Mike Kueber's Blog

September 20, 2010

Extending the Bush tax cuts?

Currently, the biggest debate in Washington is whether to extend the 10% Bush tax cuts, which were enacted in the Jobs and Growth Tax Relief Reconciliation Act of 2003.  Obama and most Democrats want to retain the cuts for low- and middle-income individuals (those making less than $200k or for a family $250k), but to repeal the cuts for high-income individuals.  They argue that the deficit-reduction benefit of a tax increase on the rich will outweigh any possible damage to the economy caused by higher taxes.  Republicans counter that higher taxes will do serious damage to an economy that is already in a recession, and this will result in reduced revenues, not increased revenues.

I share the conservative position that it is a bad idea to increase taxes on anybody during a recession.  In fact, the consensus among economists is that a mix of tax cuts and spending increases is the best way to get out of a recession.  Thus, our current recession is not the right time to increase the income-tax rate for the rich.  But what about increasing those taxes next year? 

Unlike most Republicans, I don’t think that you can routinely increase government revenue by cutting taxes.  That defies common sense.  As an old sage once said, “That’s so stupid that only an intellectual (ideologue) could believe it.”  There are, however, unusual situations where a tax cut could result in a long-term increase in government revenues, and those situations are described by the Laffer Curve.  This is an the economic theory from Arthur Laffer suggesting that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue because of diminishing returns.  The problem with the Laffer Curve is that it doesn’t lend itself to objective analysis and, therefore, there has been no consensus about what is the revenue-maximizing tax rate – some suggest 70%; others say 20%.  The Laffer Curve was first articulated in 1974 and became a part of Ronald Reagan’s Reaganomics – i.e., supply-side economics.

Similar to the Laffer curve is the Hauser’s Law, a theory proposed in 1993 by an investment economist – Kurt Hauser.  According to Hauser, federal tax revenues in post-War America will be equal to approximately 19.5% of GDP, regardless of what the top marginal tax rate is.  In 2009, however, tax receipts dropped to 15%, and many critics believe this theory reflects past experience, but does little to predict future results.  I agree – Hauser’s Law defies common sense and is so stupid that only an ideologue could believe it.  If it were to be believed, federal government will always be approximately one-fifth of the America’s GDP.  That makes no sense.  Americans will decide how socialistic we want our government to be.  If Obama has his way, and America becomes a welfare state like Europe, I have no doubt that government receipts will exceed 19.5%, just like they do in Europe.  Although most Americans are opposed to a Europe-style economy, there is no question that those economies are not total disasters for those democracies.  Rather, the citizens are receiving the government they want and are willing to pay for.

The situation in Europe leads to my common-sense position that taxes must be considered, not in a vacuum, but rather in connection with expenditures.  Except in times of recession (when deficit spending is beneficial), the federal government should decide what government services are sufficiently important to justify taking enough money from the people to pay for the services.  As Henry Butler famously said, “There ain’t no such thing as a free lunch.”  Democrats want to provide generous government services without paying for them, and Republicans want to cut taxes without cutting generous government services.  If the federal government had to balance its budget every non-recessionary year, just like state governments do, the legislators would be forced to do their job in the right way – jointly considering taxes and spending – just like Texas legislators will have to do with this session’s $18 billion revenue-expense mismatch.     

Based on my analysis of the American tax-rate for income since 1913 (when the 16th Amendment was adopted), the current rate for high-income people is relatively low.  (See my chart below.)  Thus, in my judgment, increasing the rate would not trigger the negative-Laffer Curve or significantly damage America’s economy.  Furthermore, income data indicates that high-income people have been doing better than low- and middle-income people for several years, and therefore adding some progressivity to the rates is appropriate. 

I got into some trouble during my congressional campaign for refusing to adopt the standard Republican position that permanently cutting taxes will increase long-term revenue, and I remain convinced that there is no easy route to getting America’s fiscal affairs in order.  If cutting tax rates was a surefire way to increase government revenue, I think the Democrats would be advocating tax cuts just as hard as the Republicans.  But common sense suggests that, if a government needs more money, it needs to increase its tax rates, not decrease them.  Determining how much money is needed depends on how many government services are needed.  These are two sides to the same question.

p.s., please note in the highest tax bracket during the Great Depression – 63% and 79%.  That partially explains why conservatives believe that FDR is falsely credited with leading American out of the Great Depression.  To the contrary, his policies exacerbated a bad situation.

