My comments are in italics. I’ve bolded key points.

Testimony before Congress, Janurary, 2007:

"The general view is tax cuts don't pay for themselves."

Testimony before Congress, April 27, 2006:

The other comment I would make on your issues with respect to revenues -- I've addressed in a recent letter the issue of dynamic versus static scoring. To the extent that tax cuts, for example, promote economic activity, the loss in revenues arising from the tax cut will be less that implied by purely static analysis, which holds economic activity constant.

…

SAXTON: Senator Reed?

REED: Well thank you, Mr. Chairman. Thank you for your testimony today. And just in line with sort of the question about the effective tax cuts, the former chairman of the Council of Economic Advisers, Greg Mankiw, wrote in his macroeconomic textbook that there is no credible evidence that tax cuts pay for themselves, and that an economist who makes such a claim is, quote, "a snake oil salesman who's trying to sell a miracle cure." Do you agree with that?

BERNANKE: I don't think that, as a general rule, that tax cuts pay for themselves.

Opinions expressed by Bush's current Treasury Secretary during his confirmation hearings in 2006, per article in Market Watch (from Dow Jones).

Paulson: Low taxes key to strong economy

Treasury nominee says China needs to move quicker on currency changes

By William L. Watts, MarketWatch

Last Update: 7:01 PM ET Jun 27, 2006

"I think it would be a big mistake to increase taxes. This economy is growing and jobs are being created," Paulson said.

Paulson rejected notions that tax cuts pay for themselves, but argued that they were nonetheless essential to ensuring economic growth.

"As a general rule, I don't believe that tax cuts pay for themselves," Paulson said, echoing the opinion of most economists. Paulson said the 2001 tax cuts, however, were crucial to boosting the confidence of consumers, investors and top executives.

Full article: http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7BB18C218C-3ED7-4514-898C-F7B2D24FAB43%7D&keyword=&print=true&dist=printTop

The President’s own Council of Economic Advisors concluded in its Economic Report of the President, 2003, that,

“although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity.”

The CEA chair at the time was supply-side economist Glenn Hubbard.

Below is From The Washington Post, October 17, 2006

Lower Deficit Sparks Debate Over Tax Cuts' Role

With great fanfare, President Bush last week claimed credit for a striking reversal of fortune: New figures show the federal budget deficit shrinking by 40 percent over the past two years, a turnaround the president hopes will strengthen his push for further tax cuts.

Bush hailed the dwindling deficit as a direct result of "pro-growth economic policies," particularly huge tax cuts enacted during his first term. "Tax relief fuels economic growth. And growth -- when the economy grows, more tax revenues come to Washington. And that's what's happened," Bush said.

Economists said Bush was claiming credit where little is due. The economy has grown and tax receipts have risen at historic rates over the past two years, but the Bush tax cuts played a small role in that process, they said, and cost the Treasury more in lost taxes than it gained from the resulting economic stimulus.

"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."

Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion. An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.

Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said.

Below is from the website of the National Bureau of Economic Research, “a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.” Their President and CEO is Martin Feldstein, former chief economic advisor to President Reagan.

The author of the paper discussed in this article is Gregory Mankiw, who was Chairman of W Bush’s Council of Economic Advisors and is an economics professor at Harvard.

Dynamic Scoring: A Back-of-the-Envelope Guide (NBER Working Paper No. 11000)

"In the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent."

Mankiw and Weinzierl note that when the staffs of the Treasury Department or Congressional committees estimate the revenue cost of tax cuts, they traditionally adopt a process known as static scoring. That is, they assume no feedback from tax changes to national income. By contrast, some observers have suggested that tax cuts can generate so much economic growth that they may more than pay for themselves. Most economists are doubtful about either such extreme. The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing.

Mankiw and Weinzierl consider the problem in light of a particular theory of economic growth, called the neoclassical growth model. This theory is the most widely taught model of capital accumulation and long-run growth, as well as a popular tool in scholarly literature in public finance. In this paper, they use the model to show how changes in taxes on capital and labor income affect national income and tax revenue. The model yields simple formulas for how the true dynamic estimates of these revenue effects differ from the traditionally used static estimates. These formulas in turn allow for some illuminating back-of-the-envelope calculations.

