StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



No, Gov. Pawlenty, Tax Cuts Don't Pay for Themselves

19 Jun 2011
Posted by Bruce Bartlett
Republicans claim to be deeply concerned about the budget deficit and the national debt, yet repeatedly demand additional large tax cuts. For example, former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, supports a balanced budget amendment to the Constitution but also wants an $8 trillion tax cut. He rationalizes this contradiction by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13:
 
“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”
 
In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.
 
The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.
 
This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.
 
Republicans also assert that the tax cuts of the George W. Bush years paid for themselves. On July 13, 2010, Senate Minority Leader Mitch McConnell said that there was no net revenue loss from any of the Bush tax cuts, in defense of an earlier comment by Senator John Kyl that all spending increases must be offset so as not to increase the deficit, but tax cuts need never be offset. Said McConnell:
 
“There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”
 
This is a view not shared by economists who worked for Bush. For example, Alan Viard, senior economist at the Council of Economic Advisers during Bush’s first term, told the Washington Post in 2006, “Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that.” Robert Carroll, deputy assistant secretary for tax analysis at the U.S. Treasury Department during Bush’s second term, also told the Post, “As a matter of principle, we do not think tax cuts pay for themselves.” On September 28, 2006, Stanford economist Edward Lazear, chairman of the CEA in Bush’s second term, testified before the Senate Budget Committee:
 
“Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data…do not support this claim. Tax revenues in 2006 appear to have recovered to the level seen at this point in previous business cycles, but this does not make up for the lost revenue during 2003, 2004, and 2005. The tax cuts were a positive step and have contributed to the enhanced economic growth, additional jobs, higher real disposable income, and the low unemployment rates that we currently see today.”
 
The truth is that no serious Republican economist has ever said that a tax rate reduction would recoup more than about a third of the static revenue loss. The following studies represent the generally accepted view among Republican economists.
 
● A 2005 Congressional Budget Office study during the time that Republican economist Doug Holtz-Eakin was director concluded that a 10 percent cut in federal income tax rates would recoup at most 28 percent of the static revenue loss over 10 years. And this estimate assumes that taxpayers have unlimited foresight and know that taxes will be raised after 10 years to stabilize the debt/GDP ratio. Without foresight and no compensating tax increases or spending cuts, leading to an increase in the debt, feedback would be negative; i.e., causing the actual revenue loss to be larger than the static revenue loss.
 
● In a 2006 article published in the Journal of Public Economics, Harvard economist Greg Mankiw, who chaired the CEA during Bush’s first term, estimated the long-run revenue feedback from a cut in taxes on capital at 32.4 percent and 14.7 percent for a cut in labor taxes.
 
● A 2006 analysis of extending the 2001 and 2003 Bush tax cuts by the Republican-leaning Heritage Foundation estimated that only 30 percent of the gross revenue loss would be recouped through behavioral effects and macroeconomic stimulus.
 
For the record, the CBO recently concluded that the Bush tax cuts reduced federal revenues $2.8 trillion between 2002 and 2011.
 
In short, there is no evidence whatsoever supporting Gov. Pawlenty’s view of the Reagan tax cuts or Sen. McConnell’s view of the Bush tax cuts. They didn’t pay for themselves and there is no reason to think that further tax cuts will, either. Esteemed Republican economist Alan Greenspan confirmed this fact last year on “Meet the Press.” Asked whether he thought that tax cuts pay for themselves, as Republican leaders had said, Greenspan replied, simply, “They do not.”
 
Reprinted from the Fiscal Times

Reality isn't the point

When Republicans say that tax cuts pay for themselves, they aren't talking to people who think. They are talking to people who take on faith whatever is dished out by Fox News. A point-by-point rebuttal, even one quoting Republican economists, won't convince them that tax cuts don't pay for themselves. This is what Krugman calls a zombie idea. It won't die no matter how many facts are thrust through its heart.

I wish I knew what it will take for the American people to wake up to this sort of demagoguery, but I'm afraid I don't. I simply can't imagine Joe the plumber reading this column and thoughtfully deciding that Tim Pawlenty doesn't know what he's talking about. His mind just doesn't work that way.


What most people forget, is

What most people forget, is that federal taxes were RAISED by Reagan for the average family. While he lowered marginal income tax rates, he raised payroll taxes. I remember quite clearly, because my payroll taxes more than doubled under Reagan. It truly shows the power of Republican propaganda that this is never mentioned.


