Tax Cut Facts: Do Tax Cuts Increase Revenues?
One of the more polarizing debates taking place in Washington is the issue of raising taxes.
Barack Obama campaigned on the notion of allowing the Bush tax cuts on the wealthiest Americans to expire in order to help pay down the growing debt, and close the gap between federal spending and revenues.
Republicans have been against this idea and to this day, this tax cut has not been allowed to expire.
From the standpoint of the Democrats, these taxes are needed to help pay down then debt.
From the Republican point of view, increasing taxes will only discourage investment, as investors will be less motivated to invest, knowing more of their gains will be taxed.
In fact, the logic often extends to the idea that cutting taxes raises revenue by encouraging investment to the point where so much growth is achieved, that the revenue raised from these gains offsets the lower tax rates.
This inverse correlation is generally referred to as the Laffer curve.
Proponents of this argument cite the Bush and Reagan administration tax cuts, which subsequently saw an increase in revenue.
Bush and Reagan Tax Cuts and Clinton Tax Hike Under the Bush and Reagan administrations, tax cuts were enacted and followed by an increase in revenues.
Under the Clinton Administration taxes were raised and this was followed by an increase in revenues.
However, the ensuing increase in revenue after Bill Clinton's tax increase was far more significant.
In all 3 instances, the economy was growing.
When the economy grows, revenues grows regardless of tax policy.
Neither cutting nor raising taxes increased revenue.
A growing economy increased revenue and the data shows that revenue as a percentage of GDP were far lower under Reagan and Bush than the 1965 to 2006 average.
Revenues as a percentage of GDP following Clinton's tax increase were far higher.
Furthermore, the economy under Clinton kept growing, even after reaching full employment, whereas under Reagan and Bush, the economy merely recovered to full employment.
Tax Rates vs other Factors The ideas that lowering taxes raises revenues or that people will work less if they are taxed more misunderstands human nature.
There are far more significant facts like levels of demand, market confidence and whether or not employers are hiring.
There is indeed a point at which taxes can stifle growth, but these are specific.
For example, taxing lower income households whose entire earnings go towards a mortgage and bills lowers their buying power and is bad for demand.
However increasing tax rates on billionaires will increase revenues because that money will otherwise simply be placed under the proverbial mattress, and their ability to invest isn't hindered by a few points of increased tax rates.
Barack Obama campaigned on the notion of allowing the Bush tax cuts on the wealthiest Americans to expire in order to help pay down the growing debt, and close the gap between federal spending and revenues.
Republicans have been against this idea and to this day, this tax cut has not been allowed to expire.
From the standpoint of the Democrats, these taxes are needed to help pay down then debt.
From the Republican point of view, increasing taxes will only discourage investment, as investors will be less motivated to invest, knowing more of their gains will be taxed.
In fact, the logic often extends to the idea that cutting taxes raises revenue by encouraging investment to the point where so much growth is achieved, that the revenue raised from these gains offsets the lower tax rates.
This inverse correlation is generally referred to as the Laffer curve.
Proponents of this argument cite the Bush and Reagan administration tax cuts, which subsequently saw an increase in revenue.
Bush and Reagan Tax Cuts and Clinton Tax Hike Under the Bush and Reagan administrations, tax cuts were enacted and followed by an increase in revenues.
Under the Clinton Administration taxes were raised and this was followed by an increase in revenues.
However, the ensuing increase in revenue after Bill Clinton's tax increase was far more significant.
In all 3 instances, the economy was growing.
When the economy grows, revenues grows regardless of tax policy.
Neither cutting nor raising taxes increased revenue.
A growing economy increased revenue and the data shows that revenue as a percentage of GDP were far lower under Reagan and Bush than the 1965 to 2006 average.
Revenues as a percentage of GDP following Clinton's tax increase were far higher.
Furthermore, the economy under Clinton kept growing, even after reaching full employment, whereas under Reagan and Bush, the economy merely recovered to full employment.
Tax Rates vs other Factors The ideas that lowering taxes raises revenues or that people will work less if they are taxed more misunderstands human nature.
There are far more significant facts like levels of demand, market confidence and whether or not employers are hiring.
There is indeed a point at which taxes can stifle growth, but these are specific.
For example, taxing lower income households whose entire earnings go towards a mortgage and bills lowers their buying power and is bad for demand.
However increasing tax rates on billionaires will increase revenues because that money will otherwise simply be placed under the proverbial mattress, and their ability to invest isn't hindered by a few points of increased tax rates.
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