Taxes and Growth

TAXES AND GROWTH….Captain Ed thinks E.J. Dionne slipped up today when he claimed that George Bush’s 1990 tax increase helped to “set off a decade of fiscal responsibility and exceptional economic growth”:

Dionne leaves out two important points. The first fact omitted is that the tax increase in 1990 resulted in a sudden recession….In fact, the increased rates flattened tax receipts; it did not result in any significant increase to the Treasury.

That’s a remarkable thing, isn’t it? A tax increase signed in November was apparently the cause of a recession that had started four months earlier. Somebody tell Einstein.

In fact, Dionne is correct. Bush Sr’s tax increase came after the 1990 recession had already started, and it was the recession that pushed down tax receipts. When the recession ended, Bush’s tax increase helped drive up revenue. Bill Clinton’s subsequent 1993 tax increase drove up revenue even further, and that, combined with a good economy and some fiscal discipline, finally resulted in a balanced budget five years later.

Tax increases make tax receipts go up and tax cuts make them go down ? relative to where receipts would be if no action had been taken, of course. The effect isn’t obvious if you increase taxes during a recession or cut them during an expansion, but it’s true nonetheless. Remember: we didn’t grow our way out of the Reagan tax cut of 1981. We taxed our way out of it.