The way this idea refuses to

The way this idea refuses to die speaks volumes about Republican economic policy in general. Evidence simply does not matter. Bush said he was cutting taxes in 2001 to return the surplus to the tax payer. A tax cut that increase revenue could not return a surplus. Even Bush's own words do not stop his supporters from claiming that the tax cut increased revenue. Same with Reagan who said tax cuts would starve the beast and deny govt revenue.

If revenue increasing tax cuts existed, why wouldn't they also be popular with democrats? Every politician loves to cut taxes. The fact that this is only a position taken by Republicans (or a few conservative leaning dems) says all that needs to be said. But the zombie claim continues.


Capital Gains

I think that the lowering of the Cap Gains Rate did increase revenue, as the taking of gains is a somewhat elective event. you are right on most ordinary income though. you are not going to stop working!


What you are describing is

What you are describing is not increasing revenue. Electing to sell a stock because of a capital gains rate reduction transfers future tax revenue to the present.

Greg Mankiw published a study on revenue recovered from tax cuts where he concludes 34% of the revenue from the cap gains cut is recovered.

"In a 2006 article published in the Journal of Public Economics, economist Greg Mankiw, who chaired the Council of Economic Advisers during Bush’s first term, estimated the long-run revenue feedback from a cut in capital taxes at 32.4 percent and 14.7 percent for a cut in labor taxes."

http://dash.harvard.edu/bitstream/handle/1/2770515/Mankiw_DynamicScoring...


Belief system

I believe that plenty of Republican economists (really, Republicans first and economists second) do fudge the issue and claim that tax cuts pay for themselves, when and if such tax cuts are potentially available politically. They probably don't believe their own words, but they will lend their rhetorical support to the notion, giving cover of respectability to political shills like McConnell and Pawlenty.

One interesting question is whether the relationship between taxes and output works symmetrically. Will tax rate increases deliver only 75-85% of expected revenues in a static scenario just as tax cuts only diminish them by that amount? Is there any research on this aspect?

Regarding the comments on voters, this has become a quasi-religious tenet on the right. Just as it is not worth discussing with a believer the evidence for the divinity of a particular figure etc., economic facts don't matter here. A certain group of voter with a predisposition for having "discovered things" for themselves will believe that tax cuts pay for themselves since it sounds like Good News. Until there emerges a national political figure (or several figures) of unquestioned evangelical credentials and previously successful in business who fights for a balanced budget in part based on more sensible tax policy, the Fox type groups will continue to believe in this pseudoscience.


Tax Rate Changes

are symmetrical. However, there are many tax cuts that just lose revenue dollar for dollar becaise they have no incentive effects, and there are tax increases that will raise revenue dollar for dollar. If we are going to raise taxes, we should obviously try to find those that will have the least disincentive effects and tax avoidance opportunities. 


Tax Rate Changes are Symmetrical

Good point, That would mean, I guess that if a tax cut of a given percentage costs, say 75 cents per dollar in net revenue then a tax increase of the same percentage raises only 75 cents per dollar in net revenue. Clearly, this means that (in this example), everything else being equal, a dollar of spending cuts would have the same effect on deficit reduction as $1.25 in tax increases. While the numbers are merely an example, they are not unrealistic.

For example, you wrote that, as measured by GDP, the Reagan tax cuts cost $66 billion over his 8 year term. But, I would bet that the nominal amount of those cuts (i.e. before these dynamic effects) easily exceeded $88 billion (66/75).


Multipliers

There are dynamic effects to spending changes as well. A big cut in spending right down would probably reduce growth and revenues. Thus the reduction in the deficit would be less than the nominal amount. A cut in R&D spending might not have a short run effect on growth but could reduce it measurably in the long run. 


Multipliers and Divisors

Yes, I agree. But, doesn't this point out the real problem with economic projections with respect to both tax cuts and spending increases or tax increases and spending cuts? Studies with respect to all these scenarios conveniently don't consider both sides of the ledger. It is as if our ledger only has a credit side and no debit side. In other words, a study with respect to a tax cut would typically assume there are no corresponding changes to spending policy (i.e., the assumption is that the tax cut increases the deficit). And, a study with respect to the alleged multiplier effect of spending increases would assume there is no corresponding change in tax policy (i.e., that the spending increase is funded by higher deficits). Not only are these the assumptions in what are typically only 10 year forecasts--- not offsetting these choices is also the historical reality.