The authors begin with the simplest version of the neoclassical growth model, but they also consider various generalizations of the model to see which conclusions are robust. One generalization of the model includes an elastic supply of labor, so that hours worked can respond to economic incentives. Mankiw and Weinzierl find that regardless of labor supply elasticity, if capital and labor tax rates start off at the same level, cuts in capital taxes have greater feedback effects in the long run than do cuts in labor taxes.

According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing. The authors conduct some simple calculations, plugging in numbers that approximately describe the U.S. economy. They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. This means that the true revenue cost of a cut in capital taxes is only half of the cost estimated with static scoring.

These results depend on a number of key assumptions, which are open to debate. Mankiw and Weinzierl acknowledge that current studies do not afford clear guidance about how best to apply the neoclassical growth model to the actual economy. Economists will need to focus next on evaluating which generalizations of the basic model are the most salient and then on estimating the key parameters. This task, the researchers say, is urgent. In 2003, Congress adopted a rule that requires the Joint Committee on Taxation to analyze the macroeconomic impact of any major tax cut bill before the House votes on such legislation. "One conclusion is impossible to escape," say Mankiw and Weinzierl. "Difficult as it may be, the subject of dynamic scoring should remain a high priority for those economists advising lawmakers on issues of tax policy.

-- Matt Nesvisky

http://www.nber.org/digest/jul05/w11000.html

In the actual report described above, Mankiw states in the introduction:

To what extent does a tax cut pay for itself? This question arises regularly for

economists working at government agencies in charge of estimating tax revenues.

Traditional revenue estimation, called static scoring, assumes no feedback from

taxes to national income. The other extreme, illustrated by the renowned

Laffer curve, suggests that tax cuts can generate so much economic growth

that they completely (or even more than completely) pay for themselves. Most

economists are skeptical of both polar cases. They believe that taxes influence

national income but doubt that the growth effects are large enough to make tax

cuts self-financing. In other words, tax cuts pay for themselves in part, and the

open question is the magnitude of the effect.

(http://post.economics.harvard.edu/faculty/mankiw/papers/dynamicscoring_05-0407.pdf)

Jan 12th 2006:

A surprising rise in tax revenue last year has pushed this chutzpah even further. Mr Bush last week implied that the supply-side fantasy might hold after all: tax cuts do pay for themselves. “There's a mindset in Washington that says, you cut the taxes, we're going to have less money to spend,” he noted contemptuously, before claiming that recent experience suggested otherwise.

…Even by the standards of political boosterism, this is extraordinary. No serious economist believes Mr Bush's tax cuts will pay for themselves. A recent study from the Congressional Budget Office suggested that, after ten years, up to one-third of the cost of a 10% cut in income taxes can be recouped from higher economic growth. That fraction may be higher for cuts in taxes on capital alone. But it is nowhere near 100%.

http://economist.com/displaystory.cfm?story_id=5389645

July 12, 2006

All told, Mr Bush’s tax policy may have played a modest role in boosting a temporary revenue surge. But that is very different from suggesting, as the White House does, that tax cuts were the main cause or that they permanently pay for themselves. Most serious economists have long laughed at the idea that Mr Bush’s tax cuts raise revenue. Now, it seems, the president’s own boffins agree. Deep in the Mid-Session Review is a claim that the Bush tax cuts could eventually raise the level of GDP by 0.7%, a relatively modest effect, and one that itself depends on the tax cuts being financed by lower spending.

Below is the executive summary of the Congressional Budget Office report mentioned above by The Economist (Jan 12 article).

CBO

E C O N O M I C A N D B U D G E T I S S U E B R I E F

Analyzing the Economic and Budgetary Effects of a

10 Percent Cut in Income Tax Rates

DECEMBER 1, 2005

Summary

Changes in tax policy can influence the economy, and those economic effects can in turn affect the federal budget. Although conventional estimates of the budgetary effect of tax policies incorporate a variety of behavioral effects, they are, nonetheless, based on a fixed economic baseline. For that reason, they do not include the budgetary impact of any possible macroeconomic effects of tax policies.