Tax rate in America

(married filing separately) 

Year              Highest Bracket   Lowest Bracket    # of brackets                                

1913                7% over $500k            1% under $20k            7

1914                “          “                      “          “                      “

1915                “          “                      “          “                      “

1916                15% over $2M                        2% under $20k            14

1917                67% over $2M                        2% under $2k              21

1918                77% over $1M                        6% under $4k              56

1919                73% over $1M                        4% under $4k              56

1920                “          “                      “          “                      “         

1921                “          “                      “          “                      “

1922                58% over $200k          “          “                      50

1923                “          “                      “          “                      “

1924                46% over $500k          2% under $4k              43

1925                25% over $100k          1.5% under $4k           23

1926                “          “                      “          “                      “

1927                “          “                      “          “                      “

1928                “          “                      “          “                      “

1929                “          “                      “          “                      “

1930                “          “                      “          “                      “

1931                “          “                      “          “                      “

1932                63% over $1M                        4% under $4k              56

1933                “          “                      “          “                      “

1934                “          “                      “          “                      “

1935                “          “                      “          “                      “

1936                79% over $5M                        “          “                      33

1937                “          “                      “          “                      “

1938                “          “                      “          “                      “

1939                “          “                      “          “                      “

1940                “          “                      “          “                      “

1941                81% over $5M                        10% under $2k            32

1942                88% over $200k          19% under $2k            24

1943                “          “                      “          “                      24

1944                94% over $200k          23% under $2k            “

1945                “          “                      “          “                      24

1946                91% over $200k          20% under $2k            24

1947                “          “                      “          “                      “

1948                “          “                      “          “                      “

1949                “          “                      “          “                      “

1950                “          “                      “          “                      “

1951                “          “                      “          “                      “

1952                92% over $200k          22% under $2k            “

1953                “          “                      “          “                      “

1954                91% over $200k          20% under $2k            “

1955                “          “                      “          “                      “                     

1956                “          “                      “          “                      “

1957                “          “                      “          “                      “

1958                “          “                      “          “                      “

1959                “          “                      “          “                      “

1960                “          “                      “          “                      “

1961                “          “                      “          “                      “

1962                “          “                      “          “                      “

1963                “          “                      “          “                      “

1964                “          “                      “          “                      “

1965                70% over $200k          14% under $500          25

1966                70% over $100k          “          “                      “

1967                “          “                      “          “                      “

1968                “          “                      “          “                      “

1969                “          “                      “          “                      “

1970                “          “                      “          “                      “

1971                “          “                      “          “                      “

1972                “          “                      “          “                      “

1973                “          “                      “          “                      “

1974                “          “                      “          “                      “

1975                “          “                      “          “                      “

1976                “          “                      “          “                      “

1977                “          “                      0% under $1600          26

1978                “          “                      “          “                      “

1979                “          “                      “          “                      “

1980                “          “                      “          “                      “

1981                “          “                      “          “                      “

1982                50% over $43k            “          “                      13

1983                “          “                      “          “                      “

1984                50% over $81k            “          “                      15

1985                “          “                      “          “                      15

1986                “          “                      “          “                      “

1987                38.5% over $45k         11% under $1500        5

1988                28% over $113k          15% under $15k          4

1989                “          “                      “          “                      4

1990                “          “                      “          “                      4

1991                31% over $41k            15% under $17k          3

1992                “          “                      “          “                      “

1993                39.6% over $125k       “          “                      5

1994                “          “                      “          “                      “

1995                “          “                      “          “                      “

1996                “          “                      “          “                      “

1997                “          “                      “          “                      “

1998                “          “                      “          “                      “

1999                “          “                      “          “                      “

2000                “          “                      “          “                      “

2001                “          “                      “          “                      “

2002                38.6% over $153k       10% under $6k            6

2003                35% over $156k          10% under $7k            “

2004                “          “                      “          “                      “

2005                “          “                      “          “                      “

2006                “          “                      “          “                      “

2007                “          “                      “          “                      “

2008                “          “                      “          “                      “\

2009                “          “                      “          “                      “

2010                “          “                      “          “                      “

2010                                        2002

10% up to $8375                                 10% up to $6000

15% up to $34k                                   15% up to $23,350

25% up to $68,650                              27% up to $56,425

28% up to $104,625                            30% up to $85,975

33% up to $186, 825                           35% up to $153,525

35% over $186,825                             38.6% over $153,525