The Deadman Night Rider

A forum for evening students of the SMU Dedman School of Law and other outlaws..

Tuesday, June 21, 2005

Several other bloggers have linked to this report from the Tax Foundation on the rising percentage of tax return filers that have zero tax liability – 32.4% in 2004 - due largely to increases in the child tax credit and the earned income tax credit. The report highlights a point many media stories on the 2003 tax cuts ignore: these two credits are refundable, meaning that if the credit exceeds total tax liability, the government pays out the difference.

The purpose of this is to offset the regressivity of sales taxes and other state and local levies on lower income families, and the President’s policy definitely hasn’t gotten enough credit for expanding them. According to the IRS data here, in 2004 over 22 million tax-filers received more money than they paid in, putting them in the “negative” tax bracket. The total amount disbursed between these two credits was $42 billion.

Another area where W. never got any credit was for dropping the lowest tax bracket from 15% to 10% - which not only cut income taxes but simultaneously lowered the capital gains rate for low income earners. The ‘Air America’ crowd takes it as an article of faith that any benefit of the tax cuts for lower income families has been canceled out by increased state and local taxes, but I haven’t seen one set of hard numbers to back up that claim. By focusing on the aggregate amounts of the cuts, which favored the top brackets precisely because they pay such an inordinate amount of the total tax revenue, they have been able to deflect attention from how much more money was put into the pockets of the people they claim to represent.

Meanwhile, it looks like overall tax revenues are increasing. I’m not sure this is the vindication of the vaunted Laffer Curve the writer here claims, but correlation between the cuts and the economic recovery is tough to dispute.


Blogger d.K. said...

But the larger question remains - where is the budget deficit now, and what do the trends portend. You mention that revenues are increasing - but without reading the numbers that sadly, I probably wouldn't understand, is that increase a significant number in terms of the variance between tax revenues and government outlays?

Your point on W. not getting credit for who benefitted from his tax cuts is taken; however, again, without the commitment to cutting spending (which obviously wasn't there, to an absurd degree), how much credit should he get when we look at the complete fiscal record under his direction?

I'm not trying to be snarky here... I was just struck by the thesis of your argument. It's like saying he authorized a larger bucket to bail out the gushing water from the proverbial sinking ship.

6:30 PM  
Blogger rattlerd said...

Hi D.K. -

You're right that the tax revenues are only half the picture. The figures quoted in the WSJ editorial above claim that spending rose approx. 7% '03-'04, compared to about 15% increase in revenues for that year, which translates into about $60B lowering of the deficit. Not much, but in the right direction at least.

I also agree that the trend doesn't look good since no one seems really serious about cutting spending anywhere, and there are expensive entitlements coming. I guess we'll have to hope for a new-generation 'peace dividend' from the War on Terror spending at some point. The good news is that the current deficit levels aren't putting much, if any, pressue on interest rates, and you don't hear people complaining about the 'jobless' recovery anymore.

6:50 AM  

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