One Chart Refutes Supply-Side Economics For Good

This chart once and for all ends the debate about the argument "tax cuts pay for themselves". This chart is from the St. Louis Federal Reserve's FRED data system and it shows the year-over-year percent change in tax revenues. I have circled the Reagan and Bush years because these are the two times the nation has implemented supply-side policies.

Notice there is no meaningful acceleration of tax revenues under the supply-side experiments.

Comments

[dadw5boys]

TAX CUTS = TRANSFER OF DEBT TO THE POOR - TO BE PAID WITH INTEREST.

[PerryWhite]

adios

[PerryWhite]

Revenues need only to be flat for the "tax cuts pay for themselves" statement to be true. And they are far from flat in your chart for the Bush years.

[ReasonIsMyReligion]

Good one.

But the Bush sales pitch has also been that tax cuts will spur the economy. And they have NOT, any more than NO tax cuts, or even tax hikes in certain circumstances.

e.g. Look at the Clinton period 1992-2000. Booming economy. Taxes higher than after Bush cut them. Comparable 8% (?) year over year increase in revenues.

If anything, this chart shows tax rates have no effect on tax revenues.

Whodathunkit.

[Houston15]

JFK's own words..."O­ur true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other...[A­]n economy hampered by restrictive tax rates will never produce enough jobs or enough profits...­It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut rates now." - Democratic President John F. Kennedy in a December 14, 1962 speech at the Economic Club of New York.

[olephart]

The top marginal rate at that time was 91%. He later lowered it to 70%. Today the top rate for unearned dividend income its 15%. If you like Kennedy's tax cut so much, let's raise the rate back to 70% OK.

[PAFirefighter]

Doncha just love it when neocon bullshit is rejected with cold, hard facts?

Good work in the reply!

PA Firefighter
"Cogito, ergo Liberal!"

[djthedj]

Yup, since you are so dense that you think that will work no matter what the current tax rate, we should just make the rate zero. Then revenues would go to infinity, right genius?

[Houston15]

Actually, the Laffer curve does not recommend a tax rate of zero. It locates an optimal tax rate that takes into account the job destroying impact of unnessarily high tax rates. Such as when a tax was placed on boats a few years back. It hammered not the wealthy but the poor folks who built the boats. It lost revenue and was repealed.

[SisterAnn]

The reason there are more taxes being paid in is because the prices have doubled on health care, oil and many other things. Plus they are selling more overseas. None of this has to do with tax cuts.

Also, knowing them, the taxes on Social Security is being included, but it shouldn't be, because they have to pay that back as the retirees need it.

The government owes 50 trillion debt and and less than 2 trillion of that is owed to Social Security. SS is the only government program that works and the only reason the government owes Social Security is Bush is taking it out as fast as we pay it in. That money is so the Baby Boomers wont be a burden. It is a self funded program.

All the republicans can talk about is cutting Social Security and Medicare. Medicare probably is in trouble since the private insurances are raking it in faster than we can pay it in.

[ihavenobias]

You're exactly right, Reagan DID start not only double the social security tax, he also started counting social security money (as if it went into to the "checking" account instead of the "retirement" account).

He also went on to spend hundreds of billions of dollars from the social security trust fund.

And you're right again on Bush. He's slated to spend $186 billion from the social security trust fund this year alone to help pay for the war.

The greatest trick every played may not have been getting us into Iraq, it might be tricking the American people into thinking (basically) that the war is FREE.

Oh sure, people hear about how much the war costs, but it doesn't sink in because not only have taxes been raised to pay for it, but Bush has fought to keep the *tax cuts* permanent.

He's the ONLY president in history to cut taxes during a time for war. I mean, it's so incredibly backward and illogical, not to mention completely fiscally irresponsible.

[Beachrunner]

I was going to buy a new car, but I just had to pay my property taxes.

[ihavenobias]

Well, if you have kids hopefully those are some nice properties and you have some good public schools as a result.

Then someday your kids will have the solid education to allow them to buy a nice property, complain about the taxes, and then your grandkids can get that same, solid public education.

