Lowered rates have meant a lot less tax revenue, not more. That's a plain fact. America, we have a revenue problem.

By David Cay Johnston
johnstonstake@tax.org

We take you now to the official data for important news. Federal tax revenues in 2010 were much smaller than in 2000. Total individual income tax receipts fell 30 percent in real terms. Because the population kept growing, income taxes per capita plummeted.

Individual income taxes came to just $2,900 per capita in 2010, down 36 percent from more than $4,500 in 2000. Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010.

Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

Payroll taxes increased slightly overall, but slipped per capita because the nation's population grew five times faster than the number of people with any work. The average wage also declined slightly.

You read it here first. Lowered tax rates did not result in increased tax revenues as promised by politician after pundit after professional economist. And even though this harsh truth has been obvious from the official data for some time, the same politicians and pundits keep prevaricating. Some of them even say it is irrelevant that as a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.

No matter how many times advocates of lower tax rates said it, tax rate cuts did not pay for themselves, did not spur economic growth, did not increase jobs, and did not make America better off.

Now that the news has been broken, let's see how many political leaders start speaking facts instead of fairy tales. And let's also watch to see how many Washington reporters, news anchors, talk show guests, and syndicated columnists use the actual figures. It's called holding politicians accountable, and it used to be a mainstay of journalism, where the first rule is to check it out and the second is to cross-check until you know what is going on and can give context.

The tables accompanying this column should be easy enough to read and turn into graphics for television, newspapers, and magazines, not to mention all those blogs and digital journals.

So how soon will we see Washington journalists holding politicians accountable for what they say about taxes, tax rates, revenues, economic growth, and jobs?

Here's some advice: Don't hold your breath. Washington has become a city of ideological marketing, where those who would note that the emperors have no facts are unwelcome in their own newsrooms. It is a city where access matters most and those who ask tough questions don't get access.

Just as real Mad Men persuaded millions of men to put that greasy Brylcreem™ in their hair and convinced many more that cigarettes make you healthier, pure nonsense about tax cuts spurring growth and paying for themselves gets repeated and replayed and regurgitated as if it had some basis in reality. But Washington is the marketplace of ideas and governance, not the marketplace of products. Lies about taxes sold by people with no regard for facts are at least as dangerous to our society as cigarettes are to smokers.

Consider this nonsense from the syndicated column by Thomas Sowell, who holds the Rose and Milton Friedman chair at the Hoover Institution. Sowell at least hedged a bit when he applied the word "often," writing in December:

High tax rates on paper, that many people avoid, often does not bring in as much tax revenue as lower tax rates that more people actually pay, after it is safe to come out of tax shelters and earn higher rates of taxable income.

But two months later, this former UCLA economics professor seems to have made up his facts, writing in his February column that "in each case, going back to the '20s, the reduced tax rates have led to increased tax revenues for the government."

On the radio and television, I hear this sort of falsehood posing as fact all the time, sometimes by people who cite Sowell. It was true in the century past, and for limited times, that tax rate cuts were followed by more economic growth and increased revenues.

But that has not been true in this century. And some tax increases have been followed by economic growth, a fact Sowell neglected to mention. Over time, as the facts have mounted, the leaders of the "tax cuts good, taxes bad" school have started moving from the unsupportable to the cleverly worded. Consider this quite typical 2003 report from Daniel J. Mitchell, then at the Heritage Foundation and now at the Cato Institute:

There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and "rich" taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden -- a consequence that should lead class-warfare politicians to support lower tax rates.

Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to "soak the rich," the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.

One of the best measures of who is worth listening to is whether their ideas stand the test of time. Reality has not been kind to Mitchell's views, making hash of his words in just a few years. Yet instead of recognizing reality, Mitchell has gone even further into fantasyland. Recently he mused favorably in The Philadelphia Inquirer about a federal budget of $450 billion, nearly 90 percent smaller than now. The figure he cited favorably is far less than current spending just on defense (all in, more than $1 trillion annually), Medicare and Medicaid (almost $850 billion), or Social Security (more than $725 billion).

I agree with Mitchell that we could do a lot to cut federal spending, but what Mitchell argues for is the equivalent of cutting off the body because it offends, and imagining that the head could survive the assault and go on to think with greater clarity once all those unnecessary parts had been shed.

Mitchell's tax ideas are great if you want a government with no money to track al-Qaida's money or under which our food-borne illness rate (now 21 times that of France) would make death by salmonella rank with cancer and heart disease in the mortality statistics. In Mitchell's ideal America, we would not have a cent for scientific research, a foundation of wealth creation in the future, as the governments of China, India, Korea, and most of the rest of the civilized world understand.

In 2007 and in the 2008 presidential campaign, Sen. John McCain, R-Ariz., repeatedly stressed: "The fact is, the tax cuts have dramatically increased revenues."

