US went into deep debt to pay for tax cuts
11:02 am - July 24th 2011
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Right-wingers are fond of constantly citing the ‘Laffer curve’ – an economic model of taxation – as evidence that cutting taxes will raise revenue.
Nearly ten years ago the Republican President George W Bush made the same promise: that massive tax cuts aimed at America’s richest would stimulate the economy and raise government revenue.
But it did not quite work out like that, as the Associated Press reported soon after.
Bush’s tax cuts of course pushed the US economy deeply into the red and the national debt exploded.
The tax cuts eventually added $2.5 trillion to America’s national debt.
via Think Progress
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Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments
“Right-wingers are fond of constantly citing the ‘Laffer curve’ – an economic model of taxation – as evidence that cutting taxes will raise revenue.”
No: right wingers are fond of citing the Laffer Curve as evidence that sometimes cutting tax rates will raise revenue: just as sometimes it won’t. Further, that sometimes raising tax rates won’t increase revenue: just as sometimes it won’t.
It all depends upon where we are on the curve, see?
“that massive tax cuts aimed at America’s richest……..The tax cuts eventually added $2.5 trillion to America’s national debt.”
The revenue loss from “America’s richest” is not $2.5 trillion. For the Bush tax cuts cut taxes for everyone. Somewhere around $500 billion over the decade is closer to the “tax cuts for the rich” part of that. The other $2 trillion is the revenue loss from the tax cuts on everyone else.
Do note that Obama’s not even proposing ending the tax cuts for everyone: only for the “rich”. Households over $250,000 in income. An income level which in, say, Southern California, would be well below that of two firefighters married. Or two senior nurses perhaps.
for someone who tries to be so pedantic…
The revenue loss from “America’s richest” is not $2.5 trillion
No one said it was – the point was the revenue loss added to US debt. There is a distinction you see…
@timworstall
“No: right wingers are fond of citing the Laffer Curve as evidence that sometimes cutting tax rates will raise revenue: just as sometimes it won’t”
I rarely see this distinction made by right-wingers. Well done for being brave and admitting that the tax rate which maximises revenue is far higher than that which exists in the US and the UK
Tim W
I think Sunny is right: citing the Laffer Curve as ‘evidence’ that cutting taxes would raise revenue is what right-wingers are *fond* of doing. It’s only with reluctance that they can sometimes be coaxed into conceding that, if the Curve works the way it’s supposed to work, then for all we know tax cuts would reduce revenue and tax rises would increase it.
Didn’t Reagan make the same promise and do the same thing with the same results, by the way? Why, it’s almost as if the whole thing is a flimsy, self-serving rationalisation cooked up by the rich and powerful.
Greg Mankiw, chairman of Bush’s economic advisers, and died in the wool right winger, called the idea tax cuts would raise revenue As held by charlatans and cranks:
http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/#axzz1T2Y9SqPX
He doesn’t mean tax cuts can never raise revenue, but not when being cut from the level they were then being cut from.
(that link gives an excellent short history of US right wing economics)
“Well done for being brave and admitting that the tax rate which maximises revenue is far higher than that which exists in the US and the UK”
Not quite and not exactly.
For each different tax will have it’s own Laffer Curve (which might well change dependent upon other taxes surrounding it).
For example, fag taxes are currently what, 80%, 90% of the cost of a packet? (I think that’s about right, entirely tax free fags wholesale are about 50 p I think). I’m not sure if UK fag taxes are over the peak of the Laffer Curve. New York City fag taxes definitely are, they’ve actually lost revenue as a result of their latest rise.
But I think we’d all agree that income taxes of 80-90 % would definitely be over the curve? At the moment we’re not even sure whether the 50p upper rate is over the top of the curve.
I think the one set of UK or US taxes I would argue is over the top of the urve is the US taxation of corporate profits. 35% plus a 15% dividend tax (against the UK rate of 28% and that’s credited as basic income tax paid on dividends) probably is over the curve.
But the point I really want to get across is that you can’t say “tax is over the curve”: it’s which tax on what is over the curve?
