David R. Henderson  

Krugman: Only a "Small Piece" of the Tax Cuts Were for the Rich

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Often over the last few years, President Obama has blamed the Bush cuts for a large part of the deficit. He's right. But he often gave the impression that they went primarily to "the rich." Of course, he didn't mean the rich; he meant high-income people, which is not always the same. Many of his supporters played along and one of them was Paul Krugman. I'm not saying that Paul Krugman ever lied or even said anything untrue about this issue (although he may have), but he, like Obama, left the impression that "the rich" got most, or at least a disproportionate share, of the overall Bush tax cut.

Many critics of the Bush tax cuts actually did make the claim that the taxes of high-income people (aka incorrectly as "the rich") fell by a higher percent than the taxes of low-income people.

Here's what I wrote in a review of Alexander J. Field's excellent book, A Great Leap Forward: 1930s Depression and U.S. Economic Growth, about Field's mistaken reading of the Bush tax cuts:

Field also drops his careful methodology in addressing George W. Bush's tax policy. Field writes that Bush's 2001 tax cuts "allowed disproportionate reductions in taxes to upper-income households." The author seems to imply disproportionately high, and he confirmed in an e-mail that this is what he means. In fact, though, for all the Bush tax cuts (in 2001, 2002, and 2003) combined, the percentage reduction in taxes for upper-income households was less than the percentage reduction for lower-income households. The second-lowest quintile, for example, had its taxes cut by 17.6 percent whereas the highest quintile had its taxes cut by about 11 percent. I don't have data for the 2001 tax cut alone, which is what Field's claim is about. But because the 2002 and 2003 tax cuts were aimed disproportionately at high-income people, it follows that the 2001 cut alone had to have been even more tilted to lower-income people than the above percentages suggest.

Why do so many people, including Field, think differently about this important issue? My guess is that it's because the media emphasized the absolute size of the tax cuts that higher-income people got. In a progressive tax system, with higher marginal tax rates for higher incomes, a given percentage tax cut will cut taxes of the people who pay a lot in taxes much more than it cuts taxes for people who pay only a little.


Finally, it's nice, although a little late in the game, to see Krugman explicitly say that only "a small piece" of the Bush tax cuts was for high-income people. It's at about the 7:05 point of this video.


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CATEGORIES: Taxation



COMMENTS (14 to date)
R Richard Schweitzer writes:

In all these discussions about "tax cuts," which are really about adjustments of marginal tax rates and elimination of the income tax requirements at certain levels of earnings, the effects on revenue receipts are totally ignored – totally, as in the above discussion.

If the purpose of taxation is to provide for the functions of governments (of course legislation has not been limited to that purpose) then the changes in the formats of taxation, by changes in marginal rates, or otherwise, should be judged by the effects on the revenues provided for the functions of government. Is that being done?

As I recall the records of government revenues, in the year of the enactment of the changes in marginal tax rates, etc. designated as "Bush tax cuts," the federal tax revenues declined slightly, thereafter revenues from the resulting tax structure which kicked in about 16 months later, produced substantial and accelerating increases in revenues for the functions of government.

Why is the effect of taxation modifications on the actual revenue receipts of governments not given prominent attention in all discussions about changes in marginal rates or income classifications?

Bob Murphy writes:

It's been a while since I looked at the numbers, David, but I definitely think you're right. In fact I liked Bruce Bartlett's thesis in 2006 (?) when he said the Bush tax cuts weren't very good from a supply-side perspective. I.e. if you're going to cut taxes (in a static calculation) by $x billion, do it by across-the-board rate reductions or even better yet, corporate rate reductions etc. Instead it was more of a demand-side tax cut design.

egd writes:
Why is the effect of taxation modifications on the actual revenue receipts of governments not given prominent attention in all discussions about changes in marginal rates or income classifications?
You're assuming the premise - that taxation is about revenue.
Aaron Phipps writes:

This is clearly a function of public perception. It also interests me that even though most of us consider the proportional tax rate a measure of fairness, the majority of reports were focused on lump sums, not rates.

nazgulnarsil writes:

Obama is on record stating that taxes are about fairness and that they would increase taxation even if it decreased revenue. You are not fighting the same fight these people are.

Bostonian writes:

What does David Henderson or Bryan Caplan think the Republicans should do about the "fiscal cliff"?

Libertarians prefer a smaller government, but if we are going to have a big one, I don't think only the rich should pay for it, both for reasons of fairness and because broad taxation may restrain the desire for spending growth. By this logic it would be better to let all the Bush tax cuts expire than to only let the higher-bracket cuts expire.

Bill writes:
Often over the last few years, President Obama has blamed the Bush cuts for a large part of the deficit. He's right.

What deficit are we talking about? The $1.4 trillionish deficits since 2008 (of which the tax cuts were a small part) or the far smaller deficits of 2002-7 where compassionate conservatism increased spending? I can't see how to place the lions share of the blame for deficits around the neck of reduced tax rates.

David R. Henderson writes:

@Bill,
I can't see how to place the lions share of the blame for deficits around the neck of reduced tax rates.
Nor can I. Which is why I said "a large part," not the lion's share.

Ann S writes:

I read your review and was surprised that it didn't say anything about why the author chose such a macabre title. Field seems to be arguing that the 1930s were far better than anyone realized, setting the stage for later prosperity. So why compare it to the deliberate massacre of millions?

