The Lafferites Think They Won Something
Lawrence Kudlow says he’s getting older, which is the only thing he got right here:
Also noteworthy is Alan Reynolds’ recent piece that argues tax revenues as a share of the economy actually increased during the JFK, Ronald Reagan and George W. Bush tax rate reduction periods. Revenues also rose following Bill Clinton’s second term tax cut package that included a reduction in the capital gains tax rate … Tax receipts have absolutely boomed in the aftermath of President Bush’s 2003 tax rate reduction package. That’s a fact. As a consequence, the budget deficit has fallen substantially … The older I get, the more militant I become on this subject. Lower tax rates do expand the economic pie. Lower tax rates do boost revenues. Art Laffer had it right, and he’s got twenty-five years of pro-growth evidence to back him up. The tax cutters were right. They won.
Militant? If Kudlow wants to declare victory in his war against reality, I’ll concede his free lunch camp has won the War of Stupidity. We have graphed Federal revenues excluding payroll contributions as a share of GDP. Our series captures both personal income taxes and taxes on profits. The revenue to GDP ratio rose from 10.4% in 1992 to 13.4% in 2000. Kudlow is so desperate to say Art Laffer was right that he has portrayed the Clinton era as a period of tax cuts. I guess all those Republicans who complained about Clinton’s tax increase in 1993 were just not as smart as Lawrence Kudlow.
Now it is true that the revenue to GDP ratio rose from 9.8% in 2003 to 11.8% in 2006. Oh golly gee – we finally recovered from the recession! This recovery would have happened whether we cut tax rates in 2003 or not. And maybe Mr. Kudlow might notice that the 11.8% in 2006 is lower than the 13.4% in 2000.
You might ask why I excluded payroll contributions. It is because Kudlow wants to reach back to the 1960’s and the 1980’s in his attempts to claim that tax rate cuts led to supply-side miracles. Anyone who understands tax policy, however, understands that we saw increases in payroll tax rates. Real payroll taxes did rise during Reagan’s Administration precisely because we raised tax rates. The ratio of Federal revenues excluding payroll contributions to GDP actually fell from 1963 to 1967 and during the Reagan era. On the latter, we should not be surprised as the fiscal irresponsibility during the 1980’s led to lower national savings and less long-term growth.
But let me vent about this notion that John Kennedy signed a pro-growth tax cut. First of all, the 1964 tax cut was signed by President Lyndon Johnson. Secondly, he came to regret this fiscal stimulus after the economy got back to full employment and we realized we were entering a period of excess aggregate demand. The first response of the Federal Reserve in 1966 was to raise interest rates, which led to the 1966 Credit Crunch. Since Mr. Kudlow likely has not a clue what the Credit Crunch was, let me help him out. The lower national savings combined with tight monetary policy to offset this fiscal stimulus leads to higher interest rates, which leads to less investment demand. Lower investment demand equates to slower long-term growth. Most people get this simple point. But Mr. Kudlow is getting old and apparently militant and senile.