Tax Cuts Make Money - A Response

[ticktockman]

On February 21, 2006, an editorial by Senate majority leader Bill Frist appeared in USA Today. It is currently posted on his web site and is titled "Tax Cuts Make Money". It begins as follows:

Many people in Washington have long known a dirty little secret about tax-cut measures: When done right, they actually result in more money for the government.

Ever since the Senate approved the last major tax relief bill, in 2003, revenues have increased every year. In 2004, they went up 5.5%. Last year, they rose 14.5%, the largest increase in nearly 25 years.

Frist is correct about the 5.5% and 14.5% increase and the fact that the 14.5% increase was the largest in nearly 25 years (since a 15.9% increase in 1981). However, this gain followed a loss of 12% from 2000 to 2003. This was the largest 3-year loss since a similar 12% loss in 1947, at the end of the Second World War. The comparison is even starker if one looks at individual income tax revenues. From 2003 to 2005, those revenues increased 16.8%, the largest increase since an increase of 21.2% from 1998 to 2000, just five years earlier. However, there was a loss of 21% in individual income tax revenues from 2000 to 2003, the largest 3-year loss since at least the Great Depression. These numbers can be seen in the following table:

              TOTAL AND INDIVIDUAL INCOME TAX REVENUES
                       (billions of dollars)
.
        Total  1-yr %  2-yr %  3-yr %    Indiv  1-yr %  2-yr %  3-yr %
Year Revenues  Change  Change  Change   Income  Change  Change  Change
-----------------------------------------------------------------------
1934      3.0                              0.4
1935      3.6    22.1                      0.5    25.5
1936      3.9     8.7    32.8              0.7    27.9    60.5
1937      5.4    37.3    49.3    82.3      1.1    62.0   107.2   160.0
1938      6.8    25.3    72.1    87.1      1.3    17.8    90.8   144.0
1939      6.3    -6.8    16.9    60.5      1.0   -20.0    -5.8    52.7
1940      6.5     4.0    -3.0    21.6      0.9   -13.3   -30.6   -18.3
1941      8.7    33.0    38.4    29.0      1.3    47.3    27.7     2.2
1942     14.6    68.0   123.5   132.5      3.3   148.3   265.8   217.1
1943     24.0    64.0   175.5   266.5      6.5    99.4   395.1   629.3
1944     43.7    82.3   198.9   402.1     19.7   202.9   503.9  1399.6
1945     45.2     3.2    88.2   208.6     18.4    -6.8   182.4   463.0
1946     39.3   -13.0   -10.2    63.7     16.1   -12.4   -18.3   147.5
1947     38.5    -2.0   -14.7   -12.0     17.9    11.4    -2.4    -9.0
1948     41.6     7.9     5.8    -8.0     19.3     7.7    20.0     5.1
1949     39.4    -5.2     2.3     0.3     15.6   -19.5   -13.3    -3.4
1950     39.4     0.1    -5.1     2.4     15.8     1.3   -18.4   -12.2
1951     51.6    30.9    31.0    24.2     21.6    37.2    39.0    11.9
1952     66.2    28.2    67.8    67.9     27.9    29.2    77.3    79.6
1953     69.6     5.2    34.9    76.5     29.8     6.7    37.9    89.2
1954     69.7     0.1     5.3    35.0     29.5    -0.9     5.8    36.7
1955     65.5    -6.1    -6.0    -1.1     28.7    -2.7    -3.6     2.9
1956     74.6    14.0     7.0     7.2     32.2    12.0     9.0     8.0
1957     80.0     7.2    22.2    14.8     35.6    10.7    23.9    20.6
1958     79.6    -0.4     6.8    21.7     34.7    -2.5     7.9    20.8
1959     79.2    -0.5    -0.9     6.3     36.7     5.7     3.1    14.1
1960     92.5    16.7    16.1    15.6     40.7    10.9    17.3    14.3
1961     94.4     2.0    19.1    18.5     41.3     1.5    12.6    19.0
1962     99.7     5.6     7.8    25.8     45.6    10.2    11.9    24.1
1963    106.6     6.9    12.9    15.2     47.6     4.4    15.1    16.9
