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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: Steve Dietrich who wrote (347895)	1/25/2003 10:05:14 PM
From: Peter O'Brien	Read Replies (2) \| Respond to of 769670

Yes, tax rate cuts may not always lead to revenue increases, but only when the original tax rate is low enough that it is not constraining or distorting economic activity. I also think that the optimal tax rate is different in the long-run versus the short-run. In the short-run, raising tax rates might increase revenue, but cause long-term damage to the economy which ultimately reduces revenues. Similarly, in the short-run, reducing tax rates might decrease revenue, but create long-term benefits to the economy which ultimately increases revenues. Thus, regarding Reagan, I think it is unfair to judge the effectiveness of his tax cut on just the results of the first two years after its enactment. I had already demonstrated to you in an earlier post that real revenues fell in 1980 (Carter's last full year) despite repeated annual tax increases caused by very high inflation and un-indexed tax brackets (i.e., "bracket creep"). So, we were clearly on the wrong end of the curve at that point in time. Tax rate increases were resulting in reduced real revenue in 1980. The economy was also in extremely dire condition in 1980. We were experiencing near runaway inflation which was causing severe damage and distortions to our economy. I firmly believe (although I can't prove) that if Carter had been re-elected in 1980 and had left the tax code "as is", that the real revenues collected in 1982 and 1983 would have been worse than Reagan's record. Clinton is a mixed bag. Yes, income tax rates at the high-end were raised in 1993. But, capital gains tax rates were also cut in 1997 (by the initiative of the Republicans, although to his credit Clinton did sign the law). I still believe that Clinton's top marginal rate is too high, and the damage has shown up in the last three years. Despite all of the Democratic whining about Bush Jr.'s tax cut, it is pretty puny, and it hasn't yet affected the top marginal rate by very much, so today's tax rates aren't that much different from Clinton's. One piece of empirical evidence I've noticed by looking at data over a long period of time is that the total amount of Federal tax revenue can't seem to rise much above 20% of GDP even when marginal rates are much higher than 20%. Whenever federal tax revenues rise to the "magic number" of 20% of GDP, it seems that the economy contracts, and tax revenue falls. So, based on the empirical evidence that you simply can't squeeze out more than 20% of GDP in revenues no matter what you do to the marginal rates in different income brackets, then why not just make life simpler and fairer and have a 20% (or slightly less) flat tax rate that never changes?