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Haines: Keep Bush Tax Cuts? I'm Not So Sure

I HATE when we are interviewing someone on Squawk on the Street and right at the end, when there is no time left, the guest says something worth debating.

It happened again on Monday when we had Michael Farr and Vince Farrell as guests. Just as we were wrapping it up, both said this is not a good time to raise taxes. I should have been prepared because they, and many others, have made that argument recently.

I used to agree, but now I’m not so sure. I’m not saying I disagree, just that I’m not so sure. I started to think about it more when I read in the Aug. 6 edition of The New York Times that Alan Greenspan supports the complete expiration of the Bush tax cuts: Asked whether higher taxes in 2011 could choke off the nascent recovery, Mr. Greenspan replied: “It is risky, but the choice of not doing it is far riskier. It is the difference between bad and worse, but in neither case do I think the evidence suggests that it would be the tipping point for the economy.”

Greenspan’s concern is the deficit. His reference to “evidence” prompted me to look for some. The best way to convince me of anything is to cite evidence that supports your argument. To paraphrase Jerry Maguire, show me the evidence.

It seemed logical to look at recent (post-WW2) tax increases and see what had happened to the economy thereafter. There have been six instances of tax increases of half-of-one percent of GDP or more. For a list. see pages 10-17 at in this Treasury Department document.

There were actually 10 tax hikes, but I treated the hikes in 1950 and 1951 as one and three hikes in 1982 and ’83 as one because I don’t think anyone can separate out the effects of each. Then I went to the Bureau of Economic Analysis' Web site and clicked on the link for “percent change from preceding period” to get the relevant GDP data.

Warning: A LOT of Numbers Ahead!

The 1950 and ’51 increases were whoppers, raising taxes by 3.82 percent of GDP. The GDP data show that was a turbulent time. 1949 was a bad year with negative GDP in three of the four quarters. But then there was an explosion of growth in 1950, which probably convinced Congress they could safely raise taxes.

In 1951 and ’52 GDP growth slowed dramatically and in Q3 and Q4 of 1953 as well as Q1 of 1954, GDP was negative … a recession. The lesson from that one seems to be you definitely kill the economy if you raise taxes by more than 3.5 percent of GDP.

In 1966, taxes were raised 0.6 percent of GDP. 1966 was a good year with GDP growing 9.5 percent. 1967 growth fell to 5.7 percent, but in 1968 the economy rebounded to 9.3 percent growth.

In 1968, taxes were raised again, this time by 1.09 percent of GDP. In 1969, growth fell slightly to 8.2 percent of GDP, then to 5.5 percent in 1970, but rebounded in 1971 and the next few years.

In 1982 and ’83, President Reagan took back most of his 1981 tax cuts, raising taxes by 1.08 percent of GDP in three separate bills. The economy was growing at only 4.0 percent in 1982, despite the big tax cut of 1981. After the tax hikes of 1982, the economy actually accelerated to 8.7 percent growth in ’83 and 11.2 percent in ’84, and still 7.3 percent in ’85.

In 1990, President George Bush raised taxes by 0.49 percent of GDP. That year the economy was slowing from 9.4 percent growth in Q1 to 6.4 percent in Q2 to 3.7 percent in Q3 to -0.3 percent in Q4. So, taxes were raised in a slowing economy.

In 1991, with the new taxes in effect, the economy again accelerated to 3.3 percent growth, then 5.8 percent in ’92 and 5.1 percent in ’93. Finally, with 5.1 percent growth in 1993, taxes were raised by 0.50 percent of GDP. The following year growth increased to 6.3 percent. In 1995 and ’96 growth was 4.7 percent and 5.7 percent respectively.

Here’s the way I add all this up: The ’50-’51 hikes were huge and they definitely killed the economy. But, more modest hikes in ’66 and ’68 slowed the economy only modestly. And, tax hikes in ’82-’83, ’90 and ’93 were followed by higher growth. The 1990 tax hike went into effect right after a quarter of negative GDP growth.

I get the argument that taxes should not be raised in a slow economy, but the evidence of the past simply doesn’t support that view. I’m guessing that’s what Greenspan meant when he talked about the evidence in the quote above.

Next week, I’ll address the evidence on Greenspan’s big concern: the federal deficit.

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