Tax Rates Cannot Explain Everything
I want the deficit to be fixed with higher taxes and entitlement reform. Heritage Foundation expert Brian Riedl, whom I interviewed earlier today, thinks it's 100% a problem of spending. I want to repeal the Bush tax cuts. Riedl wants them extended forever.
But as some of you noted in today's conversation with Riedl, we had a interview rather than a debate -- at least before the very end. I think I'd prefer these regular interviews with "the other side" to be mostly explanatory rather than confrontational. I don't want folks feeling like I'm going to treat them like a hostile witness, because that's where you get defensiveness rather than a reasoned explanation.
And I think much of what Riedl said was perfectly reasonable. His most powerful point about the deficit was that tax revenues are scheduled to exceed their historical average of 18 percent of GDP even without the Bush tax cuts by 2020. At the very least, given America's status quo bias, that's a compelling political argument in favor of controlling spending.
But I did have concerns about his interpretation of the last 30 years in tax policy -- particularly the notion that cutting tax rates is the surest route to economic growth. In the 1980s, the highest marginal tax rate was whittled from 70 to 28 percent, and GDP grew by an average of 3 percent. In the 1990s, those tax rates went up twice and GDP grew by an average of 3.2 percent. I didn't have a chance to make a fuller argument in the interview. But one of my commenters did. Everything from here on down is from the commenter Chucklepants:
"The early 80s recession was a natural result from high inflation under Carter, along with the high interest rates that came with that inflation. Once inflation got fixed, the economy began to grow.
The early 90s recession was, at least in part, caused by the "peace dividend" of the Soviet collapse. Many expected defense spending (going great guns since WW2) to plummet, resulting in a lot of unemployment and slowed tech development.
Clinton was blessed with the popular acceptance of the personal computer (along with all the peripherals and programs), virtually all made in the USA, in his first term and the internet in his second. Both of these drove the economy into overdrive, resulting in the balanced budget.
The early 2000s recession was caused by the collapse of the stock market due to the "dot bomb" implosion. The simple fact is that a lot of that dot bomb hysteria was based on nonsense - like buying all your groceries online. Greenspan was correct when he referred to the dot com driven market as "irrational exuberance".
While tax policy most definitely can help/hurt recessions and recovery, there are outside factors that also are at work."