Dishonest Rhetoric to Sell Tax Cut

Great Debates
1

Let me start by saying that I am in favor of most of everything Bush has proposed recently. What I am not in favor of it is the method of sale: making claims that tread dangerous close to outright lying.

Spinsanity covers several of the more egregious examples:
http://www.spinsanity.org/columns/20030110.html

The most outrageous claim is the idea, laughed at by even conservative economists (even during the Reagan years) that tax cuts can plausibly “pay for themselves” - i.e. that they can lead to enough overall growth to actually increase tax revenues even though tax rates have been cut.

Sean Hannity is running with it: “JFK knew it, Reagan knew it: Cut taxes, increase revenues. It works.”
White House communications director Dan Bartlett is for some reason suggesting both that we are paying down the deficit (since when?) and hinting that because of this tax cut, we’ll be able to “continue” doing so.

As the Daily Howler has pointed out, contrast this with Bruce Bartlett: a well-respected conservative economist claims that the left is engaging in mythmaking when it claims that supply-siders believe this ridiculous fantasy, or ever have.

Bartlett is a bright guy, and he’s mostly right about the Reagan era: most of the “supply-side” people making the more ridiculous claims were not conservative economists or policymakers (who regarded the idea with utter disdain: George Bush Sr. himself coining the term "voodoo economics), but journalists (mostly at the WSJ) and hacks like the disgraced Laffer. Unfortunately, he had the bad fortune to bring this issue up right when the Bush administration and (as usual) brainless pundits are working it into their rhetoric.

Let’s make something plain. Tax cuts are almost ALWAYS less “expensive” than they seem at first, because they eliminate some of the dead weight loss that taxes cause. But in real world situations (certainly all those Bush’s proposal addresses) you just can’t take more money from the public by taxing them less: you can’t make trick them into working hard enough to give you more money just by promising to take less. And most economists (not just liberal economists, but plenty in favor of huge tax cuts) agree: the idea has no emperical support, and very very weak theoretical support, and then only under highly unrealistic conditions. Explaining why is extremely complicated, but we need not even bother. Because even the administration’s own estimates don’t REALLY make the claim that Ari, and Cheny have made: again, as the Daily Howler notes, they simply say that the tax cut will partly pay for it’s revenue loss (which is true), not “pay for itself” outright which is something distinctly different.

So, here, again, are the smoking gun quotes:

Ari: “The entire package the President does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government and pay for itself.”

Cheny: "“But the actual impact on the deficit will be considerably smaller than the static projections because the President’s package will generate new growth, it will expand the tax base and thus increase tax revenue to the federal government ultimately.”

Bush himself was a little more vauge (what else is new) to (what else is new) say something that is technically true, but very obviously constructed to imply something that is not true:

Bush: “”[These proposals] are essential for the long run, as well – to lay the groundwork for future growth and future prosperity. That growth will bring the added benefit of higher revenues for the government – revenues that will keep tax rates low, while fulfilling key obligations and protecting programs such as Medicare and Social Security."

That COULD be read as simply technically saying that the growth from the cut will increase revenues MORE than we’d see if there had been no growth, though the statement pretty clearly tries to pass off the idea that the government will take in higher revenues overall (and since Ari cites Bush for his own unambiguous claim, we’re not far from the tree).

And, just to show that this virtual fallacy is not a Republican vice, just a political one, note that our old friend Dick Gephardt has said that the “purpose of tax cuts is to get the economy to grow. If you can get the economy to grow, you will start having more money coming into the government.”

I’m wondering if anyone is willing to defend these claims, or to explain why they are recieving so little criticism and scrutiny from the “liberal media.” I mean, they are about as close as you are going to get to outright lies: they’re litterally like promising to shoot the moon: and yet they are being treated as perfectly ordinary policy ideas.

2

Cheney’s actually gone beyond the “the taxcuts that pay for themselves” argument to claims that the cut can actually prevent a future economic downturn: Cheney Warns of Downturn if Tax Cuts Stall Kind of makes you wonder why they didn’t bother to prevent the last downturn ?

3

Apos, I really respect you for speaking out against these silly arguments even though you support Bush’s plan. And, of course, I agree with most of what you wrote [besides the supporting of Bush’s plan part :wink: ].

The one part I’d ask about is this:

Maybe this hinges on the use of “almost always” but I wonder what the evidence for this even is. If we are taxing things that are damaging behaviors then it seems to me that it could go the other way. I.e., you can get an increase in the damaging behaviors that then lead to other costs.

