Political Economics

As we approach the upcoming elections we hear some favorite myths of both the left and the right.  Today I’ll look at a favorite myth that is trotted out by supply side believers on the right.

Does lowering income tax rates produce more income tax revenue?  Below is a chart of historical income tax data from the Office of Management and Budget (OMB) – click to view larger image in separate tab.  After the Kennedy era tax cuts, revenue increased.  After the Reagan tax cuts, revenue initially decreased.  The Clinton era tax increases clearly show an increase in revenues.  The Bush era tax cuts clearly show a decrease in revenues.

Does lowering or raising tax rates produce more revenue? Increases or decreases in revenue may have more to do with the economy or rising asset values (capital gains taxes) than tax rates. Still, some conservatives will continue to insist that lower tax rates produce more revenue. The justification for their assertion is to look at TOTAL federal revenue, including social security taxes, to make their point. This is a sleight of hand argument since Social Security tax revenue is not affected by income tax rates but it is the only way that conservative supply side believers can make their point. They can only hope that their audience doesn’t look too closely at the facts – at least not until after the election.

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