This brief by the Congressional Budget Office (CBO) analyzes the macroeconomic effects of a simple tax policy: a 10 percent reduction in all federal tax rates on individual income. Because there is little consensus on exactly how tax cuts affect the economy, CBO based its analysis on a number of different sets of assumptions about how people respond to changes in tax policy, how open the economy is to flows of foreign capital, and how the revenue loss from the tax cut might eventually be offset. Under those various assumptions, CBO estimated effects on output ranging from increases of 0.5 percent to 0.8 percent over the first five years on average, and from a decrease of 0.1 percent to an increase of 1.1 percent over the second five years. The budgetary impact of the economic changes was estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.

—Douglas Holtz-Eakin

Bruce Bartlett “is an economist associated with supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a treasury official under President George H.W. Bush.” (source: Wikipedia). In 2006 (three years after this article) he came out with a book, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, criticizing Bush’s economic policies of cutting taxes without cutting spending, requiring huge tax increases in the future.

From National Review online, March 5, 2003:

The Laffer Curve is correct in theory — it simply shows that at a 100% tax rate or a 0% tax rate no revenue is collected. Every economist knows that this is true. But of course, we are nowhere near a 100% tax rate — nor were we in 1981 — such that one could expect an across-the-board reduction in tax rates actually to raise revenue. Ronald Reagan never said so, nor did any other responsible economist.

From National Review, April 7, 2003

Dynamic Baby Step
The CBO is improving the way it scores tax cuts.

On March 25, the Congressional Budget Office released an important study of President Bush’s budget proposal. What was novel about this study is that the CBO attempted to calculate the impact of the proposal on the economy as a whole. Normally, it assumes that even large changes in taxing and spending will have no effect whatever on such things as the unemployment rate, real growth in the economy, inflation, and interest rates, among other things.

This method of analysis has long frustrated advocates of supply-side tax cuts. They believe that holding the economy constant when calculating the effects of such tax changes exaggerates their budgetary cost, thereby decreasing their chances of being enacted by Congress. After all, the whole point of a supply-side tax cut is to increase economic growth by stimulating work, saving, and investment.

Some people believe that the inclusion of macroeconomic effects in revenue estimates is some kind of trick to make tax cuts appear costless. It is often alleged that Ronald Reagan played such a trick on the American people in 1981 by saying that the big tax cut that year would not reduce federal revenue. This is nonsense. The Reagan administration always said that the 1981 tax cut would lose large revenues and its estimates were comparable to those made by independent analysts.

Furthermore, supply-side economists who made private estimates of the revenue impact of the Reagan tax cut — estimates that did incorporate growth effects — also showed large revenue losses. For example, an estimate by economist Norman Ture of an early version of the Reagan plan showed large net revenue losses even 10 years after enactment. Economist Michael Evans came to similar conclusions.

What supply-siders always said is that the Reagan tax cut would not lose as much revenue as conventional (static) estimates predict. Economist Lawrence Lindsey, then at Harvard, concluded that when all was said and done the net revenue loss from the 1981 tax cut was about a third less than official estimates predicted. A CBO study found that it was about 25% less.

Supply-siders believe that a dynamic analysis of President Bush’s tax plan would show approximately the same thing — that the net revenue loss will be between 25% and 33% less than a static estimate would show.

Unfortunately, because of political and bureaucratic resistance, techniques for calculating the dynamic effect of tax cuts are not very far along. So the new CBO effort must be viewed as very preliminary. Nevertheless, it does support basic supply-side theory. It shows that marginal tax-rate reductions will increase aggregate hours worked, and that elimination of the double taxation of corporate profits will increase investment and productivity.

Because supply-side theory is not yet well understood at the CBO, some of the mathematical models used to estimate the effects of President Bush’s proposal are rather primitive. And some of the assumptions that the CBO made are quite unrealistic. However, under the leadership of its newly appointed director, economist Douglas Holtz-Eakin, I expect that the analysis will improve with time.

Consequently, the best way of measuring supply-side effects may be with commercial econometric models. Corporations use them to calculate the impact on sales of changes in economic growth, interest rates, and other economic variables. These models are based on past economic data and assume that people will behave in the future as they have in the past to changes in economic conditions.