4

Many American’s don’t seem to be buying the rhetoric though, because most polled showed that they didn’t favor the tax cuts. It wasn’t too long ago (before G.W.Bush was elected) that he was campaigning for tax cuts, because he said the government had a surplus, and we was being taxed too much so we should give it back. Nowadays, he says we need a tax cut to stimulate the economy, never-mind the projected deficit of 250 billion dollars. I fear at the rate he’s going, he’s liable to have even bigger deficits than what his dad ran up when he was president. With the exception of war times, our federal government should be bound by similar laws in which the states have to balance the budget. I like the ideal of tax cuts, but not when our government isn’t coming close to its budget. People should look at Japan’s economy right now, and ask themselves if running these huge kind of debts is going to be worth it in the long run.

JZ

5

Mr Bush is such a wacko on so many issues, it’s becoming taxing just to listen to him. But, IIRC from my Macroeconomics class, there are two ways for congress to jumpstart the economy in times of recession (Keynsian primarily).

  1. Cut taxes.
  2. Increace government spending.

Both of these tactics put money back into the hands of the people. Theoretically, if the tax cut were implemented correctly, this would work. Of course, the simplest way to do that would be to cut taxes on those who have the most propensity to immediately spend it, namely, the poor, but apparently Bush isn’t that concerned about a recovery.

Oh, you don’t remember? It was the inevitable result of the loosey-goosey policies of the Clinton administrations! Silly! :rolleyes:

And don’t get me started on the steel tariffs. Grrr.

6

It comes from the belief that we are overtaxed. A lower tax rate would grow the ecomony. History has shown this to be correct as pointed out by S. Hannity “JFK knew it, Reagan knew it: Cut taxes, increase revenues. It works”. Both have cut taxes and have seen increased revinue.

You seem to disagree but history shows you are wrong.

7

But Kennedy had at least one year in which he balanced the budget, if I’m not mistaken. Reagan on the other hand wrote about a trillion dollars in hot checks. He never even remotely came close at any time in balancing the budget.

JZ

8

Although I am a Bush supporter, I cannot defend the dishonest rhetoric. There could be circumstances where a particular tax rate cut would actually increase total tax revenue, but that’s not generally the case. I know of no economic model that says it’s the case right now.

OTOH the WSJ has a point that total tax revenues increased a lot after the Reagan tax cut. Scroll down to see that Total Income Tax after Credits grew from $249 billion in 1980 to $412 billion in 1988. (And, BTW the amount paid by the top 1% more than doubled from $47 billion to $113 billion.) IIRC total tax revenues also grew after the Kennedy tax cut, although I wasn’t able to find a cite.) So, the two most recent major tax cuts were followed by big tax revenue increases, even though most prevailing economic models said they would cause decreases. What should we believe – economic models or actual results?

Throughout his Presidency, Bush has appeared surprisingly unconcerned about balancing the budget. More education spending. More defense spending. More Homeland Security spending. More UN dues spending. Tax cuts. More tax cuts. I hope he knows what he’s doing. I hope he is planning to use the coming budget deficit as a hammer to keep government spending from growing too much.

9

The reasons for that little conservative distortion of the truth have been addressed right here, december. Total tax revenues went up mostly because they eliminated tax deductions and forced millions into higher tax brackets. Not only that, but the massive boost in government spending helped, as well. The government spent beyond its means and shuffled the money into defense contractors, who then paid tax money on the profits made from government deficit spending.

Sorry, but your ridiculously simplistic example holds no water, december, until you can do a better job of defending it.

10

I think december’s post is pretty thoughtful, and sheds some light on the issue.

Perhaps balancing the budget is not so important, but a lot of people - attuned to the concerns of a while ago, when US debt seemed to some to be on an unsustainable path - think it is. It is still politically taboo to say that a measure increases the deficit, even though policy makers are aware that it might well be useful as a stimulus.

I might add to jshore’s objection that Apos’s statement assumes government spending is excessive.

FWIW, there are examples of tax cuts that increase revenue, but they are all tariffs (which have sometimes been intentionally set at a level to yield zero revenue).

11

And why should he. Most ecomoist realise that there are some reasons to go into the red. Comming off the Clinton Resission (that’s right - the last quarter of the Clinton Admin.) and into a war (anyone remember the attacks on NYC and Washington DC, anyone, beuller) is reason enough to run a little red.

