Since many liberals are calling for new massive tax increases as a part of the debt ceiling deal congress is fighting over right now I figured it might be a good time to review some of the results of the last major attempt at tax reform. The Bush tax cuts that is.
So, what exactly does the data show us about how they performed?
First off we need to understand that the revenues resulting from tax structures are completely dependent on the state of the economy. Of course the opposite is viewed by everybody from across the political spectrum to be true as well. To make things fair I’ll be comparing the best year in terms of (inflation adjusted to 2005 dollars) tax revenues from the pre-Bush tax cuts era and our current era.
Following this rule the best pre-Bush tax cuts year on record for (inflation adjusted) tax revenues was under Clinton in 2000. The best year on record for (inflation adjusted) tax revenues under the Bush tax cuts was 2007.
Now one of the most common standards used by liberals (and even some conservatives) for how well a tax structure is doing is how much money it brings in as a percentage of GDP. In other words many judge a tax structure by how much of the economy it eats up.
This. Is. Absurd.
A tax structure ought to be judged by how many (inflation adjusted) dollars it can bring in. Ideally you could even go a bit further and say the best tax structure brings in the most revenue with the smallest burden on the economy. After all shouldn’t the goal of an efficient tax system be to get the most money with the least affect on the economy?
By either of these standards 2007 bests 2000. In 2007 tax receipts (in 2005 dollars) totaled $2.414 trillion where as 2000 tax receipts (in 2005 dollars) only totaled $2.310 trillion. Additionally in 2007 taxes were only 18.5% of GDP but in 2000 they were 20.6% In other words the best year after the Bush tax cuts was better than the best year before them.
The fact is in 2007, under the Bush tax cuts, we had a larger economy AND greater tax revenue than at any time since at least 1940 which is as far back as the Tax Policy Center keeps score.
We could certainly go around in circles forever debating the pros and cons of theoretical tax systems and I certainly wouldn’t say that our current tax structure, even post Bush tax cuts, is the ideal. However, it is extremely important to take a look at how real world reforms have performed and exactly what that means. This time around the facts clearly show us that a real world conservative supply side tax reform has produced a better, more efficient, and more effective tax system.
UPDATE: For a slightly revised and expanded version of this theory check out my op ed over at Human Events!