Monday, November 28, 2011

Can Tax Cuts Increase Government Revenue?

Data Related to Taxes and Revenue:

From 2001-2007, in the face of cuts in marginal taxes, we saw tax revenues surge by 30%, while the deficit was reduced by 61% from 2004-2007.

A visualization of the changes in tax revenue and deficits during the 1980's (after sharp drops in marginal tax rates) as well as the more recent period from 2003-2007 

Published Research:

"The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks", by Christina Romer and David Romer.

Finds that a $1 decrease in taxes may lead to a $3 increase in GDP.

Lindsey, Lawrence B. 1987. "Individual Taxpayer Response to Taxcuts, 1982-1984." J. of Public Economics 33 (July) 173-206

Found elasticity of taxable income by income category to be .728 for income > $50k, 1.023 for >$100k, 1.413 for >$250k, and 2.0 for > $1 million. Also derived the tax revenue responses to reductions in marginal taxes for those earning more than $200k / yr. Revenues increased by 19% in 1982, 35% in 1983, 56% in 1984.

Other work indicates a negative effect of tax rates on economic growth and stimulus.