Taxes & the Economy

Brian Riedl at the Heritage Foundation takes on several myths about taxes and the economy, and pretty much eviserates them. (HT: Don Luskin @ Poor and Stupid). (Italics are my comments, heartily paraphrased from Reidl's article.)

Ten Myths About the Bush Tax Cuts—and the Facts
Myth #1: Tax revenues remain low.
Fact: Tax revenues are above the historical average, even after the tax cuts. (18.4% of GDP)

Myth #2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.
Fact: Nearly all of the 2006 budget deficit resulted from additional spending above the baseline. ($237 billion more than forcast by the CBO in 2000)

Myth #3: Supply-side economics assumes that all tax cuts immediately pay for themselves.
Fact: It assumes replenishment of some but not necessarily all lost revenues. (Reducing rates often increases the tax base (and hence revenues), but it depends where the tax is on the Laffer Curve)

Myth #4: Capital gains tax cuts do not pay for themselves.
Fact: Capital gains tax revenues doubled following the 2003 tax cut. (2000 Capital Gains taxes raised $50 billion, the CBO projected a 36% increase to $68 billion in 2006, but 2006 Capital Gains raised $103 billion - double the revenues of 2000.)

Myth #5: The Bush tax cuts are to blame for the projected long-term budget deficits.
Fact: Projections show that entitlement costs will dwarf the projected large revenue increases. (Repealing the Bush tax rates would raise revenues from a CBO projected 22.8% of GDP in 2050 to a projected 23.7%. Entitlement spending without any reforms is expected to cost 38% of GDP at that time.)

Myth #6: Raising tax rates is the best way to raise revenue.
Fact: Tax revenues correlate with economic growth, not tax rates. (Despite wide variations in the the tax rate (from as high as 90%), tax revenues have grown in step with economic growth, averaging between 17 and 20% over the last 50 years.)

Myth #7: Reversing the upper-income tax cuts would raise substantial revenues.
Fact: The low-income tax cuts reduced revenues the most. (Tax cuts for lower income brackets and the AMT fix that critics accept totalled $114 billion, while the capital gains, dividend, estate and marriage penalty taxes criticized totalled only $36 billion and income tax rate cuts effected all 2 wage housholds over $62k and single filers over $31K -- hardly "the rich")

Myth #8: Tax cuts help the economy by "putting money in people's pockets."
Fact: Pro-growth tax cuts support incentives for productive behavior. (Government must either tax or borrow money, which simply redistributes income and accomplishes little in the way of growing the economy. Reducing tax rates incentivizes savings, working & investment, increasing investment and productivity and leading to long-term economic growth.)

Myth #9: The Bush tax cuts have not helped the economy.
Fact: The economy responded strongly to the 2003 tax cuts. (Growth averaged 1.7% & the American labor force lost 267k jobs in the 18 months before the cuts, grew 4.1% and added 307k jobs in the 18 months afterward.)

Myth #10: The Bush tax cuts were tilted toward the rich.
Fact: The rich are now shouldering even more of the income tax burden. (The number of filers with zero or negative liability rose from 30 million in 2000 to 40 million, and the bottom 40% of filers proportion of all federal taxes paid were reduced from 5.9% to 5.4%, while the top quintile's proportion paid rose from 66.6% to 67.1%.)