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Source link: http://archive.mises.org/3976/about-bushs-tax-and-spend-policies/

About Bush’s tax and spend policies

August 18, 2005 by

In recent months, certain Bush supporters have been gloating over the recent surge in federal tax revenues and the resulting reduction in the budget deficit, claiming that it vindicates the Laffer curve.

There are however some problems with their position. First of all, why would a libertarian or small-government conservative be happy about rising tax revenues ? Perhaps they might answer that this is because higher tax revenues are a sign of increased prosperity, yet as they should know it is often the case that tax revenues fall (Like they did in 2001-2002) or rise (Like they do now) relative to GDP even without formal tax law changes due to changes in distribution of income and that tax revenues are therefore inferior to GDP (despite its shortcomings) as a measurement of that and that anyone committed to limited government should in any case regard such a effect as a negative side effect of higher growth.Secondly, why would the validity of the Laffer Curve depend on the effects of the previous Bush tax cuts? The Laffer Curve after all, only says that tax revenues will be minimized at the tax rates of 0% and 100%, not at which point in between they are maximized. All that this dispute could prove or refute would be the issue of whether or not the revenue maximizing rate was the previous one or the present, not the Laffer Curve itself which in any case is firmly established on the theoretical ground that taxation of something will reduce the existence of whatever is taxed.

Thirdly, the strong surge in tax revenues is not based on some unprecedented wave of prosperity. GDP growth is only 3% adjusted for terms of trade changes, which is only a mediocre performance by historical American standards. Together with inflation this would only justify a 6% (i.e. nominal GDP growth) increase in tax revenues.

Instead the 13.7% surge in tax revenues is based on two sources: first the high asset price inflation which have strongly boosted capital gains tax revenues in the same way that the tech stock bubble in 1999-2000 led to a strong increase in capital gains tax revenues which then collapsed after the bubble bursted. And, of course when there is another correction in asset prices, those revenues will once again collapse.

And secondly more importantly, another source of the surge in tax revenues are a tax hike by Bush: namely the expiration of the depreciation incentives that existed between 2002 and 2004. To quote the CBO Monthly budget review:

“Tax law changes, primarily relating to the depreciation incentives enacted in 2002 and 2003, are contributing to the growth in receipts in 2005. Those incentives reduced taxable profits from 2002 through 2004 and have boosted them this year, following expiration of the incentives at the end of 2004.”

Largely as a result of this, corporate income tax revenues surged 41% as compared to the mere 6% increase in withheld individual income and payroll taxes (which tend to correlate better with economic growth). Although the higher increase in corporate tax revenues can to some extent be attributed to corporate profits rising faster than wages/salaries, the main cause is Bush’s tax hike.

Another interesting fact is that Federal government spending continues to grow fast, up 7% (adjusted for calendar effects). While this is slower than previously during Bush’s presidency it is still faster than the 6% nominal GDP growth, meaning that the Federal government continues to increase its relative burden on the American economy.

Now, what was it that people called someone who raised taxes and spending? A “tax and spend liberal [In the modern American sense of the word)”? Well, doesn’t this mean that Bush is now a “tax and spend liberal” after having previously engaged in “borrow and spend” policies.?

{ 7 comments }

Bruno Panetta August 19, 2005 at 5:28 am

Reading this article made me wish I had enough money to buy a large stake in the Financial Times’ publishing company, sack one of their so-called “economists” and employ Stefan Karlsson to write a weekly column there. Someday…

Georgist August 19, 2005 at 6:05 pm

The argument behind the Laffer Curve is correct.

Stefan Karlsson August 20, 2005 at 6:00 am

Bruno, thanks for that vote of confidence. Is there BTW any particular Financial Times writer which you are particularly eager to fire?

Georgist, I too agree that the Laffer Curve is essentially correct in its assumption that whatever is taxed will decrease (at least in a form where it can be taxed) and that at some point therefore a tax rate increase will lead to lower tax revenues. However, I am skeptical to the claim of many “supply-siders” that a tax cut from the current more moderate tax rates will increase tax revenues. They seem to misinterpret the Laffer curve as implying that any tax rate cut will increase revenue, even though one can see on that curve that at fairly low tax rates, tax rate cuts will decrease revenues. And the legitimacy of the Laffer Curve does not depend on what empirical point tax rate changes will have the opposite effects on revenues.

Dennis Sperduto August 20, 2005 at 7:04 am

Stefan,

Thanks for the fine posting and especially analysis. Along the lines of Bruno Panetta’s comments, how about a position at the New York Times or the Wall Street Journal. I hear the weather is sunnier in New York than in London.

I have a question regarding the impact of Bush’s modest cuts in the marginal income tax rates. Have you come across any studies that attempt to estimate how much of the reduction in marginal tax rates may have been offset by the increasing impact of the Alternative Minimum Tax?

Georgist August 20, 2005 at 5:19 pm

Hans-Hermann Hoppe has done some excellent work in researching what kinds of governments are most likely to tax at the Laffer point, and he concluded that “privately owned” governments – monarchies – would. (Analysis in Democracy: The God that Failed.) Historically, monarchs taxed between 8 and 15 percent of GDP, suggesting that that the Laffer point will generally be somewhere in that range – far below what we have now.

Stefan Karlsson August 21, 2005 at 5:15 pm

Dennis, yeah it would be nice if I could be a New York Times columnists. I could replace a certain Paul Krugman there. His left-liberal fans would perhaps be pleased at first glance when they see I criticize Bush, but I think they’ll less pleased when they see the kind of criticism I come with.

As for the AMT, it too has been a factor contributing to the increase in tax revenues as more and more people are hit by it, but so far the effect has been small, only a few billions of dollars of this years increase can be attributed to it. For the coming years however, it will start to have a larger effect as is illustrated in this testimony (the projected decline after 2010 is likely because of the expiration of the remaining Bush tax cuts).

Georgist: I can’t see why a absolute monarch would necessarily want to maximize tax revenues, but I can definitly see why a democratic politician would. He would presumably only want tax revenues if he thinks he can come up with a way to use it that is better than letting his subjects keep it. And since tax increases always hurt the economy even if it increases tax revenues a monarch would likely be inclined to keep taxes below the Laffer point. A democratic politician would however be very inclined to maximize tax revenues since that would allow him to bribe a maximum number of voters into voting for him (Although of course he has to be careful to collect taxes in a way which upsets as few people as possible).

And empirically it certainly is the case that tax rate increases will result in tax revenue increases as long as they stay away from extreme levels like the 83% top income tax and 98(!)% capital gains tax that Britain had before Thatcher came to power. Some tax bases like corporate investments that are better able to move has however a lower Laffer point than income taxes on employees(particularly low- and middle income employees).

But still it is clearly the case that tax revenues up to very high levels with most taxes and up to somewhat lower levels with highly moveable tax bases increase with higher tax rates. While they lower economic growth they do not lower it enough to cancel out the effect of the increased portion of GDP it will collect.
Per capita tax revenues are in fact highest in Western European welfare states like Sweden, Denmark and France and the United States has higher per capita tax revenues than relatively low tax Hong Kong and Singapore.

Bruno Panetta August 23, 2005 at 4:03 am

Actually the weather here in London is not bad: it doesn’t get as cold as in New York during winter (we hardly ever have snow) and it’s not too hot in the summer. The pay however would probably be higher in NY… and the taxes lower.

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