Tuesday, June 21, 2011

Pawlenty, a more powerful wizard than previously thought

In my last post on Tim Pawlenty I quoted Bush's own economists saying that he was wrong to say tax cuts increased revenue. Pawlenty has doubled down on his magical belief in tax cuts by saying this:

“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”

Wow. That's an amazing increase in revenue. Unfortunately, as Bruce Bartlett explains, it would take an extremely powerful wizard to conjure up that result:

In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.

The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.

This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.

Juuust a bit short Mr. Pawlenty. Maybe he was distracted by Emma Watson when they taught tax policy at wizard school. (I could forgive him if that was the case. Ms. Watson is stunningly beautiful)

What I want to know is does Pawlenty and the rest of the GOP actually believe this line about tax cuts increasing revenue or are they just flat out lying in order to get their way. If they truly belief it I would be really worried.

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