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Miscellany

by Jon Henke | August 29, 2008 at 5:41 PM

One of my pet peeves is the ongoing - and inaccurate - Republican belief that tax cuts will raise revenue.   At current US tax rates, that just isn't the case.  In fact, as has been confirmed by the Treasury Department and the Congressional Budget Office, it isn't even remotely close to accurate.  The Tax Foundation adds more in a recent report...

Recent research on President Bush's tax relief in 2001 and 2003 has found that the lower tax rates induced taxpayers to report more taxable income. In particular, the reduction in the top two tax rates induced taxpayers to report more taxable income—an increase in the size of the tax base—to such an extent that this positive behavioral response likely offset roughly 25 percent to 40 percent of the static revenue loss of lowering the top two tax rates.

 

Via Greg Mankiw, Peggy Noonan offers a very good insight

Democrats in the end speak most of, and seem to hold the most sympathy for, the beset-upon ... They express the most sympathy for the needy, the yearning, the marginalized and unwell. For those, in short, who need more help from the government, meaning from the government's treasury, meaning the money got from taxpayers.

Who happen, also, to be a generally beset-upon group.

Democrats show little expressed sympathy for those who work to make the money the government taxes to help the beset-upon mother and the soldier and the kids. They express little sympathy for the middle-aged woman who owns a small dry cleaner and employs six people and is, actually, day to day, stressed and depressed from the burden of state, local and federal taxes, and regulations, and lawsuits, and meetings with the accountant, and complaints as to insufficient or incorrect efforts to meet guidelines regarding various employee/employer rules and regulations. At Republican conventions they express sympathy for this woman, as they do for those who are entrepreneurial, who start businesses and create jobs and build things.

Republicans have, that is, sympathy for taxpayers. But they don't dwell all that much, or show much expressed sympathy for, the sick mother with the uninsured kids, and the soldier with the shot nerves.

 

Megan McArdle, on Barack Obama...

Barack Obama just promised to end our dependance on oil from the Middle East.  This is, not to put too fine a point on it, horse puckey.

She's right.  Details at her post.

Factcheck.org also notes that Obama's speech was fairly heavy on the BS.   Among the items...

  • Obama said he could “pay for every dime” of his spending and tax cut proposals “by closing corporate loopholes and tax havens.” That’s wrong – his proposed tax increases on upper-income individuals are key components of paying for his program, as well. And his plan, like McCain’s, would leave the U.S. facing big budget deficits, according to independent experts. [...]
  • He said McCain would fail to lower taxes for 100 million Americans while his own plan would cut taxes for 95 percent of “working” families. But an independent analysis puts the number who would see no benefit from McCain’s plan at 66 million and finds that Obama’s plan would benefit 81 percent of all households when retirees and those without children are figured in.
  • He said McCain, far from being a maverick who’s "broken with his party," has voted to support Bush policies 90 percent of the time. True enough, but by the same measure Obama has voted with fellow Democrats in the Senate 97 percent of the time.

  • Obama said "average family income" went down $2,000 under Bush, which isn't correct. An aide said he was really talking only about "working" families and not retired couples. And – math teachers, please note – he meant median (or midpoint) and not really the mean or average. Median family income actually has inched up slightly under Bush.

 Obama's campaign is trying to use the "what he meant was..." argument, which is less than persuasive in light of the fact that it was in his pre-scripted speech.

 

Paul Krugman says things really are bad all over, pointing to lower income numbers.  I addressed this argument two years ago, in a TCS Daily Article about the complexities of income statistics.   The short version is that total compensation, disposable income and household income tell different stories, even at the median.

 

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Comments

Economic Growth

Submitted by Jeff Roberts on Fri, 08/29/2008 - 19:28.

High taxes stagnate economic growth.  Keeping taxes low will ultimately result in economic growth that will long-term create greater revenue for the government than high taxes would.  History has proven than repeatedly.

Of course at some point,  taxes can get low enough where government revenues will stop rising.  I'm fine with this phenomenon, in fact I want that to happen.  I don't push tax cuts because I want more government revenue, it's an issue of fairness and freedom.  It's not right that Americans spend more on paying taxes than they spend on food, clothing and shelter.  I split every paycheck with Uncle Sam, in addition to paying property taxes, sales taxes, gas taxes, capital gains taxes, etc.  It's absurd.

I would rather Conservatives push tax cuts from a standpoint of fairness, creating economic growth, and giving less money to the government to waste, than the supply-side argument that the federal government will have more money to spend. 

Keeping taxes low will

Submitted by Jon Henke on Fri, 08/29/2008 - 19:36.

Keeping taxes low will ultimately result in economic growth that will long-term create greater revenue for the government than high taxes would.

Yes, the Laffer curve is a legitimate concept.  But we're indisputably on the left side of the Laffer curve.  I'm familiar with the theory.  You should familiarize yourself with its practical application. 

Republicans Don't Claim Tax Cuts Pay for Themselves

Submitted by ConservativeDC on Fri, 08/29/2008 - 19:48.

