Tax Cut Question

3 comments May 13th, 2005at 11:58am Posted by Eli

I was originally going to ask Atrios this question, but figured he’d be too busy partying in Spain to respond to an e-mail from a nobody like me. SoI’m just going to throw this one out to the world at large.

I was reading Robert Rubin’s NYT piece about the deficit, where he briefly mentions the Clinton tax increases and the economic slowdown that emphatically did not occur afterward, and it got me to wondering:

How much empirical evidence is there to support the conventional wisdom that tax cuts have a stimulative effect (and the converse)? Are they typically followed by economic booms, or just excuses? I’m struck by the apparently counterintuitive results of Clinton’s tax increases and Bush’s tax cuts, and wondering if they’re truly typical, and if there are any graphs that overlay major tax cuts and increases over a chart of economic growth.

I have pretty much zero econ-fu, but the two possibilities that came to my mind as to why the Clinton tax increases and the Bush tax cuts had such “unexpected” results were:

1) Any stimulative impacts of tax cuts are outweighed by a drag effect exerted by an increased deficit (uncertainty, interest rates, interest payments).

2) Cuts/increases on taxes on wealth and the wealthy have a very different impact from taxes on work, because the damper on incentive and initiative just isn’t there – I don’t think anyone’s going to be discouraged from hoarding and accumulating wealth just because the tax rate on it has gone up. I never really bought the incentive explanation for cutting taxes on work, either – I can’t picture someone passing up a six- or seven-figure salary because the government would take too much, so why bother.

I know, one could argue that Clinton benefitted from the “peace dividend”, while Bush had the misfortune of an economy crippled by 9/11 and Iraq, but I just don’t buy it. In the short run, maybe, but at this point 9/11 andIraq are just convenient excuses.

Anyway, I’m sure my question has probably already been asked and answered a thousand times over – I’m hoping someone can direct me to some juicy-yet-intelligible-to-the-dumbass-layman research on it. I did a quick search, but it didn’t really yield what I was looking for.

Entry Filed under: Bush,Clinton,Economy,Republicans,Taxes

3 Comments

  • 1. Thersites  |  May 13th, 2005 at 2:50 pm

    I have only passing econ-fu myself, but remember that Bush originally pitched tax cuts as a way of returning the fruits of the budget surplus to hardworking Americans, and then a couple of years later pitched them as a means of escaping the recession and ultimately fixing the deficit.

    Consistency is in some ways not his strong suit.

    Maybe you should ask this over at Brad DeLong’s? If you ask nicely there someone will point you in the right direction.

  • 2. Avedon  |  May 13th, 2005 at 10:23 pm

    It depends on the tax cuts.

    Tax cuts for the middle and lower classes can improve the economy because those people are more likely to spend that money and therefore put it back into the economy. Tax cuts on the rich don’t go anywhere so they aren’t much use.

    Tax cuts can be used as incentives to create jobs, in which case, obviously, they improve the economy if employers hire people because they have tax incentives to do so.

    Tax cuts at the top that are not tied to such incentives have the reverse effect.

    Clinton’s tax increases were on the top, so they helped the economy. Reagan’s tax increases helped the budget a bit, but not as much as Clinton’s did because Reagan’s were on the middle-class.

  • 3. Eli  |  May 13th, 2005 at 10:46 pm

    But… but trickle-down says that tax cuts for the rich amount to the same thing as tax cuts for everyone else!

    But yeah, that pretty much tracks with my own gut feeling.


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