Why Bush’s Tax Cuts Didn’t Work, and Why Pawlenty, Bachmann, Gingrich’s Won’t Either : Simple Math

So here’s the Republican mantra: “Lower taxes will lead to higher economic output and ultimately increase government revenue.”

It sounds like it might work.   You think, well, if I take a smaller piece of a larger pie, I’ll get more pie, right?

Let’s a take a few simple assumptions, and see how they work out:

  1. Assumption #1 : We have a Ten Trillion Dollar Economy ($10,000,000,000,000)
  2. Assumption #2:  If we cut tax rates by 5%, we can see an increase of economic growth of 2% (over what we would have had anyway). 
  3. Assumption #3:  A “normal” rate of growth is about 3%. 

Remember, what we are testing here is whether or not tax cuts pay for themselves and/or increase government revenue (relative to higher tax rates) by stimulating economic activity.  

Now let’s run the numbers. 

Scenario A.  20% tax rate, 3% growth rate.

   GPD  Tax Rate Growth Rate Gov’t Revenue
Year 1  10,000,000,000,000 20% 3%  2,000,000,000,000
Year 2  10,300,000,000,000 20% 3%  2,060,000,000,000
Year 3   10,609,000,000,000 20% 3%  2,121,800,000,000
Year 4  10,927,270,000,000 20% 3%  2,185,454,000,000
Year 5  11,255,088,100,000 20% 3%  2,251,017,620,000
Year 6  11,592,740,743,000 20% 3%  2,318,548,148,600
Year 7  11,940,522,965,290 20% 3%  2,388,104,593,058
Year 8  2,298,738,654,249 20% 3%  2,459,747,730,850
Year 9  12,667,700,813,876 20% 3%  2,533,540,162,775
Year 10  13,047,731,838,292 20% 3%  2,609,546,367,658

 Scenario A: Cumulative Government Revenue : $22,927,758,622,942 

Scenario B. 15% tax rate, 5% growth rate.

   GPD  Tax Rate Growth Rate Gov’t Revenue
Year 1  10,000,000,000,000 15% 5%  1,500,000,000,000
Year 2  10,500,000,000,000 15% 5%  1,575,000,000,000
Year 3   11,025,000,000,000 15% 5%  1,653,750,000,000
Year 4  11,576,250,000,000 15% 5%  1,736,437,500,000
Year 5  12,155,062,500,000 15% 5%  1,823,259,375,000
Year 6  12,762,815,625,000 15% 5%  1,914,422,343,750
Year 7  13,400,956,406,250 15% 5%  2,010,143,460,938
Year 8  14,071,004,226,563 15% 5%  2,110,650,633,984
Year 9  14,774,554,437,891 15% 5%  2,216,183,165,684
Year 10  15,513,282,159,785 15% 5%  2,326,992,323,968

Scenario B: Cumulative Government Revenue : $18,866,838,803,323


Difference between Scenario A and Scenario B :  $4,060,919,819,618

Conclusion: Cutting tax rates to increase government revenue doesn’t work.  It can’t work.  Even with favorable assumptions and unprecedented continued economic growth, we can never recover the lost revenue without raising taxes.(and I haven’t even factored in the cumulative interest based on a balanced budget in year 0).


My numbers here are pretty straightforward, and although they could be tweaked a bit, they match up pretty well with  the amount of debt added since we had a balanced budget in 2000 and then cut taxes in 2001.   According to mainstream Republican thought, and their predictions at the time, we should be debt free by now, not facing a debt-driven disaster.

Of course this is all assuming those assumptions I mentioned above.  When we look at the real world, what we actually saw was closer to 5% growth with the higher tax rate, and a lower growth rates under the lower tax rate*.   There are a number of factors for this, not the least of which is underlying technology gains which allow smaller entities to leverage assets to act like big ones, and increase growth rates.    If you wonder how “spreading the wealth” can make it grow, watch this simple explanation.

One of the big factors that Republicans never mention is the drag that huge accumulated debt (from the tax cuts) does to our economy (well, never when they are talking about more and bigger tax cuts).   The uncertainty created by the current political shenanigans re: the debt ceiling continues to exacerbate the issue and undercut our recovery.  

Republicans are now (again) claiming that what we really need to fix the debt is more tax cuts.   As you can see from history, math, and what should now be common sense, that doesn’t work. 

It can’t work. 

Math won’t let it.


3 thoughts on “Why Bush’s Tax Cuts Didn’t Work, and Why Pawlenty, Bachmann, Gingrich’s Won’t Either : Simple Math

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