Continuing with the 'shameless commie propaganda' on tax cuts and revenues

Lately this undershooting and overshooting has grown more pronounced. My guess is that it's a result of increased income inequality:

I think that another part of the problem is that we rely on GDP increases as our standard for economic growth, when very large chunks of those increases are merely "churn" and contribute only a fraction of their value to anything that could reasonably be considered "growth".

(I was shocked to read, over at Floyd Norris's Times blog, that 93% of the "new jobs" that are being reported in Labor Department numbers are based solely on demographic projections (i.e. to Labor Dept. assumes that new jobs will be created as population increases), and aren't based on any actual reports of increased employment. )

What we're really seeing, rather than fundamental economic growth, is "churn" brought about by asset inflation that is a result of rapidly growing pool of "investment" dollars chasing after a much more slowly growing set of decent investment opportunities. And while this may translate into higher tax revenues overall, its long term impact is actually anti-growth.

Well, imaginary jobs generated by BLS statisticians don't generate any taxes, so that can't be a factor in the trajectory of tax revenues. But you're right that tax revenues are much more asset dependent than they used to be. That's not always a bad thing, but the higher tax revenues generated by the mortgage insanity of 2004-2006 will probably turn out to be anti-growth. In fact, I'm thinking there's going to be a pretty dramatic decline in income tax revenue this fiscal year.

1. "Eventually, tax revenues did come to surpass their 1982 and 2002 levels in real terms."

This eventuality is not given, this is just an indication of our economy being on the particular half of the Laffer's curve. On the other half tax cuts will lead to reduced tax revenues - I simply refuse to believe that a college graduate with minimal math exposure does not understand this.

2. "The U.S. economy has a tendency to grow, whether or not Congress is cutting taxes."

This is also far from absolute. Tax at 100% and you will simply have no economy. Tax at 90% and you will see no growth.

3. "But would any non-charlatan want to argue that all of the economic growth post-1982 and post-2002 was tax-cut-induced?"

You can make as many unsubstantiated guesses about it as you want - but they will be left as unsubstantiated guesses, because there is no way to replay the history in different tax situation. It is simply dishonest to represent your unsubstantiated opinion that tax cuts did nothing but harm as anything but unsubstantiated opinion.

This eventuality is not given, this is just an indication of our economy being on the particular half of the Laffer's curve.

you seem to be under the impression that the Laffer curve is symetrical...and while popular representations of it usually are, the curve itself is not necessarily symmetrical... nor is there any evidence which suggests that the point at which revenues go up when tax rates go down is anywhere near the middle.

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But you're right that tax revenues are much more asset dependent than they used to be. That's not always a bad thing, but the higher tax revenues generated by the mortgage insanity of 2004-2006 will probably turn out to be anti-growth. In fact, I'm thinking there's going to be a pretty dramatic decline in income tax revenue this fiscal year.

I personally think that when the primary source of tax revenue is "income" taxes, a system that becomes dependent upon any kind of asset inflation is doomed to failure -- and the news business is a perfect example. Magazines and newspapers lay off staff (and increasingly hire 'stringers') not because they are losing money, but because of the demand from stockholders that p/e ratios be maintained to whatever extent possible. "Risk" is being transferred from the stockholders to the workers -- and the fewer workers there are (and the less they are paid), the less real economic growth can occur.

To p_luksiak

1. Who said anything about symmetrical or middle or that even the real shape is simple curve?

2. Working class will always pay for everything - it is simply unavoidable. The real problem is how effectively state collects taxes, spends collected and regulates business.

It is simply dishonest to represent your unsubstantiated opinion that tax cuts did nothing but harm as anything but unsubstantiated opinion.

Dude, I like tax cuts. I just go nuts when people misuse tax statistics to make bogus claims that they're revenue-positive. If marginal tax rates were 90%, they might be. But rates are nowhere near that in the U.S., and haven't been for decades.

Alex: "Tax at 90% and you will see no growth."

Hey Alex...two questions with answers below:

Q1: What the period with the largest economic growth in the US?

Q2: What was the highest marginal tax at that time?

