This is the slide I use in my class. Hopefully it will help
Turns out Heritage Foundation Agrees With Me
UPDATE: I see this chart needs a little commentary.
- Data is from the Federal Reserve. It is seasonally adjusted quarterly real federal receipts.
- The terrorist attacks, dot-com bubble etc, might explain a decline in the tax base what they don’t explain is why revenues never recover. (though more on that later)
- Its particularly telling that after an adjustment the new revenue curve tracks the old revenue curve at a lower level. Precisely what one would expect if you were taking a smaller fraction of the same pot.
In short, unless you think the economy was permanently damaged, all the way up until 2008, from the dot-com bubble in 2001 then you should expect tax receipts to return to the baseline.
After all they are pretty smooth in the wake of the larger early 90s recessions. You should also note that there is no huge boom from the housing bubble. No, for the most part federal receipts track the long run trend growth in the economy.
Lastly, the core argument here is that supply side didn’t work. Are you really going to tell me that the mildest recession in post-war history was so bad that it lead to persistent underperformance of revenue even though in a counterfactual world revenue would have surged above trend growth?
Since getting linked by Krugman I am getting a lot of push back that I have ignored Sept 11th, etc. There are some pretty technical arguments that I could bring forward to show why this is just numerically implausible. That is, Sept 11th was a big deal emotionally but it couldn’t even begin to explain a fraction of the economic effect.
The US economy is like really, really big. Probably bigger than anything the human mind is designed to conceive. We regularly use number’s in the trillions to describe its blips in its yearly behavior.
However, putting all that aside here is my more intuitive response I have offered to those who’ve contacted me:
When I am teaching I class I guess I can deal with these types of misunderstandings on the fly or perhaps my kids are too intimidated to bring them up – THEY SHOULD NOT BE. This is what class is for to debate and understand!
However, the issue here is that suppose the Bush tax cuts had no effect at all on long term revenue. For example, increases in tax rates were exactly balanced by increases in GDP or decreases in tax avoidance.
So then we might think the decline in revenues was caused by Sep 11th or the Dot-Com burst. In that case we would expect to see a drop in revenues followed by a return to trend as the economy recovers. At a minimum we should expect post dip revenue to grow faster as the economy tries to return to trend.
We don’t see that. We see a permanently lower trend.
Given that this is exactly what you would expect from reducing the percentage of the economy which taxed, I think its pretty strong evidence that this is what happened.
In short, the claim that the Bush tax cuts had such strong secondary effects of boosting GDP and tax compliance that they outweighed the primary effect of reducing taxable income is a complex one. Generally, in science we would expect someone to assemble a strong empirical case for such a claim.
When the empirics match the much simpler, more basic, more parsimonious explanation, that’s pretty damning for the complex claim.