Because economists and politicians on both sides of the spending and taxing debate use these assumptions, there is a natural bias that increasing the deficit is the answer to everything. That is largely the reason we have the deficits and the accumulated debt we are now saddled with.

Add to that the fact that only a 10-year period is used for forecasting, and one can easily see that this whole thing is mostly a mirage. There is a real cost in both directions that is never offset in forecasts. And what costs there are are simply pushed forward to the future and out of the projection window.

It is, however, legitimate to consider the effect that tax and spending policy have on incentives and, with limited exceptions, and as a straight matter of economics, there should be a general bias in favor of lower taxes coupled with lower spending. From the perspective of incentives and economic efficiency, raising taxes to increase spending on, say entitlements, has the double effect of discouraging both investment and work. One could argue that these inefficiencies are a fair price to pay for other societal benefits, but "progressive" economists like to conveniently skip over this step to merely argue that increased spending is good economics, full stop.


What a quaint belief in

What a quaint belief in multipliers. Sir, the 1970s are over.

Cutting value detracting spending will free resources and help the economy grow

Problem is that value detracting spending (ie, rent) is politically well protected.


We Live In an Intellectual Dark Age

Another excellent column, Mr. Bartlett. As other commenters have pointed out, the truth and facts don't matter any more. Whether it is believing that tax cuts pay for themselves or that climate change is not caused by humans, the hard right-wing simply doesn't care about facts or details or anything that doesn't agree with their FoxNews-provided talking points. This is a very dangerous place for this country to be. When facts have no sway in the political discourse, the most ugly and distorted outcomes can occur. This is another intellectual Dark Age dawning.....


What is functional finance...

Functional finance is a term coined by the late economist Abba Lerner that describes government policy as follows:

Financing government expenditures should NEVER be looked at through the lens of solvency, bankruptcy, or traditional measures of private sector accounting. The reason is quite simple: a federal government that issues long term liabilities (bonds or forward year tax receipts) AND issues the short term liabilities (cash) to purchase those long term liabilities does not go bankrupt - EVER.

Financing government expenditures should instead be looked at through the lens of maximizing real gross domestic product. Gross domestic product has just a few parameters GDP = Personal Consumption Expenditures + Business Investment + Government Expenditures + Exports - Imports.

The reason the Bush and Reagan tax cuts did not work is because whatever was gained from increased government debt courtesy of tax policy was lost through trade balance. What did work was real interest rates on government debt courtesy of Paul Volcker (Milton Friedman - permanent income hypothesis).

The right way to handle supply side tax policy is to sell tax breaks (forward year tax receipts) through the Treasury department rather than giving them away. When the U. S. Treasury sells forward year tax receipts, it by definition sells less debt.


Bruce, You write: The fact is

Bruce,

You write:
The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.

Bruce -- With all due respect, are you kidding???

So, just hypothetically, if a tax rate cut generated a great degree of incremental growth such that GDP ended up much larger than it otherwise would, even if it generated so much GDP growth that revenues increased (in real terms or even in real and per capita terms), you'd call it a reduction in revenues per "the only metric that really matters". In other words, the more effective and beneficial in terms of GDP impact, the worse it is per your "only metric that really matters" (and yes, I'm saying that you are clearly implying a that reduction in revenues per that metric counts against the merits of that policy).

Let me be clear about something. I think it's ridiculous and harmful that the "tax cuts increase revenues" myth persists among conservatives. A few years ago I even went to the trouble of compiling this list http://swordscrossed.org/node/1671 to provide to the analytically-challenged conservative ditto-heads who buy into that silliness (a belief which shows an utter lack of understanding of the basic concept of correlation, let alone causation).

And I favor higher taxes, not lower, as part of an overall package to address our long-term fiscal imbalance, along with substantial cuts in projected spending (both explicit expenditures and subsidies via the tax code).

So I'm not making a partisan point. I'm just saying your "only metric that really matters" seems nonsensical if the point is to downplay benefits and/or even cast in negative terms the effects of a tax cut. If I'm missing something, please let me know how it makes sense to claim that the revenue benefit (or harm) -- and in turn, to a large extent, the overall net benefit/harm -- of a tax cut should be measured solely by a metric whose magnitude (and positive vs. negative condition) declines as the benefits of the policy increase.