CBO used two commercial models to look at the Bush plan. The best known of them, the Global Insight model (formerly the DRI-WEFA model) showed continuing positive growth effects from the tax cut. A larger economy recoups about 30% of the static revenue loss, it estimates, which sounds about right to me.

One problem with the CBO analysis is that it looked at all provisions of the president’s budget, including higher spending and those tax cuts that clearly will have no growth effect. The higher spending retards growth, while the non-supply-side tax cuts inflate the revenue loss without producing any economic feedback. If the analysis were limited only to the supply-side features of the tax plan, all of the models would show strong growth effects.

From Real Clear Politics, March 28, 2006:

Bush Tax Cuts Don't Pay For Themselves

By Bruce Bartlett

Belatedly, Republicans in Congress have become concerned about the federal budget deficit. But this is making it harder for them to find the votes to extend previously enacted tax cuts, some of which expire in 2008, and all which disappear after 2010. Tax-cut supporters are now arguing that failure to extend the tax cuts will actually cause revenues to fall, thereby defeating the goal of deficit reduction.

As the Wall Street Journal put it on March 23, "The revenue data are further proof of the success of the Bush tax cuts of 2003. The fastest way to stop this revenue windfall, and blow an even larger hole in the deficit, would be to fail to extend the 15-percent tax rate on capital gains and dividends through 2010, thus assuring a huge tax increase after 2008."

The flip side of this argument is that the 2003 tax cuts are said to be raising federal revenue because of a Laffer-curve effect. The Journal cited the "astonishing" 14.6-percent increase in federal revenue in 2005 over 2004, which it rounded up to 15 percent. It also noted that revenues in the first five months of fiscal year 2006, which began last Oct. 1, are up 10.3 percent over the same period in fiscal year 2005. No other evidence was offered.

But how likely is it that the Laffer curve is causing revenues to rise, as opposed to normal operation of the business cycle? Not much, in my opinion.

First of all, the Laffer curve came to prominence during a period when the top tax rate on dividends was 70 percent, and the rate on long-term capital gains was 40 percent. Economist Arthur Laffer correctly pointed out that a 100 percent tax rate would raise no revenue and that rates close to this would reduce revenue below what a lower rate would bring in. Given the tax rates in existence, it was plausible to argue that a reduction in the top rate and capital gains tax would raise revenue.

However, when President Bush took office, the top rate on dividends was down to 39.6 percent, and the rate on long-term capital gains was just 20 percent -- far below the rates Ronald Reagan inherited. It is very implausible that these rates were in the "prohibitive" range of the Laffer curve, such that a rate reduction would raise revenue.

But even if we grant the theory, how likely is it that the recent rise in revenue owes anything to this effect? Again, not much.

The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President (pp. 57-58) says, "Although the economy grows in response to tax reductions ... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."

Recent academic research suggests that feedback effects would offset only a fraction of the static revenue loss, that which would result from no effect on consumption or incentives. A 2004 study by Harvard economists N. Gregory Mankiw and Matthew Weinzierl found that a cut in taxes on capital might recoup 17 percent of the static revenue loss in the first three years and a cut in taxes on labor could recoup 13 percent. Mankiw served as chairman of the Council of Economic Advisers under President Bush. A study by the Congressional Budget Office in December 2005 found that a tax-rate cut would recoup at most 20 percent of the static revenue loss in the first five years.

Overall, federal revenues are just barely back to where they were five years ago in nominal terms. According to the CBO, federal receipts were $2,025.5 billion in 2000 and $2,153.0 billion in 2005. Revenues fell 1.7 percent in 2001, fell another 6.9 percent in 2002 and fell again by 3.8 percent in 2003. They didn't start to bounce back until 2004, when they rose by 5.5 percent.

Revenues as a share of the gross domestic product fell every year from 2000 to 2004, from 20.9 percent to 16.3 percent. The 2005 increase only raised revenues to 17.5 percent -- still well below their historical average of 18.1 percent of GDP. It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.

In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended. The case for extending them must be made on other grounds.

Copyright 2006 Creators Syndicate

From the New York Times:

April 6, 2007

How Supply-Side Economics Trickled Down

By BRUCE BARTLETT

AS one who was present at the creation of ''supply-side economics'' back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy.

