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WebMemo #182 on Taxes

December 31, 2002

Tax Cuts Increase Federal Revenues

By

A New York Times article, Deficit Spending Can Help Republicans, by Daniel Altman, shows that old, wrong assumptions die hard. The article reports that:

"From the beginning of 2001 through the third quarter of 2002, the federal government leapt from a surplus (including Social Security) amounting to 2.3 percent of gross domestic product to a deficit of the same size. By itself, the current deficit is not terribly threatening. Indeed, running a modest deficit during an economic downturn can be useful, as long as the policies behind the deficit - lower taxes and higher spending - benefit consumers and businesses."

The article then claims that the 1980s Reagan tax cuts failed to increase tax revenues;

"The White House says lower tax rates will lead consumers to work more and businesses to expand, resulting in higher tax revenues and eventually closing the budget gap. That notion, chided as "voodoo economics" by critics, turned out to be false when it was last in vogue, during the 1980's."

However, the numbers, crunched by Heritage's Brian Riedl, show otherwise (see chart below). In 1980, the last year before the tax cuts, tax revenues were $956 billion (in constant 1996 dollars).

Revenues exceeded that 1980 level in eight of the next 10 years. Annual revenues over the next decade averaged $102 billion above their 1980 level (in constant 1996 dollars).

Any increase in budget deficits was therefore the result of spending increases rather than tax cut-induced revenue decreases.

Government Revenues increased with Tax Cut

(click image to enlarge)

More resources:

  1. The Argument for Reality-based Scoring (March 29, 2002, WebMemo).
  2. Issues 2002: Tax Reform for Economic Growth (October 25, 2002, WebMemo); which features the following Q&A:

Q: What policies would create a more robust economy?
A: Lower tax rates create better economic conditions. It's simple: lower tax rates = more robust economy = more federal revenue.

Tax relief will boost the economy's performance. To energize a soft economy, lawmakers should seek far larger reductions in the tax penalties that are imposed on productive behavior. The higher the rate, the steeper the penalty.

Q: Wouldn't higher tax rates raise more revenue?
A: No. Higher tax rates don't raise more revenue, as this chart shows.

Consulting the Federal Revenue and Spending Book of Charts, reveals the facts:

This chart, Top Federal Individual Income Tax Rates, 1960-2002, shows that the income tax rates have dropped during the last nine administrations, with the greatest relief to taxpayers coming from Ronald Reagan.

During that same time, as chart Total Federal Tax Revenue per Taxpayer, 1960-2002 shows, revenue has continued to grow.

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