To further illustrate, if (again just hypothetically) a tax increase devastated GDP, leading to deep recession and/or much lower growth on an ongoing basis than would otherwise occur, your "only metric that really matters" could show a substantial increase (in revenues as a % of GDP), even if revenues actually declined (in real terms). Would you suggest that such a dynamic be held out as a positive effect of that policy?

Or are you now going to claim that you meant nothing negative in applying that metric to the Reagan tax cuts (or Reagan fiscal policies in general)?


Bruce, As follow up, I guess

Bruce,

As follow up, I guess the simplest (and probably better) way to view your claim that revenue as % of GDP is "the only metric that really matters" is that it is akin to static analysis. If you cut tax rates (and don't reduce tax credits, deductions, etc.), you will, almost by definition, ensure lower revenues as a % of GDP (unless bracket creep and similar effects [i.e., incomes increasing and moving to higher tax brackets] makes up for the reduction in tax rate). If you go from y = x to y = 0.9x, no matter how much x grows, y will still be only 0.9x, so will always stay lower than x.

This is probably a better critique than my comment above, because it's probably unlikely that one tax cut that generates even more incremental growth than another would yield a lower figure for revenues as % of GDP (since revenues would probably increase roughly proportionately with greater GDP growth).

The key point is that your "only metric that really matters" is largely rigged to produce the result you point to as a criticism of tax rate cuts. Even if a tax cut were to generate higher real revenues via incremental GDP growth, the roughly locked-in lower ratio of taxation to GDP is likely to produce that result. In generally I think people would consider lower tax rates that yielded higher real revenues as good policy (were it to occur or be likely, just hypothetically), yet you apply this "only metric that really matters" to rig a negative result with which to criticize the policy on a specious basis.


It is not the only metric

Brooks, I agree with you that using tax revenue as a percentage of GDP has its problems, and for some of the reasons you stated. But, part of the answer to your comment regarding inflation is the fact that the figures Bartlett is using from the TPC are actually stated in constant 2005 dollars. So inflation is taken into account, at least to some extent, I think.

I have no big problem with using tax revenues as a percentage of GDP as the starting point of the analysis. In fact, I could well agree that it is an appropriate starting point. However, it is just a starting point and I think the fallacy here is the unstated claim that this metric is sufficient, in and of itself, to derive any meaningful conclusions as to the effect or effectiveness of a given tax policy. Rather, we need to use several different metrics in conjunction with each other. The fact that politicians and pundits like to pick out one or the other metric is an over-simplification and is most often used to arrive at whatever pre-determined ideological answer they want. That's why the economics and economists brands are rapidly losing credibility and value.

What I was trying to do above in a very simplified manner was to compare the projected nominal (static) cost of the Reagan tax cuts with the actual revenue loss per the GDP measure. That, in itself, is not an easy thing to do and I don't have ready access to what that static projection was (in fact, there were at least two cuts involved and one raise, further complicating matters). But, Bartlett's starting point suggested that the total revenue loss of the cuts (per his GDP measure) was only $66 billion over an 8 year period. The difference should represent something like the dynamic benefit of those cuts. That struck me as an awfully small number ($66 billion) compared with what I think was a very much larger static reduction in taxes and a terribly good bargain for the other positive benefits that would have been derived. While correlation is indeed not causation, in fact, GDP grew during this period by an average of 3.2 percent, more than the prior or subsequent administrations, which perhaps suggests that the cuts had a positive effect on GDP growth. I think that it is in this light your objection has to be viewed. This type of analysis will, I'm afraid, never be satsifactory or receive bipartisan recognition any more than the debate over the effect of government stimulus spending.


Vivian, Re: But, part of the

Vivian,

Re: But, part of the answer to your comment regarding inflation is the fact that the figures Bartlett is using from the TPC are actually stated in constant 2005 dollars. So inflation is taken into account, at least to some extent, I think.

I don't know what you're talking about. What was my "comment regarding inflation"? I was simply making the point that...well, see my explanation at http://economistmom.com/2011/06/do-tax-cuts-pay-for-themselves-sorry-no/... if my comments on this thread are not clear.