Rather, we claim (accurately) that some (not all) tax cuts grow the economy faster than it would have grown absent the tax cuts.  This results in more taxes paid.

As an example, suppose you cut the capital gains rate from 15 percent to 5 percent.  On paper, this would reduce capital gains tax revenue by two-thirds.  This is the so-called "static score."

However, it's quite likely that this would permanently increase the value of the stock market (for the sake of argument, let's conservatively say this action increases the value of the market by 25 percent).  Thus, the stock market goes from 1.00 to 1.25 overnight.

15 percent of 1.00 is .15.  5 percent of 1.25 is .0625.

Capital gains revenue dropped not by two-thirds, as the static score would indicate, but by only 58%.  The spread between the 67% revenue dropoff and the 58% revenue dropoff is the dynamic feedback effect.

So, the claim is not that tax cuts pay for themselves; it's that some tax cuts don't cost as much as the simple arithmetic would indicate.

Enlighten Us, Jon

Submitted by Jeff Roberts on Fri, 08/29/2008 - 20:01.

Please tell us the exact tax rate that spurs economic growth to maximize long-term government revenues.  You said it's obvious we're "to the left side" of the Laffer Curve, so you must know the exact rate where we pass that point.  Maybe you can win a Nobel Prize with your brilliance.

Regardless of government revenues, I believe we're overtaxed.  If government revenues suffer, I won't have any trouble sleeping at night.

Re: Miscellany

Submitted by Liquidity Jones on Fri, 08/29/2008 - 21:18.

Jon, your conclusion is flawed in so many ways, the most obvious being that you base your conclusion on 2 years of data and make the assumption that there are no other economic forces in play.  The sample size for your economic analysis is way to small to draw any conclusion, let alone one that refutes time-tested economic theory (or even considered fact).

If you want a good example of how cutting taxes RAISES revenues, take a look at corporate taxes in, of all places, Ireland.  Once a country with little economic growth or even industries, the country in the last decade cut their corporate tax rate to 15%.  What happened?  Yes, Jon, in the first year tax revenues went down, but now they have sky rocketed as companies worldwide flocked there to domicile and want to pay taxes to the country, to avoid/escape the tax policies like the US.  Similar to how many companies in the US claim there state of incorporation as Delaware via a P.O. box, companies like Microsoft and Morgan Stanley have key assets claim Ireland as their location. 

Now Ireland has had the luxury of lowering and for many eliminating personal income taxes for its citizens.  Lower taxes = less incentive to evade taxes = higher tax revenues.

 

 

????

Submitted by johnson springs on Fri, 08/29/2008 - 21:48.

What you're describing is a tax haven. Foreign enterprises are essentially paying a fee to the Irish treasury in exchange for shelting some earnings from taxation elsewhere.

What your argument requires is a measure of the return Ireland has seen from domestic corporate growth since cutting their corporate rates.

This is embarrassingly poor analysis.

cut spending bofore cutting taxes

Submitted by superdestroyer on Sat, 08/30/2008 - 07:28.

The failure of the Bush ADministration and the idiot Repubicans in Congress is that they forgot that tax cuts require spending cuts.  I guess with spending pork home to the district it is easier for deficit spend rather than make spending cuts.

Repubicans should not talk about tax cuts but should talk about spending cuts.  Deficit spending to cut taxes increase the cost of debt service.  If you want to dynamic score, you have to figure the $400 billion that the U.S. pays in interest on the national debt.  Lower taxes do not pay for themselves but deficits to have lower taxes is idiotic.

 Are higher taxes part of the

Submitted by Sammy on Sat, 08/30/2008 - 09:46.

 Are higher taxes part of the "next right"?  Good luck with that fellas.

The fastest way to lower taxes is no deficits

Submitted by superdestroyer on Sat, 08/30/2008 - 10:13.

If you want people to support smaller government and lower taxes, they ensure that there are no deficits.  The idiots in the Bush Administation and in former Speaker Hasterts office were all for giving people big government while asking them to pay 80% of the price.  As long as governments run huge deficits, people will keep wanting more government. 

After 9/11, theBush administration should have proposed huge spending cuts and tax increse in order to balance the budget.  People would have gone along wiht spending cut to support the war of Al Queda.  However, the policy idiots in the Bush Administraiton decide to keep on spending on domestic programs and pork while starting a two front war and without asking for tax increase.  Now people are going to vote in large Democratic majorities because if people want a big spending, big government party, the will alwasy vote Democratic.

 

Laffer--lol

Submitted by gunthestops on Sat, 08/30/2008 - 10:17.

