From this thread.
I think we have put this particular myth of supply side economics to rest.
You can’t answer this categorically. All you can say is that given a specific tax level, a tax cut will likely not raise more revenue through growth than directly lost through the tax.
The response of the economy when reducing taxes from 90% to 70% will not be the same as the response of an economy when you reduce taxes from 40% to 20%.
You also have to consider the time factor, because the tax collection revenue is linear, but the effect of growth is exponential. IF lower taxes increase GDP growth by 1%, then there WILL be a time when government revenue due to the tax cut rises above the level it would have been with the tax. And some time farther down the road when the increased government revenue will pay for all the lost revenue, plus interest.
What we can say is that given the empirical evidence we have from recent tax cuts (say, the Bush tax cuts), it does not seem that the revenue lost in taxes is recovered through growth in a reasonable time frame. It’s not even clear that Bush’s tax cuts increased growth.
The problem with stating anything like this categorically is the same as the problem with proving that Keynesianism works (or doesn’t work). There are so many confounding variables and so many unknowns in the macro economy that it’s very hard to state with absolute certainty that any specific policy had a specific effect to any level of detail.
Case in point: Christina Romer’s model said that with the stimulus package, unemployment would not rise above 8%, and without it unemployment could hit 9%. Clearly both of these models were completely wrong, and yet the supporters of the stimulus will not accept that this indicates the stimulus failed. They just claim that the economy would have been even worse without it. And supply siders can say the same thing. These theories become unfalsifiable at some point in the minds of the true believers in them. There’s enough complexity that they can always come up with an excuse for why the grand plan didn’t work as advertised.
I think there’s enough empirical evidence to conclude that tax cuts at today’s typical taxation levels will not increase growth enough to recover the revenue in any reasonable time period.
Tax revenue as a % of GDP has been pretty stable in the US for the last 70 years.
This despite the income tax being cut in half and the corporate tax being cut by over half, as well as various investment incomes (capital gains, dividend, etc) being cut by half or more.
It seems even if you cut corporate and income taxes in half, revenue stays about the same.
however Fica taxes have gone up a bit.
http://www.taxpolicycenter.org/taxtopics/images/ptax2_2.jpg
Maybe we’ve just gotten more regressive at the federal level and things stabilized.
Well, they keep shifting the burden to the less affluent. Increasing taxes and fees and fines for the non-wealthy to fund the tax cuts of the wealth. Focusing IRS audits on the middle class and lower while going easier on the rich. That sort of thing.
Well sheeeit son, I suppose that cutting taxes from 100% to 50% WILL in fact raise the revenue but I was assuming that we were dealing with the world as it exists. Let me rephrase the resolution: Cutting taxes at this point will not increase revenue.
You are assuming that cutting taxes raises revenue faster than the time value of money. Can you show me how that works? Assuming that I cut taxes in half without cutting spending so the entire tax cut is carried by deficits, you are saying that eventually the economy will increase its growth over expected growth by enough so that I will be able to pay back that deficit plus all interest on that deficit at SOME point in time? You do realize that interest on debt compounds as well as increases in GDP growth right? I’m not saying that it can’t happen but it doesn’t seem anywhere near a certainty to me. BTW a 1% boost is pretty ambitious, how much were you planning on cutting taxes?
Of course there are confounding factors, that doesn’t mean that we can’t reach some pretty clear conclusions about the effect of tax cuts on the revenue.
Of course it doesn’t. It only support the fact that the models were wrong.
Explain to me how deficit spending could possibly have caused MORE unemployment?
OK great, now can you show me how you can recover lost tax revenues over the long term? What sort of assumptions would we have to make about the effect of taxes on growth.
Here is a chart. I know that the difference between 21% and 16% doesn’t seem that high but it amounts to trillions of dollars in deficit. That deficit spending is the dry powder that we could use right now, to stimulate the economy. When Reagan cut the income tax rates, he also closed a bunch of loopholes.