Tax Cuts

Bruce I heard your interview on Larry O'Donnell's show. Surely you know that the argument is tax cuts outperform the predictions of the static model. You cited how tax cuts under RR took revenues down from the predictions of the CBO, but not how the CBO had scored them in the outyears. That gives me an inkling that they outperformed what the CBO expected them to do.

Second, you did prove the key tenet: Tax cuts provide enough increased revenues to cover the bonds issued.

Thirdly, the idea is to free resources for the private sector. Who died and made 'revenue neutral as a share of GDP" tax cuts the standard? The less that goes to Washington the better.

There are tax cuts that change incentives, and tax expenditures that affect the demand side.


Tax increases are gooood, tax

Tax increases are gooood, tax cuts are baaaad. Spending increases are gooood, spending cuts are baaaad. Bigger government is gooood, smaller government is baaaad. More regulation is gooood, less regulation is baaaad.

Its big govenment types like you Mr. Bartlett that have put our nation in the situation that we are today. Whether tax cuts completely pay for themselves when you want them to is a moot point. Conservatives advocate tax cuts on the principle that the people best know how to spend/invest/save their own money than the government. We are in the deficit and debt situation we are in because of government spending. You can say this or that about tax cuts, but in the end you can't ignore the obscene growth in government owing to the government programs that always overspend the projections and the tax increases always implemented to "fix" those government programs.

Why don't you and the liberals on this blog look at the original projections and intent of the government programs we have today across the board and look at all the "reforms" of those programs that included tax increases and ask whether those tax increases ever were effective in reforming those programs? Ronald Reagan that you all despise, "saved" social security with a tax increase in the 1980s and yet its still on the road to bankruptcy. That's just one example. The excuse is demographics. No, its the nature of big government. Of politicians overpromising and distorting our economics to get elected.

So no, I don't support more tax increases, because spending has never been cut! We need to cut spending, by reforming cradle to grave government programs. The government must operate in its proper role of protecting the people from external threats, not running people's lives! Cut taxes to spur economic growth and incentive to work, save and invest. And deregulate industries that pay good wages like the energy industry, which are being hampered by ridiculously hostile environmental regulations. Freedom and prosperity is the antidote to the moribound economy we have today and you don't get those by increasing taxes.


This is hilarious.

This is hilarious. Attempting to cast Bruce Bartlett as some sort of zombified uber-statist. As usual, anything that does not fit within narrowly defined Conservative dogma is defined as Liberal.

The funniest part is that you agree with Bruce's point: tax cuts do not pay for themselves and, to use your own words, that "isn't the point."

He's pointing out that the rhetoric often used to sell tax cuts (in this specific instance, by Tim Pawlenty) is BS. You get all fired up about that, but concede the point quickly, and attempt to shift the goalposts to an argument about tax cuts spurring economic growth. The problem with that is that Bruce pointed out in his post that several different analyses (by Republican economists) have concluded that tax cuts recoup about 1/3 of the static lost revenue via economic growth. He didn't ignore the growth issue.

As for spending cuts, the issue is obviously exactly what to cut and when to do the cutting (right now, with ~9% unemployment, may be a poor choice that will actually exacerabate the problem - note that this also applies to tax increases, which is why the Dems ultimately went along with extending the Bush tax cuts). I notice your rant about spending never once mentioned the military budget. Cut, cut, cut those entitlement programs, get rid of regulations... it's standard GOP boilerplate. Stock answers given for every problem.


I once tried to walk a conservative through this falacy . . . .

Using the example of a person who pays 30% in taxes. The first year, at a 30% rate, his $100,000 in income would result in $30,000 in taxes. If his pay increased 5% to $105,000 in the second year, his taxes would be $31,500. He would have paid a total of $61,500.

Now cut the tax rate the first year to 25%. The person would owe $25,000 the first year and $26,250 the second year, for a total of $51,250.

Overall tax revenues are an aggregation of individual's tax liabilities. With the reduction in rates, this hypothetical person is paying about $10,000 less than he would be with the higher rates. And so is every other person who would have paid 30% previously. So where, pray tell, does the government make up that $10,000 from this guy? At what point, and by what alchemy, will he eventually be paying more than $30,000 or $31,500 per year, which is what he would have paid absent the tax cut? He won't. Even assuming he invests the entire $10,000 and he makes a killing, it is QUITE unlikly he will not pay $10,000 in taxes. It is just as likely, though, that he pays down bills, or pays a little bit more on his mortgage. And this gap occurs every years that the tax rates are lower.

