Tuesday, December 04, 2007

Fact Check Check Checkered performance

In which I admit that I was totally scooped by Matthew Yglesias who notes that Rudy Giuliani claims to know that tax increases cause increased revenues and the Washington Posts alleged fact check falsely claims that "Giuliani's insistence that tax-cutting "produces more revenues" is ... a matter of fierce dispute among economists." This is false. Even right wing economists agree that Giuliani's claim is false.

I take my frustration out on a commenter and who I quote without permission

The thing about faith-based politics is that it's problematic all around. Reducing taxes can, and has, produced more revenue. It doesn't ALWAYS do so, as we have to ask which taxes, what kind of reductions, by how much, etc. But it's clearly not false to say that properly thought out tax reductions grow the economy and produce more revenue. It's happened too many times in too many places for any but the most partisan-blinkered to simply hold it to be false.

Posted by Robert Powell

Robert Powell I deduce that you are not an economist. Click the Washington Post link and note that Giuliani didn't cite any economists. Bush has not found a reputable economist who is willing to claim that tax cuts below current US tax rates cause increased revenues.

You seem to equate increasing the growth rate with increasing revenues. It is true that, other things equal, increased growth implies increased revenues. However, with tax cuts other things are, of course, not equal.

More importanly, there is no good reason to think that there is any tax currently imposed in the US with such large dead weight costs that tax cuts unaccompanied by spending cuts would cause increased growth. Growth is slow compared to tax cuts, budget deficits can reduce growth by crowding out investment. It is very possible that a combination of a tax cut and a budget cut would cause increased growth but a tax cut without a spending cut would cause decreased growth. In fact, this is a near consensus among economists.

Of course if the government spending is of a kind that contributes enough to growth, tax cuts combined with spending cuts are bad for growth. The far right wing economist Robert Barro likes to stress the importance of education to growth. He uses public spending on education as a proxy. It is possitively correlated with growth.

In contrast extremely extensive efforts to find a negative effect of taxes on growth using the standard data sets on growth in many countries since 1960 have been completely unsuccessful. Budget deficits, however, are strongly negatively correlated with subsequent economic growth. Of course it might be more interesting to look at growth over a longer period of time for the relatively few countries for which there are such data. Here the pattern is simple. Since WWII taxes are much higher than ever before and growth is much higher than ever before. Over the long time series the tax take as a fraction of GDP is strongly positively correlated with further growth, just as one would expect given the enormous contribution of government spending to universal education, health care (life expectency given per capita GDP is strongly positively correlated with subsequent growth) and basic research.

Your claim that tax cuts are followed by excellent growth is puzzling. Supply siders tend to pick growth since the trough of the last recession and give credit to their policies. The US pattern is simple.

20s low taxes high growth then a great depression followed by a large increase in federal spending which became huge during WWII. During this period economic growth was vastly more rapid than any other period in US history before or since.

In the 50s and 60s extremely high tax rates and rapid growth. In the 70s lower tax rates and lower growth. In the 80s lower tax rates and middling growht. In the 90s a huge tax increase and extraordinary growth, in the naughties a huge tax cut followed by growth much slower than in any high tax period except the 70s.

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