Lots of reasons to enjoy your appearance; I especially appreciate hearing a positive argument out of the Right.

One quibble; why get into a tit for tat on stated rates? In order to compare tax schemes from one time period to another, why not instead divert people to compare effective rates? Discussing stated and even marginal rates between time periods ignores the differences in deductions, credits. Stated rates have little to do with what people actually end up paying whereas the effective rate is the chunk physically paid out of income. (Though we should also remember about 17% of our after-tax individual consumption goes towards paying businesses' federal tax liabilities based on how they set prices to cover those costs.)

I've studied the CBO's spreadsheet of effective rates from 1979 forward a couple of times and it really helps provide a more dispassionate perspective that the differences we fight over are often trivial when you'd think that capitalism itself is at risk of being slaughtered when the Right starts in. The Left isn't much better complaining about taxes on the rich given how much the lowest two quintile's effective rates have been cut over the years, especially during the last President's tenure.

One of the reasons I appreciated your appearance was that you did provide an insightful dispassionate analysis on taxes. In addition I also appreciated your noting that the top rates are marginal, though again, I think it's best to focus on effective rates.

Very good. One quibble: a consumption tax does have an impact on the labor-leisure decision because it lowers real wages by increasing the price level.

Of course, I believe Mr. Bartlett knows this, but I'm not quite sure why he said it doesn't penalize labor.

Bruce,

I know you believe (as do I) that the strong "starve the beast" assumption is invalid (i.e., a dollar less in revenue does not translate into a full dollar less in spending), but your argument in that segment may be implying a belief that lower taxes (and a pure, unshakable refusal to raise taxes) actually cause higher spending by breaking the linkage between spending and the pain of taxes (or anticipation thereof). That's the argument from Cato's Niskanen http://www.cato.org/pubs/policy_report/v26n2/cpr-26n2-2.pdf, which is a matter of dispute among economists who have analyzed/considered this question. So which is your belief: Lower tax revenues, ceteris paribus, (1) cause lower spending, but not dollar-for-dollar, (2) have no/negligible effect on spending, or (3) cause higher spending?

Greg Mankiw noted (in 2006) that economist Henning Bohn reached the opposite conclusion than Niskanen, with some differences in methodology (with perhaps some advantages), albeit with less recent data vs. Niskanen's analysis. Mankiw also notes that (activist liberal economist and blogger) Mark Thoma was very critical of Niskanen’s methodology http://economistsview.typepad.com/economistsview/2006/05/a_closer_look_a.... Mankiw concluded that “Until someone sorts out these apparently conflicting results, it is (as Thoma suggests) premature for anyone…to conclude that Niskanen has the last, or even the most persuasive, word on the topic.” http://gregmankiw.blogspot.com/2006/06/starving-beast.html.

More recently, economists Christina and David Romer analyzed the question and found that (quoting the abstract of their paper) “The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases.” http://www.nber.org/papers/w13548 (The Romers were economic advisors to Obama, and Christina is now his Chair of Economic Advisers, although conclusions they have reached in their studies have been cited by conservatives advocating tax cuts (on the basis of GDP growth), and The Economist magazine described them (5/10/07) as having “impeccable neoclassical [economist] credentials” http://www.economist.com/world)/na/displaystory.cfm?story_id=9163589.

Discussion of the Romer study at http://www.econbrowser.com/archives/2007/04/new_estimates_o.html and http://streetlightblog.blogspot.com/2007/04/macroeconomic-effects-of-tax...

thanks.

I think a binding balanced budget constraint holds down spending. The proof is that since the 1930s federal spending has risen about twice as fast as state and local government spending. It was then that the implicit balanced budget constraint that had existed since the founding of the republic was largely, although not entirely, abolished. The constraint remains largely in effect at the state and local government level.

I think some semblance of a balanced budget constraint existed until the 1990s. Presidents Reagan, Bush 41 and Clinton were all willing to raise taxes to reduce budget deficits when they got too large. But in the 2000s, Bush 43 and a Republican Congress simply smashed the balanced budget constraint into nonexistence. They did so under a belief that deficits don't matter and that cutting taxes is the ONLY thing necessary to be fiscally responsible because lower revenues will starve the beast and somehow or other bring down spending.

Unfortunately, Republicans made not the slightest effort to cut or even hold down spending in the 2000s while continuing to assert, dogmatically and without evidence, that taxes must never rise for any reason because that will feed the beast, destroy the economy and probably reduce federal revenues.

The point I was trying to make in my last column wasn't that taxes are the only way or even the best way to reduce deficits. Rather, I was trying to show that restoration of a balanced budget constraint must include the potential for higher taxes or else it won't be binding. People must once again come to believe that if spending gets out of control they may suffer from higher taxes. That will discourage members of Congress from promising something for nothing in terms of ever-higher spending and no tax increases, ever.

Just imagine how different the debate over the Medicare drug benefit would have been had PAYGO been in place? Or how different the debates over some of the bailout and stimulus programs of the past year would have been? Instead of spending now and worrying abouit how to pay for it later Congress would have had to consider both simultaneously, which might have led to cuts in entitlement programs that would otherwise be politically impossible.