Also I am by no means rich (well according to some dem’s I may be) but own my own business. I pay estimated taxes and the like and let me tell you that what I buy and when is directly related to the taxes I pay. No question about it. Perhaps for people who get stadnard witholdings this is not so much the case. Which if it is true for most people (people who pay taxes directly will spend in realationship to their taxes, while those who have taxes withheld are less effected) then only the people who pay estimated taxes should get a cut.

12

Huh? I assume you mean that he’s suggesting that we are paying down the National Debt, not the deficit.

In which case, he’s mistaken. Although we’ve had several years of Federal budget surplusses, the National Debt has continued to rise. This is because a budget “surplus” is defined in terms of both the on-budget revenues and expenses and the “off-budget” revenues and expenses. Off-budget items include the Social Security program – Social Security surplusses cannot be used to pay down the National Debt, and in fact must be reinvested by buying Federal T-bills and T-bonds, which actually increases the National Debt!

13

Also for all those who think that lowering taxes will not increase tax revinue I have a question or 2 for you.

Do you think there is a tax rate that if rased would result in lower revenue (i.e tax rate is at 60% - raising it to 99.99% results in lower revenue), and if so what percentage do you think it is at (asking for a guess)?

I personally feel this number is somewhere between 25% - 40% of TOTAL taxes paid (income, sales, property, spanish american war telephone tax (yes it’s there), ect. ect. Last I heard the tax rate we are all paying (total all tax again) is around 40-60%.

14

It’s not complicated. It’s simple.

Let’s say you have $10,000 and it earns 15%. You can take that interest and spend it, or you can reinvest it.

Let’s say you’ve been taking 8% and reinvesting 7%.

If you reduce the amount you take, and increase the amount you reinvest, the faster compounding will catch you back up and end up paying for the cut you took, plus giving you a larger base than you would have had before.

For example, in this scenario compounding doubles the money (and hence the income) every ten years. However, if you only take 5% and renvest the other ten then your money doubles in 7 years.

My Financial calculator’s at work, but hopefully you get the idea. By taking a smaller percentage you can actually get more over time by taking a smaller bite of a faster growing pie.

It’s a simple calculation to figure the the loss of the present value versus the growth of the future value to find out how long it takes you to catch up depending on how big a cut you take.

The economy is larger and more complex with more variables, and it’s not a direct linear thing like compounding, but the effect is exactly the same.

The less weight that is placed on the economy in terms of taxes, the faster it can grow.

15

I’m sorry but inflation is not growth, and you have scores and scores of conservative economists who disagree with you. Even the WSJ editor who championed the “pay for itself” rhetoric in the Reagan era has retracted that part of the dogma. In short, this is a case that most Reagan defenders don’t make anymore

—The less weight that is placed on the economy in terms of taxes, the faster it can grow.—

Of course. But the growth rate due to the tax cut is in no case fast enough to take more money out than you gave up.

16

Sure it is. What are you talking about? An inflated dollar spent on goods and services that would otherwise not be purchased grows the economy just as well as any other dollar does, but I’m not just talking about inflation. The government puts a portion of its tax revenue back into the economy promoting growth as well. The key issue is the difference between a dollar taken as tax revenue by the government (and how it is spent,) and a dollar that remains in the hands of the private sector. Money in the private sector pretty much promotes growth directly. Tax revenues describe an inverted parabola in their effect on growth.

The government provides essential functions for the good of all and the revenues spent to create these functions benefit the economy promoting growth, and those dollars may also inflate.

I don’t think so, but I’ll be satisfied if you can simply cite me a single score.

The concept is basic, and easily understood. Unfortunately it has been misinterpreted and misutilized by some. All other things being equal, a tax cut creates a revenue gap in taxes that takes many many years to replace through growth. Some pundits have mistakenly used the concept of a tax cut “paying for itself,” as if it were immediate or inevitable it is neither.

For example, picture a steady state growth economy. It’s growth compounds upon itself. Now imagine that you wish to solve for the most effective tax rate, the one that gets you the greatest degree of revenue with the minimum effect on growth.

At 100% taxes, the economy does not grow. In fact, it collapses in a year, and the total revenue you receive from taxes over the life of the model is on years GDP.

At 1% taxes the economy grows very fast, but you never receive significant revenue. At 10% taxation the economy may grow just as fast. This occurs because there is a theoretical limit on how fast the economy will grow. For example, if the maximum growth rate of the economy is 7%, and you achieve that at 30% taxes, reducing the rate to 20% will not result in further stimulus. Call this taxation threshhold “A.”

Consider that there is a threshold level of taxes where if the rate is set above that threshold, it will slow the economy.