 

Supply side economics—the parlor trick of the right! In the eight years of Bush the national debt will have risen 70% from 5.7 to 9.7 trillion, an increase of 4 trillion dollars. Now this is the real “slight of hand” they keep telling everyone (the little people) that the 2 trillion dollars worth of tax cuts will pay for themselves while giving the biggest tax cuts to the upper 5% and sliding the cost of the war on to the national debt for others to pay for. By doing this you are shifting the tax burden to future generations to two ways, direct unpaid taxes and inflation. Inflation is the hidden tax that destroys purchase power and is considerably more burdensome then direct taxes. Here is an interesting link to on real inflation   http://www.chrismartenson.com/fuzzy_numbers (by the way the conservatives my enjoy this link because it kicks around Clinton a little bit for having a hand in the problem with accounting for inflation by the BLS)
 
Since Reagan the national debt has risen over 1700%, the only president to hold the line on the national debt was Clinton. But it is both parties that have sold all Americans down the river. Remember, no country or empire has ever debased its currency and ran massive debts and deficits and prospered, in fact it is usually the sign of a dying empire. 
 
Over the years Bush administration loved to trumpet out the idea that tax cuts helped create a strong economy, what a load of BS! The real propellant to a few years of high economic activity after 9-11 was low, low interest rates and huge deficit spending, which created financial leverage unseen since the great depression. The proof of this is apparent right now as we are seeing the unwinding of this leverage. Debt and leverage is not prosperity, but only the illusion of prosperity.
 
 
 
 
 
Now to the real problem; our dollar has declined approximately 40% under the Bush administration. Since we have become an imported of almost everything the decline of the dollar has a profound effect on our cost of living, and is destroying our purchase power year in and year out. 
 
Inflation; who benefits, the government (the ones who print the money) who loses the average person that has little or no investable assets. The wealthy are sophisticated enough to hedge against the destruction of purchase power and can insolate themselves to some degree against the hidden tax. It is estimated that under the 8 years of Bush we have lost 50% of out purchase power. Between food, energy, and housing/rent you have to make 50% more then you did 8 years ago----now that is one hefty tax—and it just keeps on taxing! That is the tax that I care about, but you more sophisticated people have already figured that out—lol
 
 Laffer ---give me a break—he has been so wrong on the markets in the last couple of years, it’s lucky he is still employable.
 
   
 
 

 

false generalizations are the bane of logical thinking

Submitted by Freedoms Truth on Sat, 08/30/2008 - 11:29.

One of my pet peeves is the ongoing - and inaccurate - Republican belief that tax cuts will raise revenue.   At current US tax rates, that just isn't the case.

One of my pet peeves is making generalizations and using generalized statements as strawmen. Jon, we went through before some months back, so I won't want to repeat the discussion, but lets summarize a few facts that came out of the discussion:

1. It is definitely true that taxes on anything disincentivize that activity, and thus taxes on income, production, capital gains, and corporate profits disincentivizes and reduces work, capital formation and business activity. The real 'flat earth' economics thinking is among those who blithely support higher tax rates and ignore the economic damage that it can cause.

2. Some tax cuts pay for themselves. Examples abound, such as Reagan's 70% to 50% top tax cut, or the cut in capital gains tax rate from 28% to 15%. in both cases, there are clear revenue responses that show they paid for themselves.

3. Some tax cuts do not. Even if a tax rate reduction 'costs money' it can benefit us by increasing jobs, production, and economic growth. The Bush tax cuts as a whole cost revenue but also had a positive impact on job creation. High income bracket cuts cost the least revenue, the greatest revenue loss came from simply raising exemptions, etc.

4. There are short term immediate effects, and then there is the long-term effects of growth enhancement, both of which impact revenues.

5. The greatest error in tax policy in DC today is the fallacy that ignores dynamic economy effects. Tax policy is hostage to the flat-earth belief that people will behave the same whether tax rates are 0% or 50%. That is completely false.

Unless and until we have dynamic scoring, tax policy will be tiled to favor the Big Government party.

Jon, when you boil down your objection it comes to this:  false generalizations are  the bane of logical thinking.

The point that is correct is that not ALL tax cuts pay for themselves (some do, some dont). But when you make a generalized allegation "Republican belief that ..", you are guilty of what you are condemning! You are making an overbroad false generalization! Far better and more accurate if you object and critique incorrect statements one by one, rather than paint a broad brush that is simply a strawman.

not only do tax cuts fail to raise revenue

Submitted by mnmod on Sat, 08/30/2008 - 14:39.

but they also fail to trickle down in an expanding economy as this brief excerpt highlights:

 "But the poverty rate remained higher, median income for working-age households remained lower, and the number and percentage of Americans without health insurance remained much greater than in 2001, when the last recession hit bottom.

This marks the first time on record that poverty and the incomes of typical working-age households have worsened despite six consecutive years of economic growth.[1]  The new data show that in terms of poverty and median income, the economic expansion that started at the end of 2001 was the worst on record.  The data provide fresh evidence that the gains from the expansion were quite uneven and flowed primarily to high-income households."

http://www.cbpp.org/8-26-08pov.htm

Administrations (like schools) should be held to high standards of success.  The measureable results of  GOP backed Bush administration economic policies as described in the linked report imply many families being left behind.