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Defending Tax Cuts Against Leftist Journalists

Economics / Taxes Sep 24, 2007 - 09:40 AM GMT

By: Gerard_Jackson

Economics Jonathan Chait, a senior editor with The New Republic , has written an unintentionally funny book called The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics , part of which was published in the TNA. ( How economic crackpots devoured American politics. Feast of the Wingnuts ) At or near the top of his pet hatreds is supply-side economics (a “crank doctrine”) and the Laffer curve. One thing became immediately clear: Chait is the last person who should be calling anyone an economic crackpot.

On thing became very evident: the Laffer curve is still a mystery to the vast majority of people, particularly journalists. It was my intention to use this article to reveal the process by which the Laffer curve works its magic. I then came across an article by Mike Steketee ( The Australian , The dream of a Laffer curve trickle-down , 8 September 2005) that also attacked the Laffer curve and Reagan's economic policies. Then there was John Garnaut's thoroughly dishonest attack on capital gains cuts in which the cutters were described as selfish “nutters”. Needless to say, President Reagan was not spared in this venomous and ignorant rant. ( Sydney Morning Herald , Howard's crackpot capital gains tax reforms fail , 6 September 2004). I then decided that it would probably be better to first defend the Reagan and Bush administration's policy on capital gains in one article while saving an explanation of the Laffer curve for another article.

Steketee began his attack with the leftwing canard that because of President Reagan's tax cuts

tax revenue fell as a proportion of national income for several years, budget deficits soared and there was a significant redistribution of income to the rich.

The ignorant Garnaut also took the same line. Now let us do what leftwing journalists refuse to do and that is check the facts. To begin with, any commentary on tax cuts and revenues for this period are worthless unless they take into account the 1981-82 recession. I know this will come as a shock to readers but tax revenues have a tendency to decline during a recession — and the 1981-82 recession was no, with the result that revenue for the fiscal year 1983 was the same as in 1981. So one would not expect an increase in revenues until recovery was fully on its way.

Economic activity picked up in late 1982 and then began to accelerate, driving budge receipts at about 8 per cent annually, right through to 1990. That right's, folks — revenue growth expanded. It is also true that government outlays grew. But what journalists do not tell their readers is that outlays for every fiscal year, with the exception of 1984, exceeded President Reagan's budget requests. It was not Reagan that drove federal spending increases by a Democrat congress. Something else that journalists did not report, just they did not report the fact that from 1988 to 1992 the congressional Democrats raised spending by 40 per cent

Steketee and Garnaut's accusation that Reagan sent deficits soaring is just leftist baloney. In 1983 the deficit peaked at 6.3 per cent of GDP and then began to fall, reaching 2.9 per cent in 1989. (Naturally the effects of recession on tax revenues and the budget was completely ignored). Under Carter the deficit was about 3 per cent. (as an aside, from 1933-1940 President Roosevelt's deficits averaged 3.5 per cent of GDP). So once the recession was over the deficit began to fall throughout the 1980s as tax revenues increased.

Nevertheless, ideologically motivated journalists still insist on lying about this period, and Steketee and Garnaut are not exceptions. Steketee's assertion that Regan's tax policy favoured the rich against the poor is pure leftist cant, Throughout Reagan's presidency the Economic Recovery Tax Act of 1981 was the only bill that cut taxes for higher-income individuals and corporations. Moreover, tax payments by these people actually rose. In 1980 the top 1 per cent of earners paid 19 per percent of Federal incomes taxes. By 1988 this had risen to 27.5 per cent.

Now the 1981-82 recession saw a significant slowing in revenues, just as any intelligent person would expect. Nevertheless revenues still grew. By 1989 tax revenues were 65 per cent higher than they were in 1981, with revenue from income taxes rising by 56 per cent. So while the richest 10 per cent of Americans paid the bulk of taxes the remaining 90 percent of households paid $5 billion less in income taxes during this this period. Federal Reserve Board member Lawrence Lindsey showed that taxes paid by the wealthy were substantially higher than they would have been if the top tax rate had remained at 70 percent. I think it's pretty clear that Steketee's vile assertion that the Reagan administration rigged the tax system against the poor is nothing but a politically motivated malicious lie.

Steketee, Garnaut and Chait give every indication that they believe tax rates do not affect economic behaviour and hence the capital accumulation. Sad to say, this preposterous notion is par for the course with leftwing journalists. As we have already seen, the tax and budget figures from the 1980s utterly demolish this view. The same thing happened after the Kennedy cuts. When Kennedy visited West Germany in 1961 Chancellor Ludwig Erhard impressed on him the need to avoid British-type tax rates that punished initiative and wealth creation.