They don’t even do that. They shift the relative burden to the less affluent but everyone gets a tax break. That shifts the burden to future generations. I found the entire “focus on small taxpayers” good and bad. The tax compliance amongst low income taxpayers was atrocious, they were claiming kids they didn’t have for the child tax credit and stuff like that, it was low hanging fruit. What I thought was ridiculous was that they reduced audits on the really rich. Back when Bush couldn’t get the estate tax repealed (well he did for this year), he fired HALF the estate tax auditors at the IRS. These guys uncovered over $20,000 of unpaid taxes per hour of auditing and they were fired because reducing the audit rate was almost as good as getting rid of the estate tax.
Well, we are certain they result in reduced taxes to the people whose taxes are reduced and to the government coffers, and this can be measured with a high degree of correlation and confidence. The claims that it increases revenue cannot be linked with anything like that high degree of correlation and confidence.
As an investment requiring SEC approval, supply side tax cuts would not be able to supply a prospectus that was anything close to legal. It does, however, seem slightly more persuasive than an out and out Ponzi scheme.
I think that economists who support tax cuts on the grounds that they might increase revenues are fooling themselves. Politicians know that such tax cuts immediately benefit their constituents who get the tax cuts and that is in all likelihood 99.9 percent of the reason that the increased revenue line of explanation exists.
The Laffer Curve really predicts nothing about tax revenue. Its advocates like to look at the endpoints and say that a tax rate of zero percent and a hundred percent will both produce no revenue. Well duh. But has any country ever operated on a tax rate of zero percent or a hundred percent?
So what about the real world figures between zero and a hundred percent? The Lafferites will acknowlege the the United States government is collecting revenue from taxes, so there is obviously some tax rate percentage that generates revenue.
So what’s a optimal tax rate? Will a 25% rate collect more than a 28% rate? Will a 72% rate collect more than a 75% rate? Will a 28% rate collect more than a 72% rate? On these issues, the Laffer Curve says nothing.
I’ve seen many bad OPs on this forum but this takes the cake. Will some moderator please mercifully lock it?
That’s your argument? A link to another thread?
Yeah, that puts it “to rest”! :rolleyes:
Before this gets locked, I have a technical question:
We have the claim “lowing taxes from x to y with increase/decrease tax revenue.”
Are we talking about deficit spending on balanced budget? I feel like this never gets mentioned.
It’s good that you indeed rephrased.
Judging by those in power over the past 20 years in Washington, I’m a filthy Commie European Hippie Liberal based on how high I want the tax rates to be (i.e. enough to not go in debt in the medium term, such a RADICAL idea). But even I agree that the tax structure in the 50s through the 70s likely resulted in a hit to the economy which resulted in reduced revenues over the long run. The only problem is, not only did they have huge tax brackets of around 90% in the upper regions of income, but they also had huge loopholes.
So I can’t tell if the tax rates themselves were problematic, or the loopholes, because they were changed around the same time. Furthermore, European nations with high tax rates we might compare us to also tend to be more Socialistic, so if their economy doesn’t do good enough to support a lot of revenue, it’s hard to tell if it’s due to their high tax rates or government interference with the economy.
My personal opinion is that you have to get well into the 80% region for the highest bracket before you see a medium-term hit to your revenues, and coulud probably have an upper bracket in the 50s without any long-term hit to revenues.
But what’s more telling is weird tax loopholes. Those have the double-whammy of not only reducing revenue, but distorting the economy by incentivizing people to do things not because someone else is paying them to but mainly for the tax benefits. (In addition to providing more work for the accounting and tax lawyer industry, which pulls people from otherwise more productive jobs.)
Note that I’m not saying we should have tax rates this high, only that they won’t reduce revenue. But given the choice between a medium-term deficit and tax increases, we should increase taxes. (Stimulus spending is okay as a last resort for a couple years, and increasing taxes at the same time will hurt the economy by making people feel poorer in a time of crisis. Note that if tax rates were already relatively high then people wouldn’t feel poor because they would already be poor, such are the vagaries of human psychology!)