[Houston15]

Looking at the chart I see about 20 uninteruppted years of tax revenue growth after the beginning of the Reagan tax cuts in the early 1980's, a record. It took the 9/11 attacks to finally take tax revenues back down into negative territory. The Kennedy cuts back in the early 1960's also led to an unusually long run of positive growth in tax receipts. The Bush cuts of the early 2000's seem to be having the same impact. It was Kennedy who said "a rising tide lifts all boats," just another way of saying "trickle down."

[ihavenobias]

1)-The top marginal tax rate was around 90% under republican Eisenhower and Kennedy did decrease it to 70% (but he *increased other taxes* directly and indirectly by closing existing loopholes, etc).

Reagan slashed it from 70% to an incredibly low 28%.

And while 70% sounds really high, people need to keep perspective on who this effected. The 70% tax rate only kicked in after the first 3.23 MILLION dollars of income.

So yes, post-Reagan, the US has quite a few more millionaires (and billionaires) and now also has the distinction of having the lowest level of social mobility of any industrialized country.

2)-Reagan doubled the social security tax. Reagan also started counting social security revenue as part of the general tax revenue, something previous presidents didn't do. This allowed him to present artificially inflated tax revenues to the public.

He did this because he plundered hundreds of billions from the social security trust fund and needed more revenue due to slashing the top marginal tax rate (and spending like crazy of course).

He did this instead of increasing the cap on SS. People are only taxed up to the first $90,000 of income.

In other words, while someone who earns $90,000 (or less, which is most people) a year is taxed on 100% of their income (for social security) someone earning $360,000 is only taxed on the first 25% of their income.

[worldtraveller]

Yes but their tax rate increases considerably as they go above 90k in earnings.

I just look at the chart and don't see how it says much of anything. Those circled downturns coincide with a stock market crash in 1987 and another in '99. To me it is like a Rohrshach test.. you see what you want.

[olephart]

"a rising tide lifts all boats," just another way of saying "trickle down."

Typical ass backwards logic. Something coming up from the bottom is equivalent to something coming down from above. The Kennedy Tax Cuts, implemented after his death in 1964, were formulated not as supply side cuts but as Keynesian demand side cuts. They were a combination of increasing the standard deduction to put money into circulation at the bottom and lowering the top marginal rate from 91% to 70%.


"I see about 20 uninteruppted years of tax revenue growth after the beginning of the Reagan tax cuts in the early 1980's,"

This period also includes the Clinton years. As you will remember, the supply siders predicted dire consequences from the tax hikes in the early 1990's. Funny, the economy kept growing and the deficit kept shrinking.


"The Kennedy cuts back in the early 1960's also led to an unusually long run of positive growth in tax receipts."

Notice that this period had no Recessions and after 1965 the Vietnam War increased spending to much higher levels. The tax revenues follow the expansion and contraction of the economy. Notice that the increases in revenues from the tax cuts are insufficient to recoup the loss of income. This is demonstrated by the rate of increase in Federal debt and the negative correlation of yearly deficit versus the increase in GDP. The overall economy is always behind the curve after supply side cuts.

[Houston15]

Thanks for helping me make my point when you say "Notice that this period had no Recessions­." Low taxes lead to stronger economies. In the 101 quarters since the Reagan tax cuts there have only been 5 quarters of negative growth, another record. While Clinton raised taxes, he raised them a small fraction of the amount that Reagan lowered them. Today the deficit is dropping like a stone, despite the war and Katrina. Less than 1% of GDP and heading towards surplus.

[JohnCitizen]

SUPPLY-SIDE ECONOMICS

The George Bush $3 trillion dollar tax giveaway to the rich over the past 6 years has been a disaster for average Americans. Supply-side (trickle-down) economics is a bogus theory promoted by those who benefit from it. In a mature capitalist system, supply side never rules, it is always the demand side of the equation that governs growth and well-being. Think about the 1930s Depression, General Motors had plenty of supply, but demand evaporated.