BTW, Luis E: Mankiw is one who has written a paper on where the US is on the curve. Even if we’re not over the peak of the curve, there are still Laffer Effects. So there will be some stimulation from a tax cut (or some limitation from a tax rise) which means we should really be measuring the dynamic effects, not the static ones.
From memory his paper said that a cut in income taxes stimulates enough to pay for30% of the static losses, a cut in capital taxes 50%. At any specific tax rate we’d expect the effect to be roughly symmetrical: meaning that of course a rise in income taxes only actually raises 70%, in capital 50%, of the staticly measured revenue gains.
Quite an important point really. If we say we need to raise an extra 50 billion in revenue and our current 40% rate (just as an example) raises 200 billion, then we don’t have to raise the rate to 50% to get our extra 50 billion, but to 60%.
If the economy is growing at a normal rate borrowing for tax cuts is bad economics. When cutting taxes you should also cut spending and risk the wrath of the voters, unless there is strong evidence that you are on the wrong side of the curve. It is like the difference of between borrowing to build an extension on your house and borrowing to go on vacation. Low tax is good, but borrowing to have low taxes is just deferring taxation to some future government. If the economy is depressed and the government are running a deficit it could be good to cut taxes and borrow more if the tax cuts help to revive the economy.
Right wingers should STFU because 70% of the debt was run up by Ray-gun and the Bush boy.
Isn’t this the sort of thing that you approve of Sunny? You like fiscal stimuli being applied to struggling economies. You’re still arguing that Britain should be adding to its deficit and national debt to pay for an additional fiscal stimulus of its own. Unfunded tax cuts are definitionally a form of fiscal stimulus, and in open economies arguably have a greater multiplier effect on the economy than increasing public spending.
So really the news that a $2.5 trillion fiscal stimulus had a positively harmful effect on the US economy by racking up its debt levels without triggering the greater growth that fiscal stimulus advocates had predicted ought to make you question your own economic prejudices right? Right?
Tim J,
No, fiscal stimulus during a recession and fiscal stimulus during normal times are very different things. It’s quite consistent to urge stimulus now, yet fiscal restraint during the years pre 2007. In fact that is exactly how the main proponents of stimulus see things: see Krugman’s The Return of Depression Economics for why everything changes in circumstances like these.
How the US deficit got so big:
http://www.nytimes.com/2011/07/24/opinion/sunday/24sun4.html
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Mabel Horrocks
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N|Ratimanjari
RT @sunny_hundal: Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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dm
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Mabel Horrocks
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Andy S
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Tom Miller
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Emily Davis
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RT @sunny_hundal: Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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10 years ago the US went into deep debt to pay for tax cuts http://bit.ly/nhIkS4
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HouseOfTwitsLab
RT @sunny_hundal Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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House Of Twits
RT @sunny_hundal Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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Maps Man
Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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Guy Adim
mustread 10 years ago the US went into deep debt to pay for tax cuts …: Bush's tax cuts of course pushed the U… http://bit.ly/oj75mR
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Spir.Sotiropoulou
10 years ago the US went into deep debt to pay for tax cuts | Liberal Conspiracy http://t.co/RPFO4BP via @libcon
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Garry Dent
RT @sunny_hundal Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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@Big_Kev your right. Take a look at this piece from @libcon: http://t.co/MQkaRHP
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Jamie Ellison
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RT @sunny_hundal: Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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Pucci Dellanno
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Humanitas
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Owen Blacker
Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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Ash McGregor
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DJE
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Rep in the Region
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Greig Byrne
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RT @sunny_hundal Decade ago, Bush cut taxes on super-rich, said it wld raise govt revenue. But US went deep into debt http://bit.ly/nhIkS4
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Cut tax, borrow, then blame women: now the Tories are copying Bush | Bright Green
[…] fact been tried by various US presidents: George W Bush cut taxes for the very wealthiest Americans 10 years ago. Which of course worked brilliantly, adding $2.5 trillion to America’s national […]
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sunny hundal
@allanholloway @SimonG_1 only idiots (aka right-wingers) look at nominal figures. Smoke on this http://t.co/5g01z1aM & http://t.co/UxtEEBga
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