Also, which taxes are we talking about, income?
I was trying to run through in my head what would happen if my income tax was reduced, vs what would happen if the government simply gave me the same amount of cash. In either case, it would be deficit spending, which I personally think is a bigger factor.
I was also thinking about taxes on products like alcohol and tabaco. If the government cut cigarette taxes, people would buy more smokes, meaning more revenue.
Who is ‘we’, and how has the myth been put to rest? You linked to a thread where all I really see is folks who aren’t particularly knowledgeable about economics agreeing with each other that they are right and the other side is wrong. Can you take the time to at least cut and paste the relevant posts from that other thread that you feel demonstrates conclusive proof to backup your rather limited OP?
:dubious: Wouldn’t a comparison of tax revenue (adjusted for inflation) between, say, the 50’s and the 80’s or 90’s pretty much demonstrate that your statement here is horseshit? I mean, we went from tax rates in the 90’s to tax rates in the 30’s to low 40’s, and tax revenue has certainly increased. I believe the same thing happened in Ireland as well before their economy started to collapse…they had a pretty high tax rate, lowered it, and their economy boomed, which brought in a lot more tax revenue.
While I think that ‘supply side economics’ is just a buzz word, your assertion that tax cuts ‘do NOT result in higher tax revenue’ needs a bit of backing up on your part, because it seems to me that there is a lot of historical evidence to the contrary. Intuitively it seems a no brainer as well…you lower the tax rate, which stimulates investment and brings in foreign capital, and this has the potential to stimulate your economy, which provides jobs and additional tax revenue for the government. While this isn’t always the case, your (seeming) assertion that it’s never the case seems not to be fact based, but perhaps driven by ideology or political views.
-XT
Is that causation, correlation, or an ad hoc fallacy?
I asked about deficit spending because having a “tax cut” means something to the overall budget. Didn’t the US have it’s best economy when the government was spending massive amounts of money on military buildup?
Over 10 years ago Canada balanced it’s budget, accomplished mainly through widespread cuts to social programs and the military, but also from not cutting taxes, a process that took about 10 years. As shown here. Following the cuts, Canada was able to use it’s budget surplus to start lowering taxes, allowing for a massive increase in GDP.
One could look at the period of tax cuts and claim they caused the rise in GDP. But someone else could look at the period of deficit reduction and conclude that it ALLOWED for a rise in GDP, and allowed for tax cuts to work.
I think that’s correct. If you want to reduce taxes, you’re better off doing it by reducing spending first, getting rid of the deficit, and then using increased revenues to substitute for taxes. As you say, it worked very well in Canada.
But let’s get back to the main assertion in the OP. What matter is not just the absolute tax rate, but what kind of taxes they are. Take for example the luxury tax. When it was applied in the U.S. (starting from a tax rate of ZERO), tax revenue fell. The luxury tax caused such a large reduction in demand for luxury goods that the loss of other taxes was greater than the luxury tax itself. So we have concrete evidence that raising taxes can lower revenues, even when the original tax rates are small.
But now I’d like to point out something else - the liberals have their own form of Voodoo economics - the Keynesian multiplier. I hear liberals talk about the multiplier as if it’s a universal truth that just works regardless of other factors. It gets bandied about as a general excuse for government spending just like the Laffer curve gets bandied about as a general excuse for tax cuts.
Like the Laffer Curve, the Keynesian multiplier is based on very abstract economic models, and is often defended throught thought-experiment (the babysitter circle analogy).
However, the empirical evidence we have for a big multiplier is almost nonexistent. And the one big experiment we’ve undertaken (the stimulus) in which there was an actual prediction for a multiplier made was a failure. Other economists who have studied multipliers have found that they are not nearly as big as the current crop of Keynesians would have you believe. Robert Barro’s study of multipliers from large spikes in military spending found multipliers of less than 1.
So are those of you who are sneering at stupid, lying Republicans willing to admit that the fiscal multiplier is not only controversial, but clear dependent on other factors, and there are clearly times when stimulus will return less money than the cost of the stimulus itself?
