Saturday, August 13, 2011

Are The Bush Tax Cuts Worth Keeping?

It has become an article of faith on conservative talk radio. It has become a litmus test in Republican primaries. "Thou Shall Not Touch The Bush Tax Cuts" is now the 12th Commandment. But are the Bush tax cuts so marvelous that they are the worth fighting to keep them?

Anyone, who listens to conservative pundits "knows" that tax cuts INCREASE revenue while tax increases REDUCE revenue. Counterintuitive, right? But that is what many conservatives firmly believe. So let's test this proposition.

On August 10, 1993, Bill Clinton signed into law Omnibus Budget Reconciliation Act of 1993 or, as Republicans said at the time, "the largest tax increase in American history". No Republican in Congress voted for the bill and a few Democrats joined them. Senator Phil Gramm at the time said, "I want to predict here tonight, that if we adopt this bill the American economy is going to get weaker and not stronger, the deficit four years from today will be higher than it is today and not lower ..." Newt Gingrich added, "The tax increase will kill jobs and lead to a recession and the recession will force people off of work and onto unemployment and will actually increase the deficit."

The dire economic predictions, as everyone knows, never came to pass. But what about the effects on tax revenue. Do tax hikes automatically result in lower tax revenues as claimed by so many conservatives? According to historical data (See Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789–2016), tax receipt each year for the period of 1994-2000 were as follows: 

Tax Revenue After Clinton Tax Hike (in millions of dollars)

The answer is a clear no. The Clinton Tax cuts did not result in losses of revenue. The total revenue increases were $870,856 (in millions of dollars). What about the Bush Tax Cuts of 2001 and 2003? Did they result in more tax revenue? Here is the data:
Tax Receipts After Bush Tax Cuts (in millions of dollars)
Total increases of revenue for the period was $532,909 (in millions of dollars). The Bush Tax cuts are still in effect and during the last three years tax receipts have decreased an additional $350,291 (in millions of dollars). Based on historical data, are the Bush tax cuts worth fighting for? Or should they be used by Republicans as a bargaining chip to extract concessions from the Democrats when it comes to entitlements, scrap the current tax code and beginning the process of reducing the size and scope of the federal government?