The head of the Libertarian think tank, the Cato Institute, now claims that tax cuts lead to more governmental spending, not less.
Following that logic, one of the effