The Debt Crisis Was Not Caused By Tax Cuts

The new Congress just started and already there are renewed demands from the political-media establishment for tax hikes.

The message from President Obama, the Democrats and most of the media is that current deficits resulted from decades of tax cuts, and now, jacking up tax rates is the only “responsible” thing to do.  Anyone who opposes tax hikes isn’t serious about the deficit, they say.

One would never guess from listening to the tax complainers that the government collected more tax revenue in 2007, the fourth year of the current, Bush tax rates, than any previous year ever.

Had Congress spent just 6% less in 2007 the federal budget would have been in balance that year.

Government tax revenue is down since 2007 due to the financial crisis and severe recession that followed.  But the current tax rates generated seven of the top ten revenue years in US history.

The chart below tracks tax revenue and spending over the past 40 years.  Twice during that period there were major reductions in all tax bracket rates:

  • the Reagan tax cuts of the early 80s, and,
  • the Bush tax cuts of 2003.

In both cases tax revenue to the government had been declining before, and then increased after the tax cuts were implemented.

Spending increased continuously over the 30 years covered by the chart, consuming every dollar of increased tax revenue except for the brief period of budget surplus at the end of the 90s.  Those surpluses were due entirely to a spike in capital gains tax revenue generated by the dot-com stock market bubble.  When the bubble burst and stock prices dropped the capital gains windfall ended.  But the perennial increase in spending continued without a hiccup.

Not withstanding the assertions from Obama and the Democrats it’s not at all certain that:

  • The tax rate increases on “the wealthy,” including two million small businesses, will generate more revenue than the current tax rates, or,
  • Congress won’t immediately increase spending by an amount equal to or greater than any increase in tax revenue that may happen, with our without tax rate hikes.

But, they claim the Bush tax cuts were a give-away to the wealthy.  One gets the impression that the whole problem is declining revenue from top bracket taxpayers.  Again, as the chart shows reality contradicts the political-media establishment.

For 50 years the tax grabbers in Washington have used deficits to justify tax rate increases.  But they have almost always spent in excess of revenue, always creating the next deficit that justified the next tax increase.

The spending cut Vs tax hike debate will resume next week when the new session of Congress begins.  There is no guarantee but maybe this will be the moment when Republicans grow a spine and do what they  were elected to do: cut spending and just say no to tax hikes.

No Comments

Comments are closed.