Now I'm going to write a little bit so you have to think about it.
.
.
.
A1: the 1950s
A2: 90%

Hmmm...Alex...doesn't that mean your comment above is wrong? Oh yeah. It does.

Please learn some history and how to use and apply statistics. Then come back.

To Mr.Fox what is specifically bogus in the claim that Reagan's and Bush's tax cuts were revenue positive? Did not you agree with this in your own post:

"Eventually, tax revenues did come to surpass their 1982 and 2002 levels in real terms."

And one more thing once we are talking about this:

"Which proves absolutely nothing about the efficacy of tax cuts."

However, it disproves with 100% reliability your point of view that tax cuts always lead to lower revenues.

To Corey. Marginal tax levels is only part of the picture let us take broader measure: according to CBO in 1950 government outlays were 15.6% of GDP, in 1970% 19.3 and in 1980 21.6.

http://www.cbo.gov/ftpdoc.cfm?index=3521

No serious economist believes that we are on the "right side" of the Laffer curve, not even the Bush economists. Sweden, which has an overall tax rate of 60% is growing economically, so alex's "point" isn't really.

After Clinton raised taxes in 1992, the economy grew at an accelerated rate. How can you possibly explain that away?

Alex,

Clearly by talking about HALVES of the Laffer Curve, you were giving the impression that you meant it was symmetrical. One half is as big as another half, so there is symmetry. If you had said PARTS, or something to that effect then it would be different.

Furthermore your claim that we cannot replay historical scenarios with a different tax situation is of course strictly speaking true. But nonetheless there are all sorts of reasonable prognosis that can be made. And by ANY reasonable prognosis by ANY fairly competent economist the aforementioned tax cuts, ALWAYS come out as revenue losers. It's really that simple.

... what is specifically bogus in the claim that Reagan's and Bush's tax cuts were revenue positive? Did not you agree with this in your own post:

"Eventually, tax revenues did come to surpass their 1982 and 2002 levels in real terms."

... it disproves with 100% reliability your point of view that tax cuts always lead to lower revenues.

Sigh. I never said that "tax cuts always lead to lower revenues." I don't know of anyone who does say that. I'm simply saying that the Bush and Reagan tax cuts, taken as a whole, led to lower revenues than would have been the case if there had been no tax cuts.

Now I'm actually a fan of Reagan's tax cuts, some of them at least. I liked Bush's dividend tax cut, too. And if you'll scroll back a few entries on this blog you'll see that I think the parts of the 1981 Reagan tax cut that affected the highest earners actually may have had Lafferesque effects. But the tax cut as a whole did not, and not even its advocates among economists would claim that it did. Go to the library and check out The Growth Experiment, by non-dishonest supply-sider Larry Lindsey, if you don't believe me.

Alex, are you saying you really don't understand the principal difference between revenue growing BECAUSE of tax cuts, and revenue growing DESPITE tax cuts?

The first has never, ever been documented to happen, the second will always happen eventually. It really isn't that hard to understand, although clearly a couple of Republican Presidential hopefuls don't understand it other.

But kudos to Justin Fox for at least being intellectually honest when arguing for tax cuts.

(PS. reposted due to problem at first posting)

Hej Esben, sorry about the comment posting problems. I guess it's just because of the link to your blog (which has really great pictures, by the way).

Justin,

It's even worse than that. Alex's first point is wrong as well, something too many people who debate this Laffer curve issue don't realize.

It is NOT in fact true that if tax rates were 100% no one would show up for work and therefore tax collections would be zero. This analysis just looks at govt revenue and forgets about govt spending. Whether people worked or not would depend on what they get out of it, what govt transfers they receive.

1. To Mr.Fox "Sigh. I never said that "tax cuts always lead to lower revenues." I don't know of anyone who does say that."

Then why do you call people who share this opinion with you - charlatans using bogus economic data? BTW, this question is a rhetoric one - I know why.

"I'm simply saying that the Bush and Reagan tax cuts, taken as a whole, led to lower revenues than would have been the case if there had been no tax cuts. Now I'm actually a fan of Reagan's tax cuts ..." - Had you presented it at its face value as a slight difference of opinion from a political opponent, nobody would have any problem with it.