Government taxation and spending is similar, providing services and infrastructure for the common good. At 0% taxes we have no common goods and services, no rule of law and anarchy. However, there is also a point where additional taxation and government spending no longer benefits the common good, as the effect of taking it out of the economy is more deleterious than the benefit of anything it could be spent on. Call this threshhold where benefits from government spending cease “B”

Now for A and B both there is the law of diminishing returns. For example, if Government spending is very small and far below the minimum needed to provide the infrastructure for a thriving economy, than a relatively small increase in taxation and spending can produce a large stimulous. At the other end, even a large increase will produce very little stimulous. There is a point of maximum efficiency where you get most bang for your buck with both. Call these point A1 and B1.

If we draw a line representing taxation and plot these points on the line, it will look like this

0%-------------A--------B1-----------A1--------B-----100%

The point of maximum tax efficiency is going to fall between points B1 and A1 in most normal economys. However, as economic situations change, these points will change on the curve as well and so will the location of our most efficient point. If we are trying to maintain efficiency between these points and the economy has slowed so that the point of efficiency between B1 and A1 has moved down the scale, then, over time a reduction in tax rates will result in higher levels of stimulous and revenues. The tax cut pays for itself quickly. If tax rates are currently below the point of efficiency they have no net positive effect. If tax rates are reduced through point B1 then the net effect of the change is negative.

Now the argument for tax cuts right now in this perspective is that the economy has slowed so much over the past few years, and the points have shifted so much, that our current tax rates fall between points A1 and B. A tax cut at this level will stimulate the economy to grow, and move us closer to efficiency in tax revenue, resulting in higher tax revenues over time.
In an overburdened, recessed economy a tax cut will “pay for itself.”

Probably we will agree that this is an oversimplification of the concept, since it takes time to pay for itself, and it does so only in certain circumstances, and not immediately, but by producing the most efficient increasing revenue stream.

But, I beleive there’s a good case to be made that this precisely the sort of economy we are in right now, so I don’t consider the comment false or disingenuous.

My biggest fear and I think the valid counterargument is that foreign policy may increase our governments necessary commitment to such a degree that B1 will cross A1.

This happens in times of war and such where the government must basically consume the corpus of the economy for a period of time.

In such a scenario a tax cut is not appropriate, obviously.

17

—Sure it is. What are you talking about?—

I’m talking about inflation bumping people up into higher tax brackets.

—Tax revenues describe an inverted parabola in their effect on growth.—

This is only sound in a very strict theoretical model. Empiricially, the best we’ve been able to describe is a snarl of seemingly contradictory behavior, with only the very far extremes behaving as expected. But no one has been able to provide us any reason to think that we are anywhere near the extremes in which the effects probably hold (100% tax rates, 1% tax rate). Even the Reagan cuts, which were more significant in terms of ridding us of the truly devastaingly high marginal rates, proved fairly inconclusive in terms of growth. No one can seriously maintain that we are as “overburdened” in terms of taxes as we were then. The main problem is that, at least in the U.S. other factors (many unknown) than taxes seem to have a much bigger effect on the overall growth that is necessary to tell this story.

—I don’t think so, but I’ll be satisfied if you can simply cite me a single score.—

Well, I already noted Bartlett, what do you have to say to, or about, him? Economists who supported the Reagan tax cuts spent a considerable amount of energy trying to explain that there was a good case to be made for them, and just because the “pay for itself” was silly didn’t mean the tax cuts were. Indeed, I’d like to see YOU find an published, respected economist who thinks that it’s fair to declare that tax cuts will pay for themselves.

And what do you have to say to the adminstrations OWN projections?

—Some pundits have mistakenly used the concept of a tax cut “paying for itself,” as if it were immediate or inevitable it is neither.—

Some pundits… and the administration. Hence, this thread.

18

I was going to mention Paul Krugman, if only to watch that vein throb in Scylla’s head. But I’ll just stick to GeeDubya.

Presumably, he gets expert advice. From approved economists, not those unscientific charlatans who might be described as “liberal” economists. (One wonders how “conservative” nuclear physics might be distinct from “libertarian”…but I digress)

These self same experts, after due consideration and impartial deliberation, concluded some time back that, hey! the economcy is humming along splendidly! Why, we can afford a whopping big tax cut! And so it was.

Now things are not quite so good. These same experts (one presumes, unless the previous lot have been dragged out and shot) after due etc. etc., announce that the best cure for our malaise is…another tax cut!