FYI, Good to see some folks on the left acknowledging that a tax-side-only solution is unrealistic. http://www.americanprogress.org/issues/2009/09/deal_with_it.html

Have any think tanks (e.g, Heritage, Cato, AEI) or advocacy groups on the right issues similar statements regarding a spending-side-only solution? I'm not asking rhetorically; I'd like to know (ideally with link, if readily available).

One can therefore infer that they would only support a deficit reduction that relied total and exclusively on spending cuts.

Or that they are preparing a bargaining position.

On the left you have pundits like Dean Baker and one politician after another saying there is no spending problem in our lifetime, or at least until the SS trust fund runs out in 2040/whatever ... the new Mass senator who said "Our party ... is unalterably opposed to any cuts in Social Security benefits" ... Krugman who's now saying all over to his minions that he is perfectly "sanguine", "optimistic" (his words) about the fiscal situation, no changes needed! ... and the occassional, rare politician who suggests modest spending cuts for fiscal reasons (every bit as rare as those on the right who consider tax hikes for the reason), like Hoyer, immediately being villified and castigated by the all preceeding. Etc., etc.

I keep advising people who are concerned about finding a debt solution to visit the AARP discussion boards to chat about the subject. It's quite an enlightening experience about the politics of spending and debt. But not a happy one. They ain't starting from a position of moderation over there. And neither are the Democrats who live on their votes.

Now, say you have the classical belief in limited government. You know the final size of government is going to be determined by hardball -- and I mean hardball -- crisis political negotiations between the tax-increasers and the
spending-cutters.

Your realistic objective for an outcome that is 50% tax increase and 50% spending cut -- as per the 1983 Social Security deal.

The other side's position is "we'll cut nothing!... we'll cut nothing! ... we'll cut nothing!" ... and its people are out there whipping up AARP with tales about how you want to kill old people and reduce the survivors to eating cat food.

To have the greatest chance of obtaining your objective of 50% tax increase and 50% spending cuts, your best option is...

1) Take a starting position of "Sure, we're open to solving this problem 50% with tax increases, we admit everything you say about how it can't be solved with spending cuts.

"Now will you please publicly admit that something we say is right? Anything we say is right? Please??"

Where are you going to end??

2) Line up the maximum political support for your side in the fight ahead by making every argument you can about the deadweight cost of taxes, waste of inefficient spending, the regressive immorality of taxing Warren Bufffet's employees at Dairy Queen to pay his entitlement benefits, and on and on.

You don't say, "we can solve the entire problem with spending cuts" because it's not true.

But you also don't publicly give an inch on the necessity of tax increases unless you get something from the other side.

Pick #1 or #2.

When I was a young puppy lawyer well back in the prior century I was involved in a couple of labor negotiations. Rule #1 is: in your opening offer you are *never reasonable*. Both sides may know in advance exactly where they will wind up in the end, but they *never* start with that as an offer. Because, obviously, the one that does loses. And compared to what we are talking about here, that was tiddlywinks.

Today, if I am part of any right-side organization (think tank, political, whatever) trying to control the unfettered growth of government, involved in the political fight to do so, and my realistic objective is to end up giving a 50% tax increase to get a 50% spending cut in the final fiscal solution, then on the tax increase front I concede nothing, I publicly consider nothing, until the head of AARP stands up before his membership and says, "We have to admit we can't solve this problem with just more taxes, benefits have to be cut too".

I don't give nuthin', I mean zip nada, until I get like value back from the other side.

Now, as it happens I'm not in that fight and have been a political independent my whole life. So I can talk about a 50%-50% model solution ... talk to Repubs of the need for future tax hikes and of the bogosity of unfunded tax cuts ... and even know a few people on the AARP boards whom I can talk to about Medicare's money problems.

That's the role of "honest broker", mediators can be very valuable in resolving negotiations in the end. Honest brokers can point the parties to solutions.

But one has to make a choice about the role one wants to play in the process.

Being an "honest broker" lets one be, well, intellectually honest. That's good!

But if you feel the need to get into the political fight to further one side or the other on the merits, as a matter of *right versus wrong* -- then if you play like an honest broker as a starting point, your side is going to get rolled. You are going to lose.

If you want to stand up for something you believe in a partisan political fight, you have to be partisan, political and fight. That's how it works.

C'mon...what's the only effect of huge deficits that every economist agrees on? That, once the economy picks up, the cost of federal debt will rise...leading to higher interest rates on the 10 and 30 year bonds. BINGO!

That's the world our old folks want to live in, the one where they can get 6% on their t-bonds with no thinking. And if the spending is disproportionately on them, well, that's proper, of course, they've "worked all their lives" and "deserve it".

Summary - they don't work, so they don't pay income taxes (I realize IRA disbusements are taxed, but the vast majority of old folks don't pull enough out to reach painful marginal rates). They want spending on them, not on kids (we love Medicare, we hate local school taxes). The inflation accompanying 6% returns is not a bad thing, since Soc Sec is inflation-protected. If we want to get back to a balanced budget, we must find a way for the swelling ranks of the government funded retired to hurt when there's a deficit. (Taxing mutual funds instead of property?) We see the fury at the local level when school taxes rise...we need the same fury focused on the federal government, rather than fear of losing a hand-out that is paid for by, well, somebody else.

And, who knows? If they have the federal deficit to be mad at, we might even have some peace at town meeting when a 1% school budget increase is proposed...nah, I'm dreaming...