My Home About Me

I emailed Jason Furman taking him to task for his statement in Slate (full context here) that "Laffer disciples" were "emboldened by the large jump in tax revenues in 2005 and 2006 (and conveniently overlooking the nearly unprecedented three consecutive years of declining tax revenues that preceded it)..." I pointed out to him that the three previous years -- 2002, 2003 and 2004 -- did not show declining revenue, because 2004 had increasing revenue. This distortion of the facts masks the significance of 2003 -- the year in which the bulk of the Bush tax cuts were passed -- as a turning point. Here is Jason's repsonse:

Thanks for the kind words about me. Slate originally asked me to do a piece about Chicago’s living wage. I suspect you would have liked that one more.

Revenues declined in nominal terms in 2001, 2002 and 2003. The only other time this century that revenues declined three years in a row was 1921, 1922, and 1923 – thus the “nearly unprecedented.” And, for what it’s worth, these reductions in revenue followed the quantitatively much larger tax cuts in 2001.

My narrative of recent revenue changes is that revenues dropped dramatically after 2000 because of a combination of tax cuts and bad luck (e.g., the bursting of the bubble). Since 2004, the bad luck has largely gone away but the tax cuts haven’t. Thus revenue growth over the entire expansion is a rather anemic 0.2 percent (adjusted for inflation and population), compared to an average of 10 percent in previous expansions.

The point I was trying to make is that people shouldn’t use one or two years of data to infer the effect of tax cuts – the revenue data are extremely noisy making it virtually impossible to extract the dynamic impact of tax cuts, a factor that is relatively small in most models. In fact, if we use actual revenue data from the last quarter century we find that tax cuts cost more than the “static” analysis while tax increases help the economy so much they raise even more revenue (see my discussion here). I, however, prefer sticking with more scientific models – like the Treasury model and research by Greg Mankiw and others.

I replied to Jason:

Thanks for the thoughtful response. I agree that there should be plenty of skepticism about the claims of certain supply siders. But then again I think there should be more skepticism than there is about almost all economic modeling, including the most sophisticated. And I certainly think there should be skepticism about the pure static analysis that presumes that tax increases will earn 100 cents on the dollar. You should consider debunking the typical CBPP analysis on those grounds!

I have to object to one thing though. Your paragraph that I quoted does include an error – or if not exactly an error, then a deception. When you talk about the three years that preceded 2005 and 2006 any reader would assume that those include 2004 – yet apparently they don’t. The sentence in question should be amended to correct that error.

Separately, it is a mistake to start the clock on the Bush tax cuts in 2001, because they barely even existed until 2003. The 2001 cuts on marginal income tax rates were phased in so slowly as to be barely useful. The real story started in 2003, and to claim otherwise is a substantial deception. If you want to criticize something about the 2001 cuts, criticize the claims by supply siders that such slowly phased in cuts would have any Laffer effect all. Of course they didn’t. They couldn’t. The 2003 cuts are another matter – but your rhetoric is designed to exclude them from analysis.

Jason's reply to me:

I only used “scientific” because of your exchange with Mankiw on the topic.

I still don’t find anything I wrote inaccurate or misleading: the 2001 through 2003 “preceded” 2005 and 2006 in more than just a semantic sense – they’re part of the same economic period. Also, I wasn’t trying to use those revenue losses to prove that tax cuts cost money, I was just trying to say that the simple observation that revenues went up in 2005 and 2006 doesn’t prove anything – with revenues falling so much in the preceding years they were bound to recover. Most economists believe you should look at taxes as a share of GDP. By this definition they fell for four straight years: 2001, 2002, 2003 and 2004.

...Finally, although this doesn’t matter for my argument, I’m not sure that “barely even existed” is the term I would use. Here are the JCT numbers on the revenue loss associated with the tax cuts enacted since 2001:

2001: $71 billion
2002: $75 billion
2003: $176 billion
2004: $263 billion
2005: $211 billion
2006: $196 billion

Jason's reply is very disappointing. He's taking the Paul Krugman/Brad DeLong route of stretching after-the-fact for unlikely technical and semantic explanations to rationalize away factual errors made in the heat of rhetoric. To say that 2001, 2002 and 2003 preceded 2005 and 2006 is true only in the sense that 1801, 1802, and 1802 preceded 2005 and 2006. The fact remains that he entirely omits 2004 from his statement -- a gap that makes it harder for readers to think of 2003 as a potential turning point.