No, senator, they have not. The question is how can you not know that?

But sadly, McCain's statements are just tired illustrations of a serious problem. In Washington the principles of advertising -- make it simple, make it attractive, and say it over and over again until the jingle is embedded in millions of minds -- have supplanted the rhetoric and reasoned compromises of the Framers. War is peace. French fries are healthy. Lower tax rates mean more revenue.

Right after the midterm elections, when false claims that lower tax rates increased revenues helped win votes, Fox News captured the lockstep approach perfectly in a piece on its website about how Republican leaders were "on message."

Notice these almost identical quotes from the Sunday morning talk shows five days after the midterms:

We don't have a revenue problem. We have a spending problem.
                             -- Senate Minority Leader Mitch McConnell, R-Ky.

Washington does not have a revenue problem. It's got a spending problem.
                             -- House Majority Leader Eric Cantor, R-Va.

We do not have a revenue problem. We have a spending problem.
                             -- House Budget Committee Chair Paul Ryan, R-Wis.

I think it's not a revenue problem; it's a spending problem.
                              -- Sen. Rand Paul, R-Ky.

As framed, these advertising lines are matters of opinion, but how many Americans recognize them for what they are -- opinions, not facts?

Senate Finance Committee ranking minority member Orrin Hatch, R-Utah, did not quite make things up when he took to the Senate floor on Valentine's Day. Hatch's words are a sublime example of being accurate and untruthful at the same time, straight out of the sins-of-omission playbook:

   
Deficits continue to grow in spite of increased revenues. By CBO estimates, federal revenues in 2011 will be $123 billion (or 6 percent) more than total revenues recorded two years ago, in 2009. This increase in federal revenues for 2011 includes the net effect from a one-year across-the-board reduction in payroll taxes. The important fact here is that revenues have increased over the past two years, and the deficit has still increased. Our deficit and debt problems are not being driven by tax relief.

Revenues go up when the economy recovers from a recession, like the Great Recession that gave us the worst economic performance since the end of the Coolidge and Hoover years.

What Hatch did not say is that the Congressional Budget Office estimates real economic growth averaging just 2.5 percent annually for 2010 and 2011, not the kind of above-average performance that we usually experience after a downturn. The two-year growth rate is almost one-third below the 3.6 percent average annual real growth rate for the half-century from 1950 to 2000, but it is better than the measly 1.6 percent growth rate from 2001 to 2009.

To get an idea of what a disaster the falling-tax-rates decade known as the aughts was, imagine if the disastrous economic growth of that decade had been the actual record since 1950.

The 2010 GDP of almost $14.7 trillion would have come in at less than $6.5 trillion, or 56 percent lower. Our per capita income would be $21,000, not $47,500. That would have moved us down from 10th in the world to 34th, sandwiched between Equatorial Guinea and Portugal, according to the latest CIA World Factbook.

Yet nonsense about taxes and revenues is increasing, not decreasing. So let me nominate for revenue whopper of the year a statement by Rep. Steve Scalise, a Louisiana Republican. Scalise wants to let oil companies get free oil because Clinton administration bureaucrats failed to properly prepare contracts for Gulf Coast oil leases. Those contract mistakes shock the conscience.

The contract error will cost our government about $53 billion, a mighty windfall for ExxonMobil, Shell, ConocoPhillips, Chevron, and BP.

Scalise took to the House floor on February 18 trying to make sure the oil companies get their oil without paying for it, saying that "the second largest source of federal revenue next to income taxes is royalties that are paid by oil companies." (See this C-Span video, starting at 7:16:43.)

False, Congressman. Patently, ridiculously, shamefully false.

Oil royalties are such a small source of federal revenue that they do not even show up in the basic federal revenue data. Oil and gas royalties come to about $1 billion a month, a fraction of 1 percent of annual federal revenues, a fact that Scalise may not have noticed as he relied on oil and gas companies for the largest share of his reelection campaign funds.

When members of Congress will fight to protect a $53 billion mistake that benefits one industry, giving away our commonwealth for free, it is not just unconscionable. It is part of a pattern of wrecking our government and our economy for short-term political gain. And in this one, the oil companies won the day in the House.

There is a simple, factual way to describe what is happening to our government: We have a revenue problem.

This column was first published by Tax Analysts in Tax Notes on Feb. 28. © Tax Analysts 2011. All rights reserved.

 

David Cay Johnston, a Pulitzer prize winner, is a columnist for Tax Analysts and teaches the law of the ancient world at Syracuse University’s law and graduate business schools. The Fine Print, the third book in his series about the American economy, is scheduled to be published in 2011 by Penguin. E-mail: johnstonstake@tax.org

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