Tax-cut dogma failing field testing

In politics, when theory becomes theology, there’s the devil to pay.

For the Republicans who’ve run Washington for most of the last decade, the One True Faith actually has little to do with anything Dr. James Dobson talks about.

The faith boils down to two words: Cut taxes.

For the true believer, this is the answer to all of life’s little twists. Economy slumping? Cut taxes. Economy humming? Cut taxes. America at peace? Cut taxes. America under attack? Cut taxes.

Faith, the Bible tells us, “is assurance of things hoped for, a conviction of things not seen.”

The tax-cutter’s faith demands apostolic certitude about a hopeful assertion: “Tax cuts pay for themselves.”

In other words, the economic growth that tax cuts spur will, in short order, replace any lost revenue.

Talk about a conviction of things not seen.

One-time maverick Sen. John McCain vowed his fidelity to the creed during a Republican candidates’ debate last month: “The fact is the (Bush) tax cuts have dramatically increased revenues.”

You can almost hear the implied corollary: Just like Reagan’s cuts in the ‘80s. You hear similar claims all over the Republican firmament.

Here’s the fascinating thing: Federal budget numbers and tax history don’t support this rhetoric at all. In fact, they debunk it soundly, for the Bush era and the mythic Reagan one.

One thing Bush defenders say is true: Federal tax revenues have perked up dramatically in the last year. This has spurred triumphal rhetoric among people desperate for good news to brag on.

The details: In 2000, Bill Clinton’s last year in office, federal income tax revenues were $1.212 trillion – $1 trillion and change from personal income taxes, $207 billion from corporate.

After the Bush tax cuts, combined income tax revenues dipped below $1 trillion in 2002 through 2004, fueling frightening, China-financed federal deficits. The years 2001-2003 saw the first consecutive three-year revenue decline since the Depression.

In ‘05, revenues crept back up to 2000 levels (in non-inflation-adjusted dollars). In 2006, they finally moved beyond 2000 receipts, up to $1.398 trillion, thanks to a huge leap in corporate tax revenues. That suggests where most of this economy’s rewards have flowed.

See?, the tax-cut faithful crow. We told you. Tax cuts pay for themselves.

Not really. The claim is theology, not economics, and riddled with faulty arithmetic.

First, to prove that claim, it’s not enough to show that current revenues now top the 2000 number. They would have to top the figure that the old tax rates would generate now, given inflation (however modest), rises in the Gross Domestic Product, and growth in the number of taxpayers.

To argue that, you’d have to posit that every last penny of increase in GDP over the last six years was due to tax cuts. So, regular business cycles had nothing to do with it? Technology and productivity? Massive deficit spending?

In fact, only glib Republican politicians, and their followers, seem to believe tax cuts pay for themselves. Serious conservative economists, even ones fond of tax cuts as a policy, don’t claim that.

For example, N. Gregory Mankiw, former chair of President Bush’s Council of Economic Advisers, calculates that the “replacement effect” of tax cuts ranges from 17 percent to 50 percent, depending on the type of tax.

Understand, I don’t deny for a second that tax cuts can spur growth. They often do. When a tax burden is truly uncompetitive, the revenue rebound from a well-targeted cut can be stunning. Just look at the impact of Philadelphia’s smart real-estate tax abatement for new construction, which produced a surge in real-estate-transfer taxes.

But federal tax rates just aren’t that burdensome. And federal taxes aren’t as easy for businesses to escape as Philly is. So federal tax cuts don’t spur enough growth to replace all the lost revenue.

The resulting gap, supply-side economists instruct, should be closed through budget cuts. Easy for them to say. Here’s what elected officials discover when they try to enact cuts that large: The American public really, really wants government to do most of the things government does. They don’t want austerity.

Trapped by their delusions, Republican governments have fallen back on a bad remedy: deficit spending.

Bush did it. So did Reagan. The difference is Reagan recognized the problem and altered course. This is where the gap between myth – Reagan cut taxes and the economy boomed – and reality crops up. In 1982, Reagan heeded the howls of his budget director, David Stockman, about deficits. He walked back some of his tax cuts. In inflation-adjusted terms, it was a bigger hike than Bill Clinton got passed in 1993. Reagan next approved a major increase in payroll taxes to stabilize Social Security.

So, you see, the fabled Reagan economic boom actually picked up steam after two very large tax increases. A similar expansion occurred after the Clinton tax package.

The real fiscal lessons of the last 25 years are these: Tax cuts based on theology produce deficits. Tax hikes based on genuine public needs don’t prevent economic growth.