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates -- the tax on each additional dollar earned -- as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.

The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate.

But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, ''You cut taxes and the tax revenues increase.'' Senator John McCain told National Review magazine last month that ''tax cuts, starting with Kennedy, as we all know, increase revenues.'' Last week, Steve Forbes endorsed Rudolph Giuliani for the White House, saying, ''He's seen the results of supply-side economics firsthand -- higher revenues from lower taxes.''

This is a simplification of what supply-side economics was all about, and it threatens to undermine the enormous gains that have been made in economic theory and policy over the last 30 years. Perhaps the best way of preventing that from happening is to kill the phrase ''supply-side economics'' and give it a decent burial.

It's important to remember that at the time supply-side economics came into being, Keynesian economics dominated macroeconomic thinking and economic policy in Washington. Among the beliefs held by the Keynesians of that era were these: budget deficits stimulate economic growth; the means by which the government raises revenue is essentially irrelevant economically; government spending and tax cuts affect the economy in exactly the same way through their impact on aggregate spending; personal savings is bad for economic growth; monetary policy is impotent; and inflation is caused by low unemployment, among other things.

These beliefs led to many bad economic policies. In particular, they lay at the root of stagflation, that awful combination of high inflation and slow growth that bedeviled policy makers in the 1970s. Based on insights derived from the Nobel-winning economists Robert Mundell, Milton Friedman, James Buchanan and Friedrich Hayek, the supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth.

As the staff economist for Representative Jack Kemp, a Republican of New York, I helped devise the tax plan he co-sponsored with Senator William Roth, a Delaware Republican. Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.

We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn't lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior. When President Reagan proposed a version of Kemp-Roth in 1981, every revenue estimate produced by the Treasury showed large revenue losses from its enactment, based on standard models. The independent Congressional Budget Office produced figures that were almost identical.

Moreover, we were adamant that only permanent cuts in marginal tax rates would stimulate the economy. We thought that temporary tax cuts, tax rebates, tax credits and such were economically worthless, and we strongly opposed them.

Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics -- that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon. Consequently, there is no longer any meaningful difference between supply-side economics and mainstream economics.

There is no question in my mind that we never could have overcome the stagflation of the 1970s as quickly or with as little pain as we did without the supply-side idea. But supply-side economics has done its job, just as Keynesian economics did in the 1930s. Those who campaign as its champions are fighting a fight long won -- and it is time for supply-side rhetoric to go, with its essential truths embodied in mainstream economics and its perversions discarded for good.

Bruce Bartlett, an official under Presidents Ronald Reagan and George H. W. Bush, is the author of ''Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.'

Below is from National Review editorial, June 19, 2006, after boasting about how tax revenues were up due to the Bush tax cuts:

"There is a lesson here, and it is vindicatory of the central claim of supply-side theory: Easing the national tax burden spurs economic growth, significantly mitigating the revenue loss that results from tax cuts."

Did you get that? "mitigating the revenue LOSS from tax cuts." Now, leaving aside their little weasel spin regarding supply-side theory (forgetting that supply-siders frequently claim that tax cuts from current levels [or from pre-Bush levels] would result in revenue GAINS, not just mitigating the revenue LOSS), even these guys, who are as pro-tax-cut as any people on earth, are saying that tax cuts result in revenue LOSS, albeit not as large a loss as others theorize and certainly not as large a loss as static scoring would indicate (the latter is fairly obvious since "static scoring" does not take into account ANY stimulative effect on the economy).

Below is excerpt from column by William Beach of The Heritage Foundation, Feb. 2006.

NOTE: His point is that raising tax rates slows growth, which results in a smaller INCREASE in tax revenue than would occur without that slowing effect. He’s still saying that raising tax rates INCREASES tax revenue. If that’s the case, the other side of the coin is that CUTTING tax rates DECREASES tax revenue.

http://www.heritage.org/Research/Taxes/wm994.cfm

Standard models of the economy, however, show that income tax increases are harmful to growth in employment, investment, output, savings, and even government revenues…In short, raise taxes to reduce deficits, and the result will be higher unemployment, a slower pace of economic growth, and revenues that are not rising as quickly as static scoring predicted.

