unproductive.