Sunday, December 2, 2012

Do Any Studies Show that Tax Cuts Pay For Themselves?

I concluded a prior post with the following statement:

As I mentioned, I am yet to find a single economic study that purports to show evidence that any income tax cut has ever paid for itself. If anyone who reads this should know of one, please leave a comment with a link to that study. Thanks.

I did receive a couple of replies to that request but neither of them focused on income tax cuts in the United States. One focused on capital gains tax cuts and the other focused on countries with relatively weak tax authorities where tax cuts might increase compliance (like Russia). In any case, I replied to both. I also have not found an economic study that shows an income tax cut paying for itself from any other source. However, I am continuing to search for such a study and have posted links to any related information that I've found at this link. I believe that only one of those links is to a study that purports to show a tax cut that paid for itself. It is a paper published by Laffer Associates titled The Onslaught From The Left, Part III: The Capital Gains Tax. Following is an excerpt:

We now have at least three years of data to assess the effect of the 2003 capital gains tax rate reduction on capital gains tax receipts. Figure 6 shows that from 2002 through 2005, capital gains receipts have doubled, from $49 billion to $97 billion. The latest projection for receipts in 2006 is $110 billion. This represents a 124% increase in revenues over four years with a 25% cut in tax rates. You can’t ask for more than that.

As stated, this paper involves a capital gains tax cut and looks at just 3 years worth of data. Figure 2 on page 4 of this Congressional Research Service paper shows that capital gains tax receipts sank back toward their 2002 level in the 2009 financial crisis.

In any event, I took those studies that gave actual numbers for the estimated revenue recouped following tax cuts and compiled them into a table at this link. Following is that table:

Estimates of the Percent of Revenue Cost Recouped after Tax Cut

Labor 
Taxes 
Capital 
Taxes 

Author (s)

Title 

Date 

Notes 
17-25*   Lindsey, Lawrence  Individual Taxpayer Response to Tax Cuts 1982-1984 with Implications for the
Revenue Maximizing Tax Rate
 
11/86  * 1982-1984 
33*   Lindsey, Lawrence  The Growth Experiment  10/91  * according to 
Bartlett
17 50  Mankiw, Gregory 
Weinzierl, Matthew 
Dynamic Scoring: A Back-of-the-Envelope Guide  12/04   
-5 to 
32* 
  Congressional Budget 
Office 
Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates  12/01/05  * for 2nd 5 years 
< 10*   Treasury Department  A Dynamic Analysis of Permanent Extension of the President’s Tax Relief  7/25/06  * according to 
CBPP
30*   Foertsch, Tracy 
Rector, Ralph A. 
A Dynamic Analysis of the 2001 and 2003 Bush Tax Cuts: Applying an Alternative 
Technique for Calibrating Macroeconomic and Microsimulation Models
 
11/22/06  * 295.5 / 991.9 
39*   Auten, Gerald 
Carroll, Robert 
Gee, Geoffrey 
The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the
Taxable Income Response
 
9/08  * reduction in 
top 2 rates 
32 51  Trabandt, Mathias 
Uhlig, Harald 
How Far Are We From The Slippery Slope? The Laffer Curve Revisited  4/10   

As can be seen, none of the studies projected that tax cuts would pay for themselves. At most, they projected that about a third of the cost of labor taxes and half of the cost of capital taxes would be recouped. In fact, the CBO study suggests that the feedback could actually be negative, causing the revenue loss to be larger than the static revenue loss. Following is a summary of the study given by Bruce Bartlett:

A 2005 Congressional Budget Office study during the time that Republican Doug Holtz-Eakin was CBO director concluded that a 10 percent cut in federal income tax rates would recoup at most 28 percent of the static revenue loss over 10 years. And this estimate assumes that taxpayers have unlimited foresight and know that taxes will be raised after 10 years to stabilize the debt/GDP ratio. Without foresight and no compensating tax increases or spending cuts, leading to an increase in the debt, feedback would be negative; i.e., causing the revenue loss to be larger than the static revenue loss.

This seems to agree with the study by Christina and David Romer that I mentioned in my prior post that found that "deficit-driven tax increases" have had a positive effect on economic growth. In any case, I am interested in any studies that give estimates for the revenue cost recouped following tax cuts. This especially applies to any studies that suggest that an income tax cut in the United States would pay for itself. As mentioned, I am yet to find such a study.

Note: There is a discussion of this post at this link.

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About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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