Even if we ignore the deliberate starvation of millions in China's Great Leap (letting peasants starve while the warehouses were full of food and they were exporting grain), there's still the enormous waste of the backyard furnaces, melting down metal plows, door handles, etc. to make worthless lumps; the silly but deadly farm innovations such as deep plowing and planting rice closer together plus planting rice in Tibet; and the nonsense about people killing all the birds that they could find, only to discover afterwards that this allowed insects to get out of control. This book's title is a bizarre comparison even if we overlook the shocking death toll of the infamous Great Leap.

The story of just how stupid Mao's reforms were is told in the book Hungry Ghosts by Jasper Becker. I highly recommend it.

This book's title reminds me of people who say 'let a thousand flowers bloom' as if that's a phrase with pleasant, open connotations.

Shayne Cook writes:

@ R Richard Schweitzer:

I believe I can provide a response to the question you pose in your first comment here (although I think you already know the answer). It comes in the form of a citation from a recent The New Yorker article by Elizabeth Kolbert (linked to from Greg Mankiw's Blog) - as follows:

It’s that, as Washington edges toward the fiscal cliff, it has become obvious to just about everyone, except maybe House Republicans, that Washington needs more revenue. [emphasis mine]

There is your answer, at least from the likes of Kolbert and Mankiw - "Washington needs more revenue." I might point out that Kolbert's assertion that "Washington needs more revenue" follows logically (in her mind and Mankiw's) from the devastating effects hurricane Sandy had on New York and New Jersey recently - and further exemplifies the "need" for "carbon taxes". But, global warming aside, "Washington needs more revenue."

Just now, the U.S. economy has a non-trivial part of its potential Labor force AND a non-trivial amount of its potential Capital "benched", "side-lined" or if you prefer the term, "unemployed". I rather prefer the term, "unproductive". And as Mulligan and Roberts have researched and discussed, Washington seems content to exorbitantly compensate Labor to stay unproductive (benched, side-lined, unemployed). Erstwhile, the Fed and Treasury compensates Capital (not exorbitantly) to remain unproductive - via interest payments on reserves and risk-free debt. And of course in order to sustain continued compensations to unproductive Labor and Capital to induce them to remain unproductive, "Washington needs more revenue".

I'm not a "House Republican", but I must be a rather mindless dolt. I can't help myself believing that if Washington were to actually stop compensating Labor and Capital for being unproductive, that they both might just get together and become productive. I suppose it's my own naivete, but I was under the impression that Labor and Capital could be combined to produce wealth. Turns out, according to Kolbert, Mankiw and "just about everyone", that Washington is really the source of wealth, and in order for us all to actually be wealthy, "Washington needs more revenue."

I do hope that answers your question.

Seth writes:

"He's right."

@David - I'd like to know why you think this.

First, do you have references that show multi-year revenue elasticity to tax rate changes? If so, I'd be interested in looking at it. I've seen this discussion so much with so little evidence used to support it.

Second, even if you do, I think that blaming the deficit of on revenue changes assumes government spending is fixed and cannot be changed.

Let's say I have a bad spending habit that I support with two jobs. If I lose one job, but continue spending the same I could blame my deficit on the loss of the job. But, my Mom would point out the problem with my judgement by telling me I could have spent less to avoid the deficit.

So, in that sense, it never seems correct to blame a deficit on changes in revenue, especially in normal ranges where revenues as a % of GDP only varies by a few percent one way or the other. There's only one worthy culprit -- spending.

David R. Henderson writes:

@Seth,
First, do you have references that show multi-year revenue elasticity to tax rate changes? If so, I'd be interested in looking at it. I've seen this discussion so much with so little evidence used to support it.
No. But remember that a large part of the tax cut was the increase in the child tax credit from $500 to $1000. This cut would have a pure income effect, causing people to work less. Another large part was the dropping of part of the 15% bracket to 10% for a range of income. Most earners are in higher brackets and so again, a substantial cut in taxes with just an income effect, not a substitution effect.

Second, even if you do, I think that blaming the deficit of on revenue changes assumes government spending is fixed and cannot be changed.
I didn't blame the deficit entirely, or even mainly, on revenue changes.

Let's say I have a bad spending habit that I support with two jobs. If I lose one job, but continue spending the same I could blame my deficit on the loss of the job. But, my Mom would point out the problem with my judgement by telling me I could have spent less to avoid the deficit.
You won't get any disagreement from me.

Seth writes:

@David- Thanks for the response.

I'd like to revise my "Second..." comment to, I think that blaming any of the deficit on revenue changes assumes government spending is fixed and cannot be changed.

Put another way, if you don't disagree with my "two jobs" statement, how do you assign any blame of the deficit to revenue changes?

Michael Butler writes:

There is considerable amount of controversy over who benefited from the tax cuts and whether or not they have been effective in growth. Supporters of the proposal of lower taxes have said that the tax cuts increased the pace of economic recovery and job creation. On the other hand, others of the cuts asserted that lowering taxes on all citizens, including the rich, would benefit all and would actually increase receipts from the wealthiest Americans as their tax rates would decline. Many have criticized Bush for his tax cuts, but I feel that they were necessary in his current circumstances. Thanks.

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