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Post Is Out to Lunch on Giuliani Ad
The Washington Post claims to analyze the quality and accuracy of campaign ads for its readers. BTP gives the Post a failing grade for its analysis of a Rudy Giuliani campaign ad. The ad shows Giuliani saying that "I know that reducing taxes produces more revenues. Democrats don't know that."
The Post's analysis of the ad asserts that Giuliani's claim is "a matter of fierce dispute among economists." That is not true. There are few if any economists who claim that cutting taxes will increase revenue. In fact, Douglas Holtz-Eakin, who was one of President Bush's top economic advisors, had the Congressional Budget Office analyze the evidence for tax cuts increasing revenue. Examining a broad range of models, Holtz-Eakin concluded that the growth effects of tax cuts could offset between 1 and 22 percent of the lost revenue over the first five years and as much as 32 percent over the second five years.
In short, Holtz-Eakin found that with the most favorable possible assumptions, growth could only offset less than one-third of the lost revenue from tax cuts, and even this gain was only obtainable for a short period of time. Economists don't hotly dispute whether it is possible to increase revenue by cutting taxes, only people who are trying to deceive the public claim that it is possible to increase revenue by cutting taxes.
--Dean Baker
COMMENTS (11)
I thought that the entire point of the Laffer curve is to prove that tax decreases leads to higher growth and in turn to higher tax revenues.
Posted by: Peter Paul | December 2, 2007 9:30 PM
Yes, that was the point of the Laffer curve and you would be very hard-pressed to find an economist anywhere who takes it seriously, at least for the tax rates that we see in the U.S. It would be easier to find a biologist who believes in creationism.
Posted by: Dean Baker | December 2, 2007 10:22 PM
How do you think the recently proposed "Teaser Freezer"will affect our economy? Is this a good solution or bad solution? Why do you think so? Can you please give us your input?
Thank You Dr.Baker for your daily wisdom!
Posted by: Mike | December 3, 2007 2:48 AM
"at least for the tax rates that we see in the U.S."
That's the important qualifier though. I'd also add "currently" to it. And it also depends upon which tax.
In the US experience I'd at least posit that JFK's dropping the top rate of income tax from 90% to 70% increased revenues. Certainly, I'd insist that the UK's dropping the top investment income tax rate from 98% to 60% (early 80s it happened) did.
"Economists don't hotly dispute whether it is possible to increase revenue by cutting taxes"
No, indeed they don't. They hotly dispute the tax rates at which this is true, not that it is true at some tax rates.
Posted by: Tim Worstall | December 3, 2007 6:09 AM
Dean,
Absolutely correct, and thanks for pointing out WaPo's error. There is a consensus even among conservative economists -- indeed even among current & former top economists of the Bush Administration -- that the Bush tax cuts, and tax cuts in general (at least on labor & investment income at anywhere near current tax rates) have a substantial negative net impact on revenues. I've compiled a list of quotes here: http://logicizer.townhall.com/
Posted by: Brooks | December 3, 2007 5:51 PM
Peter Paul,
That's not what the Laffer Curve says. The Laffer Curve just says that at a high enough starting point, and increase in a tax rate will, ceteris paribus, increase revenues, and that at starting points below that rate, tax cuts will, ceteris paribus, decrease revenues. It's really just basic algebra combined with common sense regarding economic behavior (responsiveness to incentives of different magnitudes). For an explanation and illustration of why -- even intuitively -- tax cuts from anywhere near current U.S. rates on labor and investment income are very unlikely to have a net positive impact on revenues, see my post here http://logicizer.townhall.com/g/c5ecb3cf-2712-4f5a-ad89-7ae03da99280
Posted by: Brooks | December 3, 2007 5:59 PM
CORRECTION !!
That should have read:
"at a high enough starting point, and CUT in a tax rate will, ceteris paribus, increase revenues"
Posted by: Brooks | December 3, 2007 6:04 PM
This was intresting.
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