Got that sluggish, run-down feeling? Have a tax cut! Pellagra, beri-beri? Tax cut, just the thing. Decline of Western Civ., dogs and cats, living together, the Four Horsemen riding across the night sky? Well, thats when you really need a tax cut! One has to wonder at the “science” that prescribes the same cure for two entirely opposite conditions.

19

Hm.

I see a whole lot of logic working here.

Unfortunately, it seems to be economic logic.

Now, it’s a well known fact that if you put two economists in a small room together and lock the door, they’ll kill each other. No, not really, but getting two economists to AGREE is a bit of a trick.

There are some pretty simple things they DO agree on, though.

Giving poor people tax breaks is useless, or almost so. They’ll just go out and put the money into circulation, thus stimulating the economy in the short run… but putting us back at square one when they run out of money.

Giving middle-class people tax breaks is nearly useless. They tend to make bigger purchases with their savings – cars, houses, boats, college educations, and so forth – but this simply stimulates the economy in a slightly better, slightly more long-term way. They don’t usually INVEST it, so much as they simply SPEND it. You’d really have to give the middle class a MAJOR tax cut to achieve anything statistically significant… and to do that, you’d have to shut off the main source of government money. EEK! Can’t do THAT.

This leaves “tax breaks for the rich.”

Tax breaks for the rich are great. Rich people get LOTS of money back, so each of them is theoretically likely to invest large amounts of it in economic powerhouses, like stocks, bonds, business, steel plants, or campaign fund donations. THIS stimulates the economy in an immediately apparent, meaningful way that carries on for years. Plus, it means that the politician in question has made a friend of the wealthy, and by extension, of big business.

Admittedly, it also eliminates an immediate source of income for the government. This is why it becomes necessary to NOT give tax cuts to the middle class; ultimately, they’re the ones who get to carry the weight, because they have less to contribute. Admittedly, they are also the ones who are going to have to help the economy get rolling by BUYING everything, so we can’t jack them TOO badly… but this can be offset by not necessarily taxing them HARDER, but by simply not including them in a tax cut package.

This is why I laughed when I heard about that $400 bonus that taxpayers are supposed to be getting, per child, on their Earned Income Credit. Yeah, $400 goes a long way. Hell, if you have more than one kid, you’re not going to be buying a whole lot of stocks with that. In fact, you’re going to be doing well to not spend it all on groceries.

This may seem like I have something against rich people. I don’t. Rich people are good for the economy, too. Assuming you didn’t get rich by robbing banks or selling children into prostitution or whatever, you go be rich all you want. And yes, giving you rich people money WILL stimulate the economy, for the reasons I just mentioned above… so long as your share of the tax money isn’t coming out of my pocket.

I DO object to the spin-doctoring, though. I realize it may well just be obsolete to expect a politician to come right out and tell the truth and be done with it, but it sure would be nice.

Then again, considering we elected the man, he must be right. We’ll believe any damn thing he says…

20

Oh. It looked like you were talking about the inflation of a dollar in the economy as it’s reused.

Bullshit. It’s well established and repeatedly observable, through a variety of times and economies.

I don’t mean to be rude, but this is also utter bullshit. If anything we have less data to go by on the extremes than we do in the middle.

We’re not. Who said we were?

I don’t recall saying we are, though “overburdened” is a purely relative term as I’ve attempted to demonstrate. Tax rates that might be easily born in a zipping heated economy may still be onerous in a recession even if they’re cut in half.

Again, I don’t think anybody has seriously indicated that taxes are the sole driver of the economy. They are however one of the prime tools available to the government to steer it.

He doesn’t give a complete picture, but what he says in no way contradicts me. Bartlett does not contradict me, nor does he represent a “score.”

The effect is pretty sound, and I’ve gone to some trouble explaining it to you.
The term is a generic oversimplification of a complex effect, but not necessarily innacurate in some circumstances. Like Niskannen says:

"“Supply-side economics … does not conclude that a general reduction in tax rates would increase tax revenues”

One is in error if one assumes the effect is automatic, or immediate or of fixed relation. Nevertheless their is a relation there.

Since that’s not what I’m saying, I don’t see why I should try.

Like I said in my last post, my only real concern is the commitments of government spending moving through the point where a tax cut can be effective stimulous, thus creating a damned if we do, damned if we don’t economy.

I don’t beleive you’ve demonstrated that the administration has acted irresponsibly.

Cheney’s and Bush’s comments are qualified if simplistic and hyperbolic. They are after all trying to sell their program, and thus emphasizing positives.

Hardly a dishonest lie, but it is rhetoric.