Presumably because of the Big, Beautiful Bill (BBB), progressives on Twitter have been railing against so-called “Trickle Down Economics.” In the present post, I want to correct the record on US tax cuts and whether they “pay for themselves.” What you’ll often see is critics citing the budget deficit going up, as if that’s proof that a tax cut “for the rich” did not eventually bring in more revenue. I’ll first cite a specific example of economist Justin Wolfers doing exactly this, and then I’ll show the actual record of tax receipts for the periods he cites.
Below I reproduce Wolfers’ tweet (and my incredulous reaction):
My tweet reaction should be self-explanatory, but just to make sure: Notice that in his critique, Wolfers isn’t even attempting to prove his claim. He is pointing to the US budget deficit (as a percent of GDP, too, which is yet another move that weakens the link to his actual point) as a test of whether historical tax cut episodes “paid for themselves.” Now notice in particular that the chart he grabbed shows the tax cut episode and the following decade. This is important, because there were sharp recessions involved in these three episodes, which arguably would make it unfair to check in the following year or two after a tax rate reduction.
Before looking at the actual US tax revenue data, let’s first explain the so-called Laffer Curve. This is a graphical demonstration from supply-side guru Arthur Laffer, who first drew it on a cocktail napkin in 1974 when discussing tax policy with Don Rumsfeld in a restaurant. (The story of that night comes from Jude Wanniski, with Laffer himself not being able to remember the details, as explained here.) Here is a canonical version of the Curve, from the Laffer Center itself:
The crucial insight behind the curve is this: When the government raises the income tax rate applied to incomes, there are two effects: (A) The amount of revenue raised from a given “tax base” increases. But also (B) Other things equal, the “tax base” will shrink.
Consider the two extremes: At a tax rate of 0 percent, the government will of course raise $0 in tax revenue. But on the other hand, at a tax rate of 100 percent, the government will also raise $0 in revenue, because nobody will have an incentive to earn an income (or at least to report it).
Now I personally worked for Arthur Laffer (in 2006-07) and can attest that he was not saying that “every tax cut pays for itself.” He was also not saying, “The optimal tax rate is the one that maximizes government tax receipts.” It’s true that many people over the years have claimed that this is what Laffer and/or his Curve imply, but they are simply mistaken.
And to be clear, when I worked for Laffer I had occasion to go back and re-read all of his early papers from the Reagan years when the supply side revolution was just beginning: Laffer wasn’t merely changing his tune later on. No, from the beginning, he was merely arguing that you had to take incentives into account, and that it was too imprecise to refer to “tax cuts” or “tax hikes.” You had to be more specific about “tax rate reductions” or “tax rate increases,” since that was not the same thing as the effect such a policy would have on revenue collection.
With that context, let us naively look at the history of federal tax receipts for the three episodes Wolfers highlighted in his tweet. I saw “naively” because ultimately, we want to know the “counterfactual”; we want to know what tax receipts would have looked like, in the absence of the “tax cuts for the rich” that the critics lambaste. But, because Wolfers seemed content to simply look at the actual record of budget deficits, let us do the same with the simple—and obvious—improvement by looking at the actual record of tax receipts.
My source is the White House historical budget tables from the Office of Management and Budget (OMB). First let’s look at the famous Reagan episode:
Reagan was elected in November 1980 and the famous Kemp-Roth tax cuts became effective in August 1981. Reagan’s successor (George H.W. Bush) was sworn in in January 1989. So people can quibble about how to assign responsibility to the years shown in the table (we also have to worry about fiscal versus calendar years), but for our purposes that is a moot point: Clearly, federal tax receipts went way up during the 1980s, basically doubling. Yes, the deficit got worse under Reagan’s tenure, but that was because spending grew even faster than receipts during the “Decade of Greed.”
Next we turn to George W. Bush, who was in office from January 2001 – January 2009. Here’s how the federal budget fared under his tenure:
Here the case isn’t as much of a slam dunk as it was for Reagan, but the first column in the table shows how wildly misleading Wolfers’ chart was for W as well. By the year 2005, federal revenues were higher than they had been when Bush implemented his tax rate reduction. Again, the large deficits that occurred on W’s watch were due to spending growth, not a fall in receipts.
I should emphasize at this point that it would be unfair to look at the reduction in revenues in, say, 2002 and 2003, or again in 2009, and blame those on “tax cuts.” Those were obviously in part due to economic calamities that had nothing intrinsically to do with US fiscal policy. In other words, even if the Bush Administration (with Congressional origination of course) hadn’t “cut taxes for the rich” in 2001 and 2003, revenue presumably would have taken a hit because of the dot-com crash and the 9/11 attacks. (Indeed, some supply siders might argue that the hit to revenue might have been even worse without the early Bush tax cuts, because the economy would have recovered more slowly.)
Finally let’s look at tax receipts in the wake of Trump’s signature tax reduction in early 2018:
In this case, it’s crystal clear that federal revenue was not strangled because of the fiscal moves during the first Trump term. Even with the lockdowns of 2020, federal revenue didn’t fall significantly, and six years after the policy was implemented, federal tax receipts were 48 percent higher.
Look again at Wolfers’ chart, and how it dealt with Trump’s quote about his cut being “revenue neutral when you add growth,” by juxtaposing it with the federal budget deficit. Look now at the table above. Obviously, the reason the deficit exploded was that spending went through the roof. You can say that was a good idea or a bad idea, and you can say Joe Biden should get the credit for his great economic policies, but what you can’t say—at least if you are honest with your followers on Twitter—is that Trump blew a hole in the budget with his “giveaways to the rich.”
In summary, I want to again emphasize that the above analysis is hardly scientific. In reality, one would at least want to control for various factors, to try to tease out the implications of changes in federal tax policy on tax receipts.
But since the progressive critics of “tax cuts for the rich” and “trickle-down economics” so often rely merely on the history of budget deficits to make their (dishonest) point, in this article I simply showed what happened with tax receipts for the three episodes in question.
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