Mythbuster alert: Do tax cuts increase revenues?

For about 30 years the GOP has told us that lowering tax rates will stimulate the economy and thereby increase government income. Is it true?

In other words, if income taxes are made lower does that automatically increase government revenues? One would think there must be a government study that solves the question once and for all. But oddly there doesn't seem to be one that directly answers the question. Studies provide lots of facts and figures but except for partisan opinions, honest government studies (I have found) offer little conclusive evidence.

Moreover, with politicians who would rather commission a study then make a decision why has there not been a comprehensive study to prove or disprove the famous Laffer theory? Or better yet, determine percentage to tax different income levels.

Recall that a few presidents ago the so-called Laffer curve was presented as proof that if income taxes were lower overall purchasing would increase, more people would be employed and the economy would grow. The result would be more income taxes paid to state and federal treasuries.

This was loosely based upon what was called a "thought experiment" by professor Bernard Laffer. Professor Laffer used a graph (famously done on a napkin for Dick Cheney and Donald Rumsfeld) that logically made the case that if taxes are zero there would be no income for the government. Also, if taxes were 100 percent of income then no one would work and the effect would be no tax income for the government.

The point of the thought experiment was to show that there must be an optimum percentage of tax income to produce the most government revenue without being a disincentive to taxpayers. Unfortunately, many pundits and politicians use this professor Laffer's theory to support the idea that lower tax rates always increase revenue. And of course arguing that any tax increase is a bad idea.

But before considering if this is true we must first recall a few basic facts. First, as the population and economy expands the tax base will grow. If more people pay and if the tax rate stays constant the government revenue grows.

Second, it is important to use "constant" dollars rather than "current" dollars. This adjusts for the inflationary aspect of declining dollar values when considering real tax incomes.

Third, tax revenues generally decline during recessions because more people are unemployed. This also means the government will be spending more to support the unemployed. Tax revenues then rise again during recovery. Fortunately, since World War II far more years have shown economic growth.

So what is the historical record? After President Reagan's tax cuts took effect in 1982 real constant dollar tax collections began to fall. And in real constant dollars the 1989 the combined loss of corporate and individual taxes fell by $88 billion in constant dollars. Since that time the amount of real tax income based on constant dollars has dropped due to the lowering of personal and corporate tax rates under three presidents.

The numbers are mind-numbing but may be summed up by my lay person analysis: Government revenues in real dollars have fallen consistently for the past 30 years. There is no real evidence that reducing tax rates has increased real constant dollar revenues. Since Mr. Reagan, we are now trillions in the red and paying back the borrowed money is consuming almost one-half trillion per year from our budget.

Watching pundits on TV discussing removing a cap on national debt or reducing the debt, the one thing rarely mentioned is increasing personal and corporate tax rates.

So here are two real world questions:

1. When you use your charge card you have to pay it back, right?

2. If you do not take in enough money to make full payment for a few years your debt on the card grows, right?

Solution for the government is just the same for the family: make more money. Unfortunately, that is the solution politicians and most pundits don't want to propose. Clearly, cutting taxes is not the solution -- it's the problem.

The solutions most offered (particularly by the GOP) is to severely cut benefits such as Social Security and Medicare. These solutions are not favored and will be opposed by the people most likely to vote. Old people.

Seems to me, the one central problem is that the U.S. government hasn't been taking in enough money for the past 30 years. It is time to start concentrating on that side of the problem.

Carrico is a San Diego attorney and can be e-mailed at Comments may be published as Letters to the Editor.

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Fred Schnaubelt 1:10pm May 23, 2011

Ron makes some astounding claims. First, “Since that time (1989) the amount of real tax income based on constant dollars has dropped ... under three presidents.” In constant dollars the U.S. government collected in 1989 $1,494 billion. In 2010 it was $1,919 billion. Most people concede this an increase. Second, under three presidents the bottom 50% of tax filers now pay only 3% of the total income tax. Should they pay more? Amity Schlaes, in this newspaper, explained it all to Ron on 4/20/11. There are dozens of studies cited in the Wall Street Journal, Heritage Foundation, Tax Foundation, etc. that lower taxes increase revenues. But we can just go with the IRS which shows when Capital Gains tax rates were reduced there followed substantial revenue increases. The best studies on tax rates, however, have been the USSR, Cuba and N.Korea with nearly 100% rates. Where’s the evidence, claiming there’s never enough, that our neighbors who work for the government spend money more wisely?