(By Mark Bridger, cross-posted as That Mans Scope blog)
Few things have been more persistent than the claim that tax cuts either “pay for themselves” or, in fact, increase growth. It seems hardly possible to dispel this notion, in spite of the fact that all evidence indicates that it is a myth. In response to a comment by an anonymous reader, I discussed this briefly in a previous blog; however, it seems that I still need to say a few more words and give some statistical references.
First of all, whether there are tax cuts or tax increases, the history of capitalism in this country has always been one of recurring “business cycles.” These comprise a period of growth (G) then a period of leveling off of growth (L) culminating in a peak (P); these are followed by recessionary periods of varied seriousness (R), then a leveling of decline (L), then a repetition. Schematically, then, we have the cycle: GLPRL, GLPRL, … etc.
The length of such a cycle can vary, with an average of maybe 5-7 years, though very serious recessions — including the Great Depression, can themselves last many years. Since the Great Depression and the ascendancy of Keynesian theory, the seriousness has been greatly mitigated — at least until the recent Great Recession which began around 2008.
The general path of the economy in the U.S. has been upward: most business cycles end in a recovery with the economy in a better state than it had been in the previous cycle, measured in terms of investment and GDP growth. On average this increment from peak-of-cycle P to peak-of-cycle P has been around 2%. There is also the matter of average (over the cycle) real tax revenue per capita; this is a measure of how much the government is actually taking in per person, adjusting for inflation.
Note the phrase “on average.” Results do vary from cycle to cycle, which enables us to make comparisons between business cycles and tax policies. In the early ’80s, under President Reagan there were a series of “supply-side” cuts in the tax rates, where “supply side” means favoring the investing class. Again, in the early years of the 21st century, the Bush Tax Cuts cut the rates for investors and the wealthy (both supply-side + “trickle down” theories at work). In between, in the ’90s there were tax increases on the wealthy under President Clinton. How did these varying tax policies, based on competing economic theories, effect the business cycles?
The answers are quite clear. Comparing the Reagan and Clinton cycles, the recoveries from the recessionary periods of the respective business cycles were quite similar; (about 2%); however, the per capita tax revenues under the Clinton recovery were about twice the size as those under the supply-side Reagan recovery. Thus, the supply-side theory fared no better in terms of recovery, but was a real drag on government revenues. This is part of the reason that, rhetoric aside, the Reagan “conservative” theory resulted in deficits, while the Clinton administration actually achieved the budget balance that the Reaganites merely talked about.
Moving on to the next business cycles, the comparison between the Clinton and Bush years is even more noticeable. The improvement in the economy (investment and GDP growth), from P to P, from Clinton to Bush, was somewhat lower than the historic improvement, but the tax revenue increase was no more than 1/2 % — virtually nil in comparison with the average over the last 50 years of about 10% (11% under Clinton).
Thus, in terms of economic recovery, there was no discernible difference between Republican/conservative and Democratic/liberal tax policies. But, in terms of real per capita tax revenues, tax cuts, far from “paying for themselves, seem to be very damaging. And here’s the kicker: None of these comparisons take into account the disastrous economic consequences of the Republican/conservative policy on de-regulation of speculation in the financial markets: the Great Recession of 2008-2011 (and still counting).
In the crucible of real-world testing of economic theories — the only meaningful test, after all — the conservative program has failed. As the handwriting on the wall says from Daniel 5: “Mene mene tekel upharsin” (“You have been judged in the balance and found wanting”).
The data backing up these remarks comes from official statistics reproduced by the Center on Budget and Policy Priorities in this report. Please check it out: it has references to many other sources.
In Part II of this evaluation of tax cuts, to be posted here on Friday, I will address economic fairness and the role that conservative tax cuts on the wealthy have played in widening economic inequality in America.