1964    112.6     5.7    13.0    19.3     48.7     2.3     6.9    17.8
1965    116.8     3.7     9.6    17.2     48.8     0.2     2.5     7.1
1966    130.8    12.0    16.2    22.8     55.4    13.6    13.9    16.5
1967    148.8    13.7    27.4    32.2     61.5    11.0    26.1    26.3
1968    153.0     2.8    16.9    31.0     68.7    11.7    24.0    40.9
1969    186.9    22.2    25.6    42.8     87.2    27.0    41.8    57.4
1970    192.8     3.2    26.0    29.6     90.4     3.6    31.6    46.9
1971    187.1    -2.9     0.1    22.3     86.2    -4.6    -1.2    25.5
1972    207.3    10.8     7.5    10.9     94.7     9.9     4.8     8.6
1973    230.8    11.3    23.3    19.7    103.2     9.0    19.7    14.2
1974    263.2    14.0    27.0    40.7    119.0    15.2    25.6    37.9
1975    279.1     6.0    20.9    34.6    122.4     2.9    18.5    29.2
1976    298.1     6.8    13.2    29.1    131.6     7.5    10.6    27.5
1977    355.6    19.3    27.4    35.1    157.6    19.8    28.8    32.5
1978    399.6    12.4    34.1    43.2    181.0    14.8    37.5    47.9
1979    463.3    16.0    30.3    55.4    217.8    20.4    38.2    65.5
1980    517.1    11.6    29.4    45.4    244.1    12.0    34.9    54.8
1981    599.3    15.9    29.3    50.0    285.9    17.1    31.3    58.0
1982    617.8     3.1    19.5    33.3    297.7     4.1    22.0    36.7
1983    600.6    -2.8     0.2    16.1    288.9    -3.0     1.1    18.4
1984    666.5    11.0     7.9    11.2    298.4     3.3     0.2     4.4
1985    734.1    10.1    22.2    18.8    334.5    12.1    15.8    12.4
1986    769.2     4.8    15.4    28.1    349.0     4.3    16.9    20.8
1987    854.4    11.1    16.4    28.2    392.6    12.5    17.3    31.5
1988    909.3     6.4    18.2    23.9    401.2     2.2    15.0    19.9
1989    991.2     9.0    16.0    28.9    445.7    11.1    13.5    27.7
1990   1032.1     4.1    13.5    20.8    466.9     4.8    16.4    18.9
1991   1055.1     2.2     6.4    16.0    467.8     0.2     5.0    16.6
1992   1091.3     3.4     5.7    10.1    476.0     1.7     1.9     6.8
1993   1154.5     5.8     9.4    11.9    509.7     7.1     8.9     9.2
1994   1258.7     9.0    15.3    19.3    543.1     6.5    14.1    16.1
1995   1351.9     7.4    17.1    23.9    590.2     8.7    15.8    24.0
1996   1453.2     7.5    15.4    25.9    656.4    11.2    20.9    28.8
1997   1579.4     8.7    16.8    25.5    737.5    12.3    24.9    35.8
1998   1722.0     9.0    18.5    27.4    828.6    12.4    26.2    40.4
1999   1827.6     6.1    15.7    25.8    879.5     6.1    19.3    34.0
2000   2025.5    10.8    17.6    28.2   1004.5    14.2    21.2    36.2
2001   1991.4    -1.7     9.0    15.6    994.3    -1.0    13.1    20.0
2002   1853.4    -6.9    -8.5     1.4    858.3   -13.7   -14.5    -2.4
2003   1782.5    -3.8   -10.5   -12.0    793.7    -7.5   -20.2   -21.0
2004   1880.3     5.5     1.5    -5.6    809.0     1.9    -5.8   -18.6
2005   2153.9    14.5    20.8    16.2    927.2    14.6    16.8     8.0
.
Source: Budget of the United States Government, FY 2007: Historical Tables, Table 2.1

Frist continues:

Total government collections, in fact, increased more after President Bush's 2003 tax cuts than they did after President Clinton's 1994 tax hikes.

Frist is evidently referring to the fact that total revenues increased 20.8% from 2003 to 2005 but increased just 15.4% from 1994 to 1996. However, if one looks at individual income tax revenues, that gain was 16.8% from 2003 to 2005, less than the 20.9% gain from 1994 to 1996. Even looking at total revenues, the picture changes greatly if one widens their view beyond two years. As the above table and following graph show, the 2003 to 2005 gain was a recovery from a very deep drop whereas the 1994 to 1996 was part of an 8-year rise in revenues.



