I think Tory leader, windmill pioneer and attendee of uber-Chav celebrity bashes, David Cameron, might want to take a break from the social whirl and read this about the much-derided U.S. tax cuts of 2003:
In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters–three full years–since the tax cut passed, growth has averaged a remarkable 4%. Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses shell-shocked by the dot-com collapse, 9/11 and Sarbanes-Oxley.
This growth in turn has produced a record flood of tax revenues, just as the most ebullient supply-siders predicted. In the first nine months of fiscal 2006, tax revenues have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office recently noted, “That increase represents the second-highest rate of growth for that nine-month period in the past 25 years”–exceeded only by the year before. For all of fiscal 2005, revenues rose by $274 billion, or 15%. We should add that CBO itself failed to anticipate this revenue boom, as the nearby table shows. Maybe its economists should rethink their models.
Britain’s Conservatives believed – at least during the 1980s when a certain Nigel Lawson was Chancellor – that cuts to marginal tax rates could actually generate more, not less revenue for the State, as well as being a good thing in its own right for widening economic liberty and reducing the bite taken out of the pockets of the citizenry. Now, I know that some libertarian purists out there might actually be suspicious about a measure that would raise more revenues, even if it is a good thing for individual taxpayers. I say let purity be damned. we know that politicians are not motivated much by supposed abstract concerns about the balance between the individual and the State these days, but the practical benefits of cutting tax rates should still resonate with our political classes. The Laffer Curve still operates, at least if you accept the WSJ article. Even current Chancellor Gordon Brown might wake up to the sort of facts that the Wall Street Journal is on about. It would be nice to think that the Tories would seize on such data, make a fuss, point out the benefits of flattening the tax code, simplifying it and cutting rates. Instead, unless I am missing out here, is silence.
Maybe the implosion of the current government means the opposition can afford to slump in the hammock during the back end of summer and wait. But it would be nice to think that they could be a tad more ambitious. Only a tad – I would not want our Dave to break into a sweat or anything.
Part of the problem here, I am led to believe, is how the Treasury formulates policy, basing it on a static model, rather than a dynamic one, ie ‘double the rate of tax and revenues will double’.
The Taxpayer’s Alliance has an interesting theme in this area, calling for HM Treasury to support an analysis team, as Bush has done, to look at dynamic models.
Take a look here: http://www.taxpayersalliance.com/news/individual_blog.php?post_id=250
Readers might also be interested in this article (http://burningourmoney.blogspot.com/2006/07/voice-from-other-side.html) from Burning Our Money, as well.
Supplementary to these articles, readers might also be interested in an article on the increase in revenues and Bush’s tax cuts in the current edition of The Economist.
It tempers the idea that tax cuts are directly responsible for the increase in revenues (apparently, Bush’s tax cuts didn’t include corporate tax), but are more likely to be down to a number of factors, including increased global profits- including countries with no tax cuts.
A curious read for the non-economist!
In Australia since the introduction of the GST ( Goods an Services ) tax, there has been a steady decrease in taxations of all sorts year after year, some years big changes, some years small taxation changes, always reductions not increases. Due to this every year, the government seems to be raking in more and more money from taxes…
http://www.washingtonmonthly.com/archives/individual/2006_07/009190.php
LAFFING AT YOU, NOT WITH YOU….President Bush and his conservative enablers have been gleeful about the news that tax revenues are higher than the White House projected back in February. As Thomas Nugent puts it, “The supply-side Bush tax cuts of 2003 worked. The Laffer curve, and the notion that if you tax something less you get more of it, also worked. Hurrah!”
Indeed. But Greg Ip and Deborah Solomon point out something a bit peculiar today in the Wall Street Journal. (The news pages, that is. You won’t find this on the editorial page.) Here’s the conundrum: if tax revenues are 5% higher than projected thanks to the economy-boosting magic of tax cuts, shouldn’t the economy itself be larger than projected too? But it’s not. Economic growth is only 0.1% higher than projected six months ago.
So what happened? If the economy is growing at the expected rate, where’s all the extra tax money coming from?
What has changed isn’t the size of the economy, but how the economic pie is divided. The share of national income going to corporations and the wealthiest individuals, already large, has expanded, while the share going to typical wage earners has shrunk. Because corporations and the wealthy generally pay income tax at higher rates than does the typical wage earner, that shift benefits the federal Treasury.
….The administration has raised its estimate of corporate profits this year by 11%, but trimmed its estimate of wage and salary income by 1%….Individual income taxes were revised up 7%, with the increase primarily from wealthier taxpayers. Payroll taxes — for Social Security, levied only on the first $94,200 of wage income, and Medicare — are expected to total 1% less than expected.
So, the tax windfall is another piece of evidence that income inequality in the U.S. continues to grow, which in turn may explain why the average American still gives President Bush low marks on the economy despite its overall strength.
If you pursue policies that increase income inequality, then corporations and the rich will have more money. If the rich have more money, they’ll pay more taxes. And since tax rates are progressive, that means tax revenue will be higher than you’d expect if you based your estimates solely on the overall rate of economic growth.
Could this explain why “the average American” is not ecstatic over this month’s alleged vindication of the Laffer Curve? Namely that “the average American” is actually worse off than before even though the overall economy is growing nicely? I think it could!
“I’m stuck on Gilligan’s Island, but I’m not paying ANY taxes!”
Mary Ayn Rand
MAY, your argument sounds like crud to me. I have read so many of these studies purporting to show that since 1960, the “average family” income has barely improved while the top x percent of the population has become so much richer. These studies tend to ignore obvious facts such as that we tend to accumulate more capital as we get older, move up and down into different income brackets, and so on. If you adjust the data for such considerations, you get a more realistic picture.
The idea that the great mass of ordinary Americans are no better off than they were say, 10 years ago might get a cheer from an illiterate doofus like say, Lou Dobbs, but others should remain sceptical.
MAR’s argument also claims that projected economic growth is hardly any greater than it was 6 months’ ago, but even tiny percentage-point shifts in overall growth can have quite dramatic impacts on revenues drawn from certain sources, so I usually treat that sort of point fairly carefully.
Don’t forget this country is also fighting a two-front WAR as well as natural disasters that have hit the econmy hard. It is amazing that we are not in deep recession, let alone sustaining economic growth, however small.