Fox News' Megyn Kelly claimed that tax cuts "on the so-called rich" increase federal revenues. In fact, tax experts and economists note that tax rates are not high enough for a tax cut to increase revenues, and President Bush's own economic advisors have said the Bush tax cuts did not raise revenue.
Kelly Suggests Extending Bush Tax Cuts For Wealthy Will Raise Revenues
Kelly: "Tax Cuts For The Rich Led To Increased Federal Revenues." From Fox News' America Live:
KELLY: Here's the interesting thing. I mean, you know, it's very easy to demonize the rich. And you hear somebody is making more than a million dollars and you think, they should pay more -- better them than the middle class. They can afford it and the middle class can't.
But doing some research on this issue lately, Mike, I saw the following fact. Now they cited at least four presidents who decided to lower taxes on the so-called rich. All right? You can see -- you got Calvin Coolidge, JFK, Reagan, and Bush. You've got Democrats and Republicans. And those four presidents, at least, decided to lower taxes on the rich -- the group we're talking about right now -- and according to the reports, in all four of those administrations those tax cuts for the rich led to increased federal revenues, increased federal revenues, with people earning high incomes paying a bigger sum of the total tax revenues and a higher proportion of all the tax revenues.
So if the theory is that if you really want to soak the rich, lower their tax rate because it will lead them ironically to wind up paying more taxes and to take on more of the tax burden. [Fox News' America Live, 11/30/10]
Revenues Almost Always Increase Regardless Of Changes In Tax Rates
PolitiFact.com: "You Should Expect Tax Revenues To Go Up Each Year Due To Economic Growth And Inflation." On November 9, PolitiFact.com fact-checked Rep. Mike Pence's claim that "raising income tax rates will likely actually reduce federal revenues," countering that "you should expect tax revenues to go up each year due to economic growth and inflation, even if tax rates stayed the same":
But we consulted the tax experts, who told us you can't just look at the raw numbers, for several reasons. First, you should expect tax revenues to go up each year due to economic growth and inflation, even if tax rates stayed the same. Second, there's not a straight line between tax rates and tax revenues. You can raise taxes the same year the economy tanks and get less revenue, or you can cut taxes during a time of economic growth and get more revenue. And those changes in the economy aren't necessarily caused by what the government is doing with tax rates -- the upturns could be due to new inventions and innovations, and the downturns could result from financial panics and real estate bubbles that have little to do with tax rates. And economists have to go to quite a bit of trouble to separate out the effects of tax policy from other things happening in the world. [Politifact.com, 11/9/10]
FactCheck.org: "Revenues Have Declined In Only Five Years Since 1962." Rebutting Sen. John McCain's claim that the Bush tax cuts have "increased revenues," FactCheck.org wrote:
Federal revenue normally increases every year. In fact, revenues have declined in only five years since 1962. The 35 percent growth between 2003 and 2006 is significant - the last major growth in revenue was between 1997 and 2000, when the economy was booming and federal receipts rose 28.2 percent. But the recent three-year period also comes after three years of decreases, a drop Viard attributes to the 2001 tax cuts and the start of a recession that same year. [FactCheck.org, 06/11/07]
Economists: Tax Cuts Now Would Not Generate Revenue
Time: Tax Cuts Can Raise Revenue In Cases Of "Punitively High Marginal Rates." From a December 2007 post on Time's Curious Capitalist blog:
I'm certainly not going to say that no tax rate cuts have ever raised revenues. Would Mark Thoma say that?
Just two off the top of my head: The 1964 Kennedy reduction of the top marginal income tax rate from 91% to 70% (it was enacted after JFK's assassination, but it was his bill), the 1981 Reagan reduction of the top marginal rate from 70% to 50%. I'm not at all an expert on this, but I don't think it's too controversial among economists to assert that those particular changes (but not the rest of the of Kennedy and Reagan tax legislation) were a break-even or better for the Treasury. (Brad DeLong on the 1980s tax cuts: "As I read the evidence ... reducing the top tax rate from 70% to 50% is probably a revenue gainer and surely not much of a loser. From 50% to 28% is, I think, very different: a big revenue loser.")
The common thread is that these were cuts in punitively high marginal rates. They paid off in large part because they removed incentives to shelter income from taxes. The other benefits that supply-siders like to talk about -- making people work harder and longer and encouraging capital investment -- are there too, but probably not in great enough measure to offset the tax cut.
Which is why it's awfully hard to imagine any cut in current tax rates (or the rates that were prevailing when George Bush took office in 2001) that would pay for itself. The only possible candidate, I think, would be the corporate tax rate. [Time, 12/10/07]
Tax Foundation: "Few If Any Of Today's Tax Rates Are So High That Cutting Them Would" Cause Increase In Revenue. In May, the Tax Foundation stated:
There is no definitive answer to the question of how much the Bush tax cuts cost the Treasury in foregone revenue from 2001 to 2010.
First, there is much disagreement pertaining to the feedback effect that resulted from the tax cuts. No tax cut that has significant marginal rate cuts, as the Bush tax cuts did, will cost the Treasury its full "static" score. Static in this sense means that people don't change their behavior when tax rates drop or rise: if a 40% tax rate raises $500 billion, then a 20% tax rate would raise $250 billion. This is wrong because people do change their behavior when faced with such starkly lower tax rates. They earn more money, which generates additional tax revenue. Just how much is hard to estimate.