Kennedy very wisely ignored the advice of the socialist Galbraith and took Erhard's advice. The 1963-1965 Kennedy tax cuts were implemented and marginal rates cut by 23 per cent. The result: personal savings which had been declining leapt from an annual rate of 2 per cent to 9 per cent, business investment rose significantly, per capita disposable-income jumped and the per centage of Americans living below the poverty line dropped from 22 per cent to 13 per cent by 1968. Perhaps more significantly, the tax take took off. (This is what happens when you ignore the advice of socialists and economic illiterates calling themselves journalists).

But there was nothing knew here. Between 1921 and 1925 the Secretary of the Treasury, Andrew Mellon, persuaded Harding, Coolidge and Congress to cut taxes four times from a top rate of 73 per cent to 25 per cent. Despite dire predictions to the contrary by the then likes of Steketee, Garnaut and Chait tax revenues rose, most of which came from the top income groups. The per centage of taxes paid by the $100,000 plus earners (an enormous amount in those days) rose from 28.8 per cent in 1921 to 48.8 per cent in 1925. But left-wing journalists are not interested in unearthing let alone discussing facts like these. To them taxation is a means to punish the ‘rich' and the economically successful.

Also ignored is that during the Reagan presidency the median family income grew by an estimated $4,000 dollars and the he real income of households in every quintile group rose in every year from 1983 through to1990. Blacks also benefited greatly from Reagan's policies, with about 4.2 million of newly created jobs going to them while their participation rate hit a record high of 64 per cent. The per centage of low-income black families fell while the proportion of those blacks earning more than $50,000 a year jumped from 7.9 per cent to 13.8 per cent.

Now let us not forget the leftwing canard — not repeated by Steketee, incidentally — that most of the “Reagan jobs were based on “poverty wages” is just that — a myth. The United States Bureau of Labor Statistics calculated that in Reagan's first term 48.7 per cent of new jobs were actually in the best-paid managerial and professional category. Furthermore, real GDP growth averaged averaged 3.2 percent during his presidency compared with 2.8 percent during the Ford-Carter years.

Both Steketee and Garnaut claimed that halving the capital gains tax in 1999 was a complete failure that saw not only tax revenues dive but the number of those paying capital gains taxes shrink significantly. The thing to note here is the year 1999. It was in that year that the economy started to slow. By the end 2000 many commentators were predicting a recession. But the Reserve Bank came to the rescue in 2001, injecting a massive amount of ‘liquidity' into the economy. From January 2001 to February 2002 bank deposits rocketed by 25 per cent and M1 by 38 per cent. (Isn't it odd that an economic genius like Steketee can link cuts in capital gains taxes to the housing boom but not a reckless monetary policy).

Once again, any reasonably intelligent person with a passing knowledge of economics — which certainly precludes Steketee, Garnaut and Chait — would suppose that this monetary explosion would also see house prices and capital gains also take off. And that person would be right. The estimates of revenue for 2007-2008 budget predict that net capital gains taxes will exceed $10 billion. This estimate is illustrated with a chart that — wait for it — shows that revenue from capital gains taxes dropped at the same time as the economy slowed in 1999, and that these revenues continued to fall until the 2001monetary injection started to drive them up again in 2003-2004.

Unfortunately Garnaut and Steketee's political point scoring is typical of what passes for economic commentary in Australian. Which reminds me, Steketee is the brilliant economic theorist is claimed productivity generates unemployment. Productivity v. jobs: another economic fallacy .

Bigotry is rooted in ignorance. So what we are dealing with here is journalists who have no knowledge of economic history, the history of economic thought and certainly little or no knowledge of economic theory, a discipline that they clearly do not have a feel for. And it ain't going to get any better.

I think we should also note that after the Bush cut taxes in 2003 federal tax receipts rose by 15 per cent in the fiscal year 2005 and nearly 12 per cent in the fiscal year 2006 while the federal deficit dropped from $413 billion in 2004 to $158 billion today. And it gets even better. After cutting capital gains taxes from 18 per cent to 15 per cent in 2003 revenue from this source rose by $53 billion instead of shrinking as predicted by the congressional Joint Tax Committee.

I think I should point out at this stage that in my opinion one cannot truly grasp the connection between these revenue flows and tax cuts without taking into account monetary policy. This is not to suggest, however, that economic conditions cannot arise where tax cuts will be more than compensated for by an increase in revenue. In the US in 1916, for example taxes of 7 per cent were levied on incomes in excess of $300,000, and 1,269 tax returns were filed by this group.

As a war-time measure the tax was raised to 73 per cent where it still stood in 1921. However, the number of tax returns plummeted to 246 which raised $84,797,344. Realising that this rate was counterproductive Andre Mellon, Secretary of the Treasury, managed to get it down to 24 per cent while also cutting rates from 4 per cent to 2 per cent for those in the lowest income bracket. By 1929 tax receipts had risen by nearly 40 per cent over the 1921 level*.

* Under the apparent influence of President Hoover Mellon raised taxes significantly once the country sank into a depression. These measures only served to help deepen and prolong the depression.

How the Laffer curve really works

Carr's housing tax won't do the job . This article provides the correct explanation for the housing boom.

Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

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