I have never had one conservative ever try to explain why I am wrong on this. They simply rely on the bromide "Tax cuts do increase revenues, and if you are unwilling to accept reality, you are not intelligent enough to discuss this issue." And with that, they run away with tails between their proverbial legs . . . .


I once tried to run a liberal

I once tried to run a liberal through this: When tax rate is 50% (state/local), they choose how much to trade off work/leisure.

WHen they move to FLA and the feds cut the tax rate, and suddenly face a 25% tax rate, they the incentive is to take less pay in leisure and more in cash.


Incentives say no

Here is the funny thing with that example.
Conservatives yammer on about taxation causing disinsentive to work.
Yet there is just as good a case to be made that the opposite is true; especially at the top of the income distribution.
At high levels of income, given a windfall of higher income with a tax cut leads to sloth and pleasure seaking rather than renewed work effort and more productivity, since the extra income is received as a gift. Certianly this has been the observed pattern with senior managers in American corporations.
The irony being, if you want top people to stay productive and hungry you need to provide some character building adversity and challanges: ie taxation (like the 1950s). Everyone benefits. The high performer stays sharp, the government can lower taxes at the bottom of the pyramid where there will be increased demand effects, and the budget is more likely to be balanced. Win win win.


Your assumption is flawed

As a typical liberal you have a hard time thinking in dynamic terms. Instead you come up with an example that can only work in a static world. Guess what? The world isn't static! No wonder we are in the mess we are in now! In a real world, if you give an investor more money to invest with or a consumer with more money to spend with or a saver more money to save with (and those are the only three things you can do with money) you will generate more economic activity!

The government takes money out of the productive private sector to spend on the priorities of politician who don't give a damn about anything but the next election. How is that efficient and productive?

But to your example, you assume everyone is employed and that everyone who receives a tax cut remain in their current economic situation. If you cut the taxes in the economy that results in greater economic activity so that a person who makes $100,000 may find an opportunity that pays him $150,000. Or he may find the money to make an investment that yields him a higher rate of return.

Another poor assumption you make is that everyone in your economy is employed. In this economy, if a tax cut results in lowering the unemployment rate from 9% to 4% over 5 years, this won't lead to greater revenue?

But a true conservative, not Mr. Bartlett, will tell you that the intent of cutting taxes is not to raise revenue for the federal government! Its to spur private economic activity and to restrict the bite government has on the economy. Conservatives want government to "grow" as a consequence of economic growth, not at the expense of economic growth. We don't want government to grow at the whim of a politicians priorities or pop idea, but in accordance with the constitutional role of government.

So go on ahead with this red herring argument to try to discredit tax cutting to mask your real desire for massive government spending and intrusion in our economy (like we don't have enough of that already!). It won't take away from the fact that government spending is causing our debt to explode. There is not enough revenue, even if the government confiscated all of the income of the rich to pay for the spending of this federal government. Spending has to be checked and the economy needs a real jolt by the private sector. The government can help this by putting itself on a diet and giving the people some their money back.


///The government takes money

///The government takes money out of the productive private sector to spend on the priorities of politician who don't give a damn about anything but the next election. How is that efficient and productive? ///

The conservative argument asserts that tax revenue is effectively thrown down a pit, taken out of the economy. The truth is, tax revenue is spent. Tax revenue pays salaries, buy contracted goods and services. Tax revenue goes right back into the economy.

///So go on ahead with this red herring argument to try to discredit tax cutting to mask your real desire for massive government spending and intrusion in our economy.///

Nobody is in favor of massive government spending, nor intrusion in our economy. The problem is that conservatives want to cut government size with a chainsaw or with C4 instead of with a scalpel. They've unsuccessfully tried to shrink or eliminate specific programs but have failed due to the popularity of the programs. So, now they've figured out that if they run the economy into a ditch, cuts somewhere, anywhere, will have to be made, and they will be able to make the Democrats complicit in the cuts so Republicans don't take all the hit for it.


Suppose it were only

Suppose it were only politically feasible to cut 10% from spending, which is currently around 24% GDP. Revenue is around 15% GDP. So we're cutting 2.4% GDP worth of spending. That gives us a deficit of 6.6% GDP instead of the previous 9% GDP.