And to say that "Most economists believe you should look at taxes as a share of GDP" is a wholly unjustified appeal to unaccountable authority. How does Furman know what "most economists believe" about how tax revenues should be measured in this particular context? At least he didn't stoop all the way to Krugman's version of the same thing: "All serious economists not on the Bush payroll believe." But regardless of what they believe, if anything, in this context it makes little sense to think of tax revenues as a share of GDP. After all, the Laffer argument is that lower tax rates bring in higher tax revenues by causing the economy to expand. If you calculate the growth in revenues in a way that deliberately discounts the fact that the economy has expanded, you've set up a system in which Laffer's theory can never win -- by construction. To put it another way -- when did any "Laffer disciple" ever claim that lower tax rates would lead to a larger claim by the government on the economy?

Finally, the differing natures of the two Bush tax cuts in 2001 and 2003 does matter to Furman's argument. It's not enough to prove that the 2001 tax cuts had significant dollar impact -- although, that said, it's clear from Jason's numbers that their impact was much smaller than that of the 2003 tax cuts. The real issue is that the 2001 tax cuts were not supply-side tax cuts to any significant measure. The supply-side cuts to top marginal rates enacted in 2001 were set to phase in very slowly over many years (the 2003 legislation accelerated the phase-in to 2003). The $71 and $75 billion cuts cited by Jason came mostly from other provisions, including demand-side credits and rebates.

So I ask Jason this -- if he really stands by these explanations, then why didn't he embody them in his original statement? He could have dealt with the factual error of omitting 2004 this way:

"Laffer disciples" were "emboldened by the large jump in tax revenues in 2005 and 2006 (and conveniently overlooking the nearly unprecedented four consecutive years of declining tax revenues as a percentage of GDP from 2001 to 2004)..."

He could easily correct his column this way now, if that's what he really means it to say. But apparently he won't make that correction. Why? Probably because the complex truth is less persuasive -- and more open to question -- than the simple error. I believe he should correct his statement this way. Leaving it as it stands embeds a factual error. The only way to rehabilitate it is to disclose the complex rationales that justify it. But Jason seems to want to walk the path of Paul Krugman, and never admit even the smallest error. Too bad. There's no surer way to destroy credibility.

The other matter -- distinguishing between the 2001 and 2003 tax cuts -- is not a matter of pure fact. Jason and I may legitimately disagree as to whether there is any important distinction, or perhaps more important, whether "Laffer discplines" believe there is. In my judgment, the distinction is critical and to pretend that it does not exist is to establish a straw man that is easier to knock down. It's a long and tortured sentence, but the full truth (as I see it) could be captured this way:

"Laffer disciples who advocated the 2003 supply-side tax cuts on incomes, dividends and capital gains" were "emboldened by the large jump in tax revenues in 2005 and 2006 (and conveniently overlooking the nearly unprecedented four consecutive years of declining tax revenues as a percentage of GDP from 2001 to 2004 that followed the 2001 tax cuts consisting largely of demand-side credits and rebates)..."

Here are a couple of comments from readers. Erick Van Houten writes,

The point that the author could have been attempting to make was that due to the rapid decline of tax revenues during the 2000-2003 period it casts a modicum of doubt on if the cuts were responsible or if the economy was just returning to normal. You'll note that the projected delta has returned to a value very similar to that of the 1993-2000 era.

While he may have misspoken, and he should modify his statement for the sake of clarity, the point that obtaining a rapid gain after a rapid loss is one that should be given due consideration. If there is economic or statistical reasons why revenues would not tend towards the trend line that had been established for the last 10-20 years I would be eager to hear it.

Perry Eidelbus writes,

I really hate his straw man of mischaracterizing supply-siders as claiming "tax cuts always spur enormous gains." Always? Enormous? I've never, ever heard that you, Kudlow, Laffer, Mundell, Wanniski, or any other supply-sider said any such thing. It sticks in my craw when liberals point to (well, Furman is just implying) the 2001 tax cuts as evidence against the Laffer Curve -- ignoring, as you pointed out, that the big ones were in 2003.

I agree and disagree with Bruce Bartlett's new book, like his criticism of the 2001 rebates. I agree that rebates aren't as good, in principle, as a real tax cut. However, you have to give Bush a lot of credit for pushing the real cuts two years later. As a matter of practical politics, it was easier for Bush to get a "warm-up" passed in 2001, instead of trying to ram the full 2003 package through Congress. They weren't ready for the meat, because, in my cynical opinion, they weren't sure how an "extreme" tax cut would affect their election chances. Look at Bush's attempt to start privatization of Social Security: a major step, and most every member of Congress is too chicken to do it.

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