2. To SanFranciscoJim

"After Clinton raised taxes in 1992, the economy grew at an accelerated rate. How can you possibly explain that away?"

There is nothing easier - our economy is oscillating near the max (or at least near a local max) on the Laffer's curve, so raising taxes when times are good is as good policy as cutting them when times are good. The only problem is that Congress is way too slow in its reaction to the bad times - it took market crash of 1929 proportions, recession, a major terrorist attack and finally a danger of a double recession in ordder for Bush's tax cuts to passed.

To be continued.

Correction:

"so raising taxes when times are good is as good policy as cutting them when times are good."

Should be

"so raising taxes when times are good is as good policy as cutting them when times are bad."

To Esben, you are joking, right?

"Alex, are you saying you really don't understand the principal difference between revenue growing BECAUSE of tax cuts, and revenue growing DESPITE tax cuts?"

There is simply no such such difference there: revenue growth occurred DESPITE the rate cut, and it occurred BECAUSE economic growth was invigorated by the rate cut.

To Gabriel. North Korea is the only example of 100% taxation with abundance of government provided benefits, nobody else even tried to go near this level for any substantial period of time. And even North Korea does not do 100% anymore.

BTW, there is problem with my previous post, the correction to this post is already in the log, but the post did not make it yet. I will repost tomorrow if required.

Alex: "There is simply no such such difference there: revenue growth occurred DESPITE the rate cut, and it occurred BECAUSE economic growth was invigorated by the rate cut."

This is one of the most nonsensical things I have ever read.

Alex, things don't happen despite AND because of something. Either something - overall - contributes in a negative direction or in a positive direction. Both at the same time is a logical impossibility as they are opposites. Of course a rate cut might in some ways reduce revenue (for instance from low income groups) and strengthen in others (for instance from high income groups) but the overall effect is either positive or negative.

If the overall effect is negative, but the economy keeps growing then it is so DESPITE rate cuts. If the overall effect is positive then the economy grows BECAUSE of rate cuts.

You cannot abolish basic laws of logic, Alex.

Alex,

Either you are joking or seriously misinformed. it's hard to tell which. Simply put no serious economist, on the left OR on the right, believes that tax cuts pay for themselves. Not Reagan's. Not Bush's. The estimates published by CONSERVATIVE economists of the loss in revenues varies from 50 to 70 cents on the dollar. Google Mankiw on this, among others.

Correction: My second last pragraphed should have read:

"If the overall effect is negative, but the *revenue* keeps growing then it is so DESPITE rate cuts. If the overall effect is positive then the *revenue* grows BECAUSE of rate cuts."

To Esben: If the overall effect is negative but revenue ... - and how do you measure this mythical substance of "overall effect"?

To Gabriel - I like that you did agree with me so fast on how 100% taxation affects work habits. I do not need to consult an economist when I can simply look at reliable data myself.

Alex, you estimate it based on comparison with reasonable prognosis for the alternative scenario, i.e. no tax cut.

Imagine the growth in revenue has been, say, 3% per year following a growth in the economy of similar magnitude for a number of years. Given no major economic events it is reasonable to expect that revenue would continue to grow at about 3% next year.

If you then introduce large tax cuts and revenue growth then falls to 1%, while growth in the economy remains constant then it is fairly obvious that the tax cuts are reducing revenue, even though it still growing. Because 1% growth is much less than the reasonably expected 3% you would have had without a tax cut. Thus revenue keeps growing DESPITE the tax cut, not because of it.

It's not rocket science. It's very basic logic.

And Alex, what reliable data do you have regarding 100% taxation? For the record I agree with Gabriel that there is nothing given about revenue falling to 0 at 100% tax. Plenty of people work for free today, why not under those circumstances?

Hey Alex,

Those goalposts sure move fast don't they...especially when you push them. Just admit you were wrong and then we'll move on to your next point.

To Esben: "Given no major economic events" - if we had no major economic events in 1981 and 2001 than what would you call a major economic event.

To Corey: I do not understand your last post.