Excerpt below from The Heritage Foundation by DANIEL J. MITCHELL, PH.D. (presumably an economist). NOTE: He’s saying (1) raising tax rates leads to higher government spending because they result in INCREASED tax revenue (with the POSSIBLE exception of capital gains tax cuts), and (2) “pro-growth” types of tax cuts result in less of a LOSS of tax revenue than would be calculated by static analysis (which does not consider the increased economic growth effect. http://www.heritage.org/Research/Taxes/wm992.cfm

Higher taxes encourage additional spending. There is no fixed relationship between taxes and spending. But history suggests that politicians generally will spend every penny the government collects—and then as much more as they think they can borrow without making voters nervous about deficits and the debt. Tax increases, then, almost surely have the effect of loosening the reins on government spending. In some cases, such as the 1990 tax increase, federal spending rose significantly. In other cases, such as the 1993 tax increase, spending grew by a smaller amount. But the long-term relationship of more taxes leading to more spending is unavoidable.

The tax rates/tax revenue downward spiral. If the Bush tax cuts are not extended and the economy is hit by a sizeable increase in marginal tax rates, economic performance will falter. This translates into fewer jobs, lower incomes, and diminished profits, and that means less money for the government to tax. In some cases, such as with the capital gains tax, the reduction in the “tax base” can be so great that the government collects less revenue at a higher tax rate. In most cases, though, the shrinkage in the tax base merely means that the revenue increase will be smaller—perhaps dramatically smaller—than estimated. Sadly, government revenue-estimating models are very simplistic and fail to measure any impact of tax policy changes on economic performance. As a result, politicians will fall into a rut of raising tax rates, boosting spending, and then raising tax rates again when revenues are lower than anticipated. This type of downward spiral already has caused great damage in Europe. It would be a terrible mistake to let America travel down the same path to economic stagnation and high unemployment.

…pro-growth tax cuts have a much smaller impact on tax revenues than rebates, credits, deductions, and other preferences. When tax rates are lowered and people have more reason to engage in productive activity, this results in more taxable income. Depending on the increase in taxable income and the change in the tax rate, the actual reduction in tax revenue will be lower than forecast by “static scoring.”

Below is from a February 15, 2007 piece from The Heritage Foundation, describing a recent analysis, and, of course, arguing for extension of the Bush tax cuts (EGTRRA and JGTRRA refer to the Bush tax cuts on income and capital gains, respectively). Note that even they acknowledge a revenue LOSS. And this projected loss would be even greater if the analysis assumed a permanent increase in the AMT exemption amount or indexation of the AMT brackets to inflation.

Dynamic Budgetary Effects of the Extension Plan

Extending EGTRRA's and JGTRRA's expiring provisions has a positive effect on U.S. GDP, incomes, and employment over the 10-year budget period. It also generates substantial revenue feedbacks ($295.5 billion). Ignoring the macroeconomic effects of the extension plan on individual, non-corporate business, and corporate incomes puts federal tax revenues $991.9 billion below the CBO's projected baseline levels over 10 years. Taking the dynamic effects of the extensions into account reduces the estimated revenue loss to the Treasury to $696.4 billion over 10 years.[12] In 2009 and 2010, dynamic revenue feedbacks do not exceed about $9 billion. But they more than treble in size in each of the final 6 years, reaching $56 billion in 2016.

The estimated change in federal income tax revenues would be significantly higher if not for the AMT. The extension plan does not include a permanent increase in the AMT exemption amount or indexation of the AMT brackets to inflation. Without these, an ever larger number of middle-to-upper-income taxpayers will fall prey to the AMT.[13]

Originally published in the WALL STREET JOURNAL

Monday, December 6, 1999

Martin Feldstein

Bush's Tax Plan Makes Sense

…The revenue effect of specific tax changes is of course important if we are to avoid a return to budget deficits. Any sensible estimate of the effect of tax rate reductions on government revenue would take into account their favorable impact on work effort, skill development, risk-taking and other factors that increase taxable income… I estimate that such favorable feedback effects would offset about one-third of the traditionally estimated revenue loss from cutting the top tax rate to 33% from 39.6%.