When the Kennedy tax cut dropped the top income tax rate from 91% to 70%, or when the Reagan tax cut dropped it from 70% to 50%, it is quite possible that the lower rates raised more revenue than the old, higher rates would have. On the other hand, few if any of today's tax rates are so high that cutting them would generate a surge of income-producing activity so large that revenue would rise. There will certainly be a feedback effect, just not such a massive amount. [Tax Foundation, 05/26/10]
Tax Policy Center's Williams: No Established Economist "Would Argue That We're Near" The Level Where Tax Cuts Raise Revenue. In its fact-check of Pence's claim, PolitiFact further reported:
Interestingly, [Reagan budget director David] Stockman agreed with a little bit of Pence's underlying assumption that increases in taxes can inhibit economic growth. But he disagreed that tax revenues would decrease if the government raised taxes. "I just have to respectfully disagree," Stockman said. "You will have some loss of revenue because some activity or transactions won't happen, but if you raise taxes on paper by $100 billion, maybe you'll get $90 billion or $85 billion. But it's just common-sense fact that, when you raise the rates, you get more revenue. Normally, it's a bad thing to do. But we are in such dire shape that we have no choice but to accept the negative trade-off of some harm to the economy to start paying our bills."
The tax experts we spoke with agreed with Stockman. In this climate, raising the top tax rates from 35 to 39.6 percent would increase revenues. The effect Pence is talking about would not happen at this level of taxation, they said.
"There is some rate at which it would be true," said Roberton Williams of the nonpartisan Tax Policy Center. "But I don't think there are any established economists who would argue that we're near that."
"At current tax rates, most tax increases will increase revenues, at least in the short and medium run," said Brian Riedl of the conservative Heritage Foundation. "The caveat is that in a fragile economy, it can be unpredictable." [Politifact.com, 11/9/10]
Former Treasury Department Official: "Only In Very Exceptional Circumstances" Would A Tax Cut Pay For Itself. Bruce Bartlett, who has worked for the Heritage Foundation and served as deputy assistant secretary for economic policy at the Treasury Department, has written:
The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President (pp. 57-58) says, "Although the economy grows in response to tax reductions ... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."
Recent academic research suggests that feedback effects would offset only a fraction of the static revenue loss, that which would result from no effect on consumption or incentives. [RealClearPolitics.com, 03/28/06]
Even Bush And Reagan Economists Reject Notion That Tax Cut Packages Raised Revenue
Former Bush Economist Viard: "There's No Evidence That These Tax Cuts Would Come Anywhere Close" To Paying For Themselves. Alan Viard, a former Bush White House economist, was quoted in The Washington Post as saying:
"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that." [The Washington Post, 10/17/06]
Former Bush Economist Holtz-Eakin: "You Are Not Going To Get Tax Cuts To Pay For Themselves." In a Boston Globe column, former Bush economist Douglas Holtz-Eaken was quoted as saying: "You're not going to get tax cuts to pay for themselves":
The supply-side notion doesn't even work in responsible theory. In 2005, the Congressional Budget Office evaluated the effects of a 10 percent income tax cut on federal revenues, using a number of different assumptions. Here's CBO's conclusion, from a summary by then-director Douglas Holtz-Eakin, a well-regarded conservative economist: "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."
So under the most optimistic assumptions, the economic stimulus from such a tax cut would replace about one-fifth of the lost revenue in the first five years and about one-third in the second. In the worst case, there would be no longer-term revenue replacement at all, but rather an even greater loss.
Now, Holtz-Eakin believes there are good economic reasons to keep taxes where they now are. But as he told me in an interview, "You are not going to get tax cuts to pay for themselves." [Boston Globe, 12/07/07]
Bush's CEA Chairman Lazear: "We Do Not Say The Tax Cuts Pay For Themselves." During testimony before the Senate Budget Committee, Ed Lazear, the chairman of Bush's Council of Economic Advisers (CEA) stated:
LAZEAR: Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data presented above do not support this claim. Tax revenues in 2006 appear to have recovered to the level seen at this point in previous business cycles, but this does not make up for the lost revenue during 2003, 2004, and 2005. The tax cuts were a positive step and have contributed to the enhanced economic growth, additional jobs, higher real disposable income, and the low unemployment rates that we currently see today. Our goal is not to maximize the size of government, but to provide revenues to make sure that we can operate those programs that society deems necessary, while at the same time allowing the private sector to take full advantage of its growth potential. [Testimony before Senate Budget Committee, 09/28/06]
Reagan CEA chairman Feldstein: "It's Not That You Get More Revenue By Lowering Tax Rates, It Is That You Don't Lose As Much." The New York Times reported in March 2008:
While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan's Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue -- but only by 3 to 5 percent.
"It is not that you get more revenue by lowering tax rates, it is that you don't lose as much," he said. [The New York Times, 03/26/08]
Feldstein also reportedly wrote in 1986 that "[t]he height of the supply-side hyperbole was the 'Laffer curve' proposition that the tax cut would actually increase tax revenue because it would unleash an enormously depressed supply of effort. ... I have no doubt that the loose talk of the supply-side extremists gave fundamentally good policies a bad name and led to quantitative mistakes that not only contributed to subsequent budget deficits, but also made it more difficult to modify policy when those deficits became apparent."