Given the above, would you consider it wise or unwise (in the long term) to cut taxes by 10% without any further decrease in spending? This would reduce revenue to 13.5% GDP and increase the deficit from 6.6% GDP to 8.1% GDP.

You spur growth but at the cost of growing the debt. Or do you contend that the increase in the economy's rate of growth will be so large as to overwhelm the increase debt's rate of growth?


If tax cuts increase revenue,

If tax cuts increase revenue, doesn't that mean that they are ineffective in "starving the beast"?


Big Government

Yes tax cuts are ineffective in starving the beast because politicians have no shame, they simply borrow money to paper over the difference. The result is still bigger government. A tax cut can drop revenue to 16% of GDP, but shameless politicians like Barack Obama will still increase the government share of the economy to 24% of GDP through borrowing. So you are correct, unless we get adults leadership that act like every business and household in America, we will still have bigger government.


Many good points, but...

I think many people are making this more complicated than reality suggests. On the point of revenue neutrality after a tax cut, the basic question is not just whether or not the economy will grow. If it does indeed grow, it must grow by a percentage that exceeds the magnitude of the rate cut. To see this, note that the:

1. Tax Cut Rate = (old base - new base)/old base, and
2. Required GDP Growth = (old base - new base)/new base.

The exchange is not quite this linear as a result of the differing dynamics of various tax handles, but the major take away is that the new static base will be smaller than the old one. And since the absolute revenue reduction in the numerator is constant across the two equations, it means that growth will have to exceed the % of the tax cut. Now we need only ask whether or not we expect the economy to substantially beat the size of the rate cut. I think when actual numbers are discussed, this is pretty unreasonable in most scenarios. Incentives matter, obviously. The question is: how much?

With respect to some sort of statement about the optimal size of government relative to the economy, I am afraid it does not exist. Anyone arguing that the size of government should be x% larger or smaller is generalizing about the function of government beyond all relevance (except for, perhaps, conversations about the moderation of business cycles). While not as complex as the private market as a result of simple relative size, it is still too complex to capture in a single indicator. Should we not, as we do with the market, promote automatic optimization by directing our efforts to marginal analysis when advantageous? How useful is it to impose ill-informed macro level constraints when we know little of the future "exigencies of government"? I never understood that about the free-market idealist crowd. The strength of the market is the ability to respond to changing conditions. How does this pillar not support more general application? In case you are wondering, I do not argue that growth in government is always good. (This, of course, does not even begin to consider the distributional implications, which are non-partisan in their effects.)

Finally, one important point >>> demography isn't some liberal hoax. Unless you actively advocate for inequality in means-tested benefits, I don't see how any appeal to the statutorily intended size of a program makes sense. The intent was to provide a benefit to people in a specific situation. As it turns out, the US (thanks to the Constitution) is grounded on values in addition to those of economy, efficiency, and effectiveness. Values such as representativeness, responsiveness, due process, and equivalence under law would all suggest that the statutory intent was ideally to provide for the citizenry in a fair and equitable manner. This is not an argument for the status quo, just a rebuttal to the idea that we are wildly out of touch with original intent.


Re: your algebra, you might

Re: your algebra, you might be interested in this simplified illustration/explanation of the Laffer Curve that I put together http://swordscrossed.org/diary/20071026/logic-laffer-curve


Nice

I can't believe my oversight in not discussing the Laffer curve explicitly. This concept is just one (albeit a major one) of the reasons I don't believe government growth is good along the entire spectrum. In any case, looking at the relevant range of marginal tax rates supports the general argument. Though I can't speak to the assumptions used in determining these figures, yes Brooks, that is useful.


Thanks Marvin. FYI, the

Thanks Marvin. FYI, the figures in the table aren't based on any economic assumptions. The figures merely reflect the kind of algebra you discussed (to break even on revenues, the new tax base divided by the old tax base has to equal the old tax rate divided by the new tax rate -- because any fraction multiplied by its reciprocal equals 1).


You know...

I often wish you'd run for office, Bruce. Or, failing that, find a suitable candidate and advise the bejeesus out of him.


answer

That is not easy to create premium quality academic papers, peculiarly if you are inexperienced. However, that is not the worst thing because you can always buy essay paper. Moreover, customized essay paper corporations will be naturally prepared to help you.




Recent comments


Advertising


Order from Amazon


Copyright

Creative Commons LicenseThe content of CapitalGainsandGames.com is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.