The actual numbers and sources can be seen at http://home.att.net/~rdavis2/mts.html. In any case, Frist continues:

In 2000 and 2001, the end of the dot-com bubble, the 9/11 attacks and a series of corporate scandals sent the economy into a tailspin. During the downturn, high taxes limited economic growth and kept receipts down. Although Americans were making some of the largest per-household tax payments in our nation's history, revenues plummeted in 2002 and 2003. When the major tax-relief measures kicked in, they restored the economy to health and helped deliver quarter after quarter of strong growth.

As the above table shows, individual income taxes plummeted 20.2% in 2002 and 2003. How could this have happened if Americans were "making some of the largest per-household tax payments in our nation's history"? In any case, Frist fails to make any mention of the 2001 tax cut. Of course, admitting that this tax cut may have had anything to do with the drop in revenues would greatly confuse the point that Frist is trying to make.

Frist continues:

Republicans' decision to reduce taxes on capital gains and dividends provides a good case study in effective tax policy. When we enacted these measures in 2003, the Congressional Budget Office estimated that revenues would decline by $27 billion over the next two years. Instead, it turned out that the tax cut stimulated investment and increased revenues by $26 billion — a $53 billion difference.

As Frist gives no source for these numbers, it was difficult to figure out exactly which revenues he is referring to. As it turns out, he appears to be referring to a January 27, 2006 National Review Online article by Donald Luskin titled "The 2003 Tax Cut on Capital Gains Entirely Paid for Itself". The following table summarizes the numbers given by that article:

Projected and Actual Capital Gains Tax Liabilities
              (billions of dollars)
.
                                 Change from
Release Date  2004  2005  Total  January 2003
------------  ----  ----  -----  ------------
January 2003    60*   65*   125*
January 2004    46*   52*    98*    -27
January 2006    71    80    151      26

* projected
Source: CBO Budget and Economic Outlook, January 2003, 2004, 2006

The basic argument put forth by Luskin and Frist appears to as follows: Actual Capital Gains Tax Liabilities turned out to be greater in 2004 and 2005 than the Congressional Budget Office projected that they would be in January of 2003. Therefore, the 2004 capital gains tax cut increased revenues.

It's hard to know where to start with this. It assumes that the 2003 CBO projections accurately predicted every event of the next three years except for passage of the 2004 capital gains tax cut. In addition, it assumes that the CBO accurately evaluated the effect of each of these events upon capital gains. Among the events that the CBO would have had to accurately predict and evaluate was the 41 percent rise in the S&P 500 from January 2003 to January 2006. The possibility that the CBO simply made an inaccurate projection, regardless of the reason, never seems to enter the minds of Luskin or Frist.

Frist concludes his editorial:

If we really want to avoid burdening our children and grandchildren with debt — which does represent a major problem — we need to reform entitlement programs. Within the lifetimes of today's college students, the combined budgets of Social Security, Medicare and Medicaid will consume all federal revenues, leaving nothing for defense, education, housing or any other program.

Making sure that our children and grandchildren don't face the burdens of debt requires that we reform these entitlement programs and set them on a sustainable course for the future. A sensible low-tax policy that keeps the economy growing will play a major role in confronting our fiscal challenges.

Frist is correct that we need to reform entitlement programs. One problem with our current programs is that they promise beneficiaries longer and longer retirements without providing any realistic way to pay for them. We need to be skeptical of any painless, free-lunch proposals to pay for those longer retirements. Likewise, we need to be skeptical of free-lunch proposals to provide tax cuts that pay for themselves. I suspect that much of the deficient analysis in Frist's editorial came from other sources. I hope he becomes much more skeptical and checks such analysis more carefully in the future before putting his name to it.

The latest version of this response can be found at http://home.att.net/~rdavis2/frist1.html.

[babylonsister]

1. ticktockman, I hope Frist sees this, welcome to DU, and

that's a lot of effort! Thank you! I also hope Frist 'becomes much more skeptical and checks such analysis more carefully in the future before putting his name to it.'

:toast: :rofl:

[ticktockman]

3. Re: welcome to DU

Thanks! I don't expect a retraction or even a response from Frist but I do hope that he becomes aware, through this or some other response, the poor quality of the analysis on which his editorial was based. I have come to expect such cherry-picked numbers and flawed analysis from political hacks but I expected better from the Senate majority leader. Anyhow, thanks again to you and unhappycamper for the welcome.

[unhappycamper]

2. Welcome to DU ticktockman.

Great post! :hi: