Quote from piezoe:
Thank you for this link on a subject I am keenly interested in. Sadly, it doesn't by itself shed much light on whether lower tax rates cause revenues to increase. The problem is that there does not appear to be any examples of revenue increases that might be linked to tax cuts as cause and effect in periods that were not also immediately preceded, or accompanied, by increases in government expenditure and expanded debt and deficits. Would that there were, we might then get a much clearer picture.
For example, the period 1922 to 1928 in the U.S. is very interesting if not very instructive. That was a period following by less than 4 years the euphoric end to World War I. But also, of course, following a period of hugely expanded government debt, borrowing, and expenditure! The well described "Roaring Twenties" followed -- similar to the roaring 1950's following WW II. This was a period of business and investment boom; hence rapidly growing profits. Naturally one expects government tax revenue to grow during such a period, and it did. Simultaneously the high marginal rate was lowered to 25% from a war period 70 something percent. So what really was the cause of the higher revenue following a tax cut during a boom period?
It is tempting to attribute the business boom to lowered marginal rate, but again the picture is clouded by the increased government spending and borrowing that both preceded, and to a lessor extent, accompanied the 1922-28 boom period. The waters are similarly muddied in other periods following cuts in the upper marginal tax rate. In the British example of the linked article by Winnett and Kirkup, one is confronted with the same problem of sorting out the real cause and effect. It can't be done from the information contained in the article alone.
An additional comment regarding the non-application of Keynesian economics is apropos to 1922-28 period in the U.S. According to Keynes this should have been a period of either increased tax rates or decreased government expenditure sufficient to compensate for expenditure and borrowing during the war. Just as today, it didn't happen. Though in 1922-28 Government spending dropped dramatically with the end of the war, it nevertheless remained at a level roughly 3.5 times that of the years immediately preceding the war. Of course the U.S. Government of the 1920's was not yet guided by what we would later call Keynesian economics, and so it can be forgiven for not knowing better. Today's Government has no excuse for not following Keynes, and the transgressions are far greater now.
