Do tax cuts ever raise revenues?

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Mark “Economist’s View” Thoma was appalled by my statement in this post that, “Some tax cuts do raise revenues, of course.” So much so that he took back a bunch of nice things he’d just said about my column on Arthur Laffer.

Chastened at having so disappointed the alarmingly prolific man from Eugene, I briefly contemplated changing my wording to, “In some extreme circumstances, tax cuts do raise revenues, of course.” But that wasn’t substantively different from what I had already written, so there didn’t seem to be any point. And I’m certainly not going to say that no tax rate cuts have ever raised revenues. Would Mark Thoma say that?

Just two off the top of my head: The 1964 Kennedy reduction of the top marginal income tax rate from 91% to 70% (it was enacted after JFK’s assassination, but it was his bill), the 1981 Reagan reduction of the top marginal rate from 70% to 50%. I’m not at all an expert on this, but I don’t think it’s too controversial among economists to assert that those particular changes (but not the rest of the of Kennedy and Reagan tax legislation) were a break-even or better for the Treasury. (Brad DeLong on the 1980s tax cuts: “As I read the evidence … reducing the top tax rate from 70% to 50% is probably a revenue gainer and surely not much of a loser. From 50% to 28% is, I think, very different: a big revenue loser.”)

The common thread is that these were cuts in punitively high marginal rates. They paid off in large part because they removed incentives to shelter income from taxes. The other benefits that supply-siders like to talk about–making people work harder and longer and encouraging capital investment–are there too, but probably not in great enough measure to offset the tax cut.

Which is why it’s awfully hard to imagine any cut in current tax rates (or the rates that were prevailing when George Bush took office in 2001) that would pay for itself. The only possible candidate, I think, would be the corporate tax rate. The U.S. corporate rate is, at 35%, the highest among the world’s wealthy nations (throw in state taxes and our average rate, at 39.3%, comes in just behind in Japan’s). Corporations can often easily move their activities from jurisdiction to jurisdiction, and also often have big staffs of very smart people who spend all their days figuring out ways to reduce the company’s tax bill. Give them less incentive to do so by lowering the tax rate, and we might be pleasantly surprised by the result. It certainly has worked out okay for Ireland.

That’s pure speculation, though, unencumbered by a single calculation. And correct me if I’m wrong, but I don’t think Rudy, Mitt & Co. are making the rounds in Iowa promising to cut corporate taxes (although maybe they are doing that at some of their fundraisers). So I agree with Mark Thoma that journalists ought to be asking, every time a Republican candidate says cutting taxes will increase revenues, “Have your economic advisors informed you that there’s no basis for that claim, and if so, why are you making it anyway?” But that’s a long ways from arguing that tax cuts never raise revenues.

Update: Mark Thoma, as he notes in the comments, responds here. It sounds like our main disagreement is definitional: The 1964 and 1981 tax cuts consisted of much more than just cuts in the top marginal rates. Thoma thinks focusing on just the cuts on high-end taxpayers and saying they paid for themselves is misleading. He writes:

I suppose with a narrow enough focus we could find somebody who paid more taxes after the change, even a group who did, but to me that just confuses the issue – overall these tax cuts did not pay for themselves, and even the statement that they did for small subgroups at the very top is debatable and subject to interpretation.