Or, alternatively, what we have here is a clear example of post hoc ergo propter hoc, luxury tax added, revenue falls, point conclusively made. Might there be other variables to be considered? We are not offered any, we are offered B followed A, hence B always follows A.
I was under the impression the academic economics in general, and not simply ooga-booga Keynesian economics held that military spending is not prone to multipliers, being an economic sinkhole. Hence, Mr Barros thesis would be wholly in concordance with such woolly thinking weirdos as Mr Krugman, *et. al. *
Further, the question about the “experiment” in stimulus spending buggers the question. Mr Krugman and others insisted that insufficient stimulus spending would produce weak results, hence, Mr Weirdo Liberal might be said to have predicted the results according to his own objection of insufficiency. That a homeopathic concentration of penicillin will not cure an infection is by no stretch proof that penicillin does not work.
We are, as always, grateful for your stern admonishments regarding our hypocrisy and our failure to agree with the utter clarity of your arguments. Were you to stop, we would no doubt be the poorer for it, no such experiment is needful.
I see. And yet, you’re willing to use the exact same logic to dismiss ‘supply side’ economics, aren’t you?
But in the case of the Luxury tax, the effects happened so quickly and clearly that even Democrats supported its repeal. I think most economists would agree that the Luxury Tax was ill-advised.
Cite?
And yet, the economy turned out to be even worse than the NO STIMULUS model the President’s own economic advisors came up with. Japan spent a decade employing stimuluses four to five times bigger than the American stimulus, with the same poor results. Just how big is big enough? And if you only go halfway there, shouldn’t you see half of the improvement, and not worse results than your no-stimulus prediction? Just when does this theory become falsifiable?
Ah, it wouldn’t be an elucidator message without the gratuitious snarky cheap shot generally devoid of any kind of actual content. You never disappoint.
The reason the increased revenue line exists is because there used ot be PAYGO rules and Republicans wanted tax cuts but didn’t want to have to come up with spending cuts so they said, “we don’t need spending cuts because tax cuts pay for themselves” It was an ideological fig leaf they could hide behind whenever people asked them if these tax cuts were fiscally responsible when they were not accompanied by spending cuts.
They were encouraged by Randians like Greenspan who said that tax cuts were good for the economy (while conveniently neglecting to add that the tax cuts had to be accompanied by spending cuts).
The wealthy now are sitting on 10 trillion dollars of investible cash. It lives in the Cayman Islands, Swiss Bank accounts are other places. The wealth management firm today released the numbers. The fact is giving the fabulously wealthy more money does not result in them investing it. If we taxed them at a reasonable rate, we would have a huge impact on our debt.During Ikes time it was at 90 percent.
But the corporations have been shedding jobs for decades. Cutting their taxes has just allowed them to do more off shoring. They have no intention of starting jobs here. That should be perfectly clear to everyone by now.
Can we resolve that “starving the beast” doesn’t work?
Nothing ab out taxation and the economy is THAT simple but as a general rule raising taxes tends to raise tax revenues, lowering taxes tends to lower tax revenues.
I can’t remember the last time someone suggested that deficit spending would pay for itself. At least it doesn’t seem to be the fitrst thing that Democrats talk about when they talk about increasing spending. they usually talk about all the widows and orhpans its gonna help.
Part of the reason for the failure is the credit crunch. Remember that the multiplier relies on lending to multiply the effect of stimulus. I don’t know what else we can do to encourage lending in this environment, its not like the TARP fund was too small.
IIRC the part fo the mutliplier that was less than 1 was the Republican part of the Bush stimulus package taht gave accelerated depreciaation deductions to businesses. It created almost NO stimulus, it just handed out tax cuts to business.
Its not controversial but it does depend on a lot of assumptions about peoples marginal consumption and the willingness of banks to lend.
There may be odd cases here and there but the only stimlulus that I can think of that didn’t have a multiplier over 1 was the accelerated depreciation from teh bush stim,ulus package.