Tuesday, April 19, 2011

Tax hikes: An "Inconvenient Truth"

Some conservatives tend to have a one track mind when it comes to taxes--cutting them is good; raising them is bad. According to the model these type of conservatives have, tax hikes damage the economy—that was the refrain of conservatives, including the Heritage mob, back in 1993, when Clinton's administration enacted them. As was said then:

[I cleaned up the text from the original archive site jumble, for readability] “CONCLUSION Raising tax rates on income is the most economically damaging element of the Clinton plan. There is little reason to expect that the higher rates would generate much, if any, additional revenue. By contrast, there is every reason to believe that higher rates on income would fuel new government spending, increase the budget deficit, depress savings and in vestment, destroy jobs, boost tax shelters, punish families, and hinder America’s international. competitiveness. Notwithstanding these serious drawbacks to enacting higher tax rates on income, the Clinton Administration seems determined to push forward, apparently believing that lower- and middle-income taxpayers will acquiesce to tax increases on their own in comes if they think that wealthier taxpayers are being punished even more. This calculation may work politically, but it will mean only harm to the American economy ”

The issue can be framed as some conservatives do—tax cuts good—lower taxes, and they produce more revenue. But it can also be framed as the corollary—a test of whether tax hikes hurt an economy. And, in that case, the Clinton experience is an “inconvenient truth” so to speak. Clinton's economic record is far better than Bush's. Some conservatives argue that Clinton's tax hikes happened when the economy was going great guns, and acted to slow down what would otherwise have been a spectacular recovery. That may be so, but such a recovery is not without its possible dangers.

In any case, it shouldn’t make any difference when Clinton’s tax cuts came in—after all, according to this "tax rise bad" theoretical framework, these tax hikes should have WRECKED THE ECONOMY. They didn’t. Conservatives might want to think about how that result fits within their framework.

Where would we like to compare the Bush and Clinton administration performances? If not at the bottom of the troughs, then when? If the bottom of the trough for Clinton was 1991-I and for Bush, it was 2001-IV, and you don’t like the bottom of the trough, where? Why not two years out for both? So that would be 1993-I and 2003-IV. Go out four years. That would be 1996-I and 2006-IV. Why four years? Because the Clinton administration enacted tax cuts on capital gains that Heritage, for example, has argued increased growth and gave us more boom times, then would have been had in their absence. Now, in real terms, we get:
Stat Clinton Bush
GDP +8.5% +9.9%
Receipts +17.5% +22.3%
Outlays +3.3% +11%

By all means use other sources if you prefer to check my results.

So, it looks like in this comparison, the extra GDP growth helped explain the growth in receipts. Though it also was helped by a large differential in spending as well. With two large tax cuts as well, it is clear that Bush was using a Keynesian strategy in this period of time.

When you look at the six years from trough to 1996-I and 2006-IV, the picture looks like this:
Stat Clinton Bush
GDP +11.6% +14.3%
Receipts +20.5% +0.6%
Outlays +4.1% +25.6%

So, again, Bush’s Keynesian approach is pretty obvious.

You don’t want to look at the first four years, because, there were already two years of growth before the tax hikes. I wondered about this, so I went back to compare the first two years. A comparison of those first two years looks like this:
Stat Clinton Bush
GDP +4.6% +3.9%
Receipts +2.6% -0.2%
Outlays -3.9% +8.0%

What is interesting is that the Heritage Foundation felt that the impact of the 2001 tax cuts would be felt almost immediately (as they also said with the Ryan Plan), with higher tax revenues (starting in 2003) and lower national debt. 9-11, two wars, and Medicare Part D created the need for expenditures, so that helps explain part of why debt rose, instead of fell (increased expenditures). But, even with additional tax cuts, tax receipts fell in both 2003 and 2004, when compared with 2000 & 2001 peaks. The bottom of the trough for the recession was 2001-IV. Surely, with all this tax cutting, we should be seeing much higher tax revenues by 2003, or 2004 at the latest? 2005?

So, what we have, when we compare the two early parts of the recoveries, is the curious result that tax cuts were not immediately effective in getting the kinds of results that the Heritage Foundation (and some conservative commentators) said that we could expect to find. I grant that real GDP growth was better for most of the range in the Bush recovery than it was in the Clinton recovery, for the period I have surveyed. But then again, the Clinton recovery went on longer. One reason why it did, is that tax hikes put a lid on economic growth, slowing the economy down, ensuring that there was not a repeat of one of the earlier causes of recessions, namely: when accelerating inflation results in the Fed raising interest rates, slicing private investment and consumption, killing economic growth. As for the 1997 tax cuts—it can be argued that these helped fuel the technological speculative bubble that helps explain the eventual burst and recession in 2001.

Some conservatives are going to have to come up with a better model of how an economy works, or just acknowledge that in this regard at least, their beliefs are more articles of faith, then evidence based arguments.

1 comment:

  1. Hi Cas >> Not sure if you will be able to read this, as this post is very old and I don't know how else to contact you.

    Helio and I have had rocky road these last two years and we are at a good place right now (at least, from my angle). But, it hasn't always been this way. To his credit (as well as mine), we could at least work towards this. I don't expect that with most anyone else at GP, though The Live Wire did come to my defense today (in a back-handed way after referring to be as an ass).

    I admire your intelligence and ability to argue your points. You can obviously express things I feel that I can't. However, I only ask you to consider to be very careful with how you argue with the guys (and one or two conservative girls) at GP. The more you keep it at a professional level, the better. I'm not perfect either. And I'm not going to pretend to tell you how you should act. Let me say this, though: I take great pleasure when you make your points minus anything that can even be remotely construed as smugness.

    It just makes them look all that more foolish.