Factcheck Reviews Voodoo Economics

Some see the world as it is. Conservatives often live in their own alternative reality which denies science and denies sound economics whenever they conflict with their ideology. The mind set is easy to understand. Those whose interpretation of the bible tells them that evolution did not occur believe any and all of the bogus attacks on evolution and pretend that the vast amount of supporting evidence simply does not exist. Those who do not want to consider any changes in their lives to reduce global warming ignore that the consensus of all the scientists working in the field is incorrect. Some people who both want tax cuts and don’t want to make the hard decisions on spending cuts defend the Laffer curve despite all evidence to the contrary.

Last fall I posted on how Megan McArdle found that a conservative publication was not willing to publish an article which questioned the Laffer curve because it “because it violated their editorial line on taxation.” George Bush Sr. once laughed at the belief that you can cut taxes and not spending as “voodoo economics” until he found it was easier to stick to conservative group think. Factcheck.org looks at the Laffre curve today:

Q: Have tax cuts always resulted in higher tax revenues and more economic growth as many tax cut proponents claim?

A:No. In fact, economists say tax cuts do not spark enough growth to pay for themselves.

This economic theory is what George H.W. Bush called “voodoo economics.” We called it “supply-side spin” when we wrote about Republican presidential contender John McCain’s claim that President George W. Bush’s tax cuts had increased federal revenues. We found that a slew of administration economists from the Congressional Budget Office, the Treasury Department, the Joint Committee on Taxation and the White House’s Council of Economic Advisers all disagreed with that theory, saying that tax cuts may spur economic growth but they lead to revenues that are lower than they would have been if the cuts hadn’t been enacted.The supply-side theory that tax-cut proponents often espouse was demonstrated by the Laffer curve, named for economist Arthur B. Laffer. The curve suggests that a higher tax rate can generate just as much revenue as a lower rate. But most economists are not Laffer-curve purists. Instead, while they may believe in the power of tax cuts to create an economic boost, they don’t say that growth is enough to completely make up for lost revenue. For example, N. Gregory Mankiw, former chair of the current President Bush’s Council of Economic Advisers, calculated that the growth spurred by capital gains tax cuts pays for about half of lost revenue over a number of years and that payroll tax cuts generate enough growth to pay for about 17 percent of what is lost.

Corporate income taxes, however, may be an exception. There is some evidence that cutting the corporate tax rate can produce more revenue than was projected under the higher rate in the special case of multinational corporations, which can move their money and operations around to take advantage of lower taxes in certain countries. Economists with the pro-business American Enterprise Institute came to that conclusion in a study released in July 2007. They found that lower corporate rates attract enough growth in corporate income to produce higher government revenues. However, one of the authors, Kevin A. Hassett, told FactCheck.org that small countries, such as Ireland, had the most success and that “it may or may not be correct” to apply the study’s results to the United States.

-Lori Robertson

United States Congressional Budget Office. “The Budget and Economic Outlook: Fiscal years 2008 to 2017” Jan. 2007.

United States Council of Economic Advisers. “Economic Report of the President.” U.S. Government Printing Office. Feb. 2003.

United States Joint Committee on Taxation. “Estimated Budget Effects of the Conference Agreement for H.R. 1836” JCX-51-01. 26 May 2001.

United States Joint Committee on Taxation. “Estimated Budget Effects of the Conference Agreement for H.R. 2 The ‘Jobs and Growth Tax Relief Reconciliation Act of 2003.’ ” JCX-55-03. 22 May 2003.

United States Department of the Treasury, Office of Tax Analysis. “A Dynamic Analysis of Permanent Extension of the President’s Tax Relief.” 25 July 2006.

Mankiw, N. Gregory and Matthew Weinzierl, “Dynamic Scoring: A Back-of-the-Envelope Guide,” 12 Dec. 2005.

Revenue-Maximizing Corporate Income Taxes: The Laffer Curve in OECD Countries,” American Enterprise Institute, AEI Working Paper #137, 31 July 2007.

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  1. 1
    me me me! says:

    John McCain: “People who make under $80,000 are too stupid to understand taxes anyway.”

  2. 2
    George Seals says:

    How can it be verified that John McCain made this statement?  This is not an insignificant statement for John McCain to make.

  3. 3
    Ron Chusid says:

    I believe the commenter above was giving his impression of McCain’s attitude and not a direct quote.

  4. 4
    Ron Chusid says:

    Maybe the person commenting really did mean that as a quote. There is a story going around that McCain made the statement in the comment above at a dinner party, but I have not found any evidence that McCain actually said this.

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