Previous U.S. economic downturns have been cured with only $200 billion in tax cuts targeted to the middle class, because the consumer (the great middle class and 2/3rds of the economy) spends that tax cut and primes the economic pump. But George Bush has raised the debt that our children and grandchildren will have to pay from almost $6 trillion to almost $9 trillion for current economic growth (i.e. we all get trickled on, as the rich spend some small fraction of their gains). Unfortunately, this supply-side growth has been largely and uniquely without wage gains, and so has shrunk the middle class that makes America strong and great. This growth is also already over ($3 trillion flushed down the toilet and gone), as the FED has had to cut interet rates because recession looms.

Corporations (the supply side) are now loaded with cash, but there is no place to spend it because they do not see any demand. So many corporations are using that cash to buy back their stock - WOW, supply side is wonderful in how it fulfills our needs (NOT)?? Meanwhile, no demand indicates that the middle class is slowly being tapped out, as home values (most of their net worth and the credit card of last resort) are stagnant or falling in price, and a considerable number of homeowners are heading for foreclosure. With the rich-poor divide increasing, we are headed toward previous shining examples of trickle-down economics: South America of the recent past and feudalism in the Middle Ages (South America and feudalism also had no wage gains!).

[ReasonIsMyReligion]

Note the converse is also true, HIGHER tax rates do not correlate with a DRAG on overall tax revenue.

In short and in sum, tax policy appears to have NO EFFECT on tax revenue.

This is so counter-intuitive, I'm going to ask Bonddad to weigh in...

[ReasonIsMyReligion]

Supply-side economics: Some rich SOB peeing on my leg while telling me it's raining lemonade.

[ReasonIsMyReligion]

Or rather, "trickle-d­own"...

[DemandSide]

Does this mean that the tax cuts for the wealthy, the Supply Side trademark, were translated not into increased revenue, but into debt? Since there was only an increase in spending under Reagan and the Bushes, I think it does.

And remember the Greenspan Commission in the early 80s? It revamped Social Security payroll taxes higher. So its tax hikes on earned income met Reagan's tax cuts for the rich and netted probably the most regressive shift of all time.

[Badwater]

The tax cuts for wealthy were meant to benefit the wealthy. Wake up and stop voting for Republics.

[jeffmorgan]

I don't know much about economics, so someone who does don't be shy to respond.

I imagine like a leakage to foreign markets in a tax policy referred to as supply side. Like, the poor or middle income person's money is cycling domestically more so than the high income person's money, which is more likely to go to a foreign market. I would imagine this to be an increasing trend in recent years.

Is this a factor at all, or a misconception?

[worldtraveller]

I see it as rich money moves to foreign equities and middle class money goes to buying foreign televisions. I guess if I had to favor one or the other it is better that americans own part of foreign companies than depreciating assets from foreign countries. Then again we will be paying them back in depreciating dollars. :-)

[jeffmorgan]

perhaps some of why service industry is so big, when I buy that TV, Best Buy gets a cut, keeping retail humming along, heh.

Thanks for the response.

[themodernleader]

Bondad, you are developing new ideas and concepts form empirical data and ordinary human experience.
The jackasses running this government derive their ideas and generalizations from overriding philosophical and religious principles that are eternal and immutable.
Anybody disagreeing with their reality is not only deranged but dangerous to their good society.
Bondad: You are learning too much. And may the angels of enlightment and truth always be in your eyes and ears and with your intellectual integrity. Then you will be announced in the memories of patriots as a great American.

[MuseScavenger]

Supply side economics is precisely what the former Soviet Union had: If there was meat in the meat market, you could have it for the price posted; if there wasn't, no amount of consumer demand could get it there. Pretty much like Wal-Mart today: if they can get it cheap in quantity, you can buy it there; if they cant, no special request will get in the store. You can only buy what they want to sell. The consumer has no power except to not spend under such a system. Supply side is anti-thetical to honest capitalism.

[RitchieG]

I don't like the sample size. Let's give it another hundred years of not working before we jump to any conclusions. Besides, in a hundred years the world could prosperity itself out of having any poor people at all.

[OhPlease2007]

Hale, great post! Have you read any of, Greg Palast's books? He is another writer that legitimately documents the disastrous after-effects of, supply-side economics. In fact, Greg Palast -- while in college -- studied directly under, Milton Friedman.

Palast's books are definitely well worth the read:

Greg Palast (Bio)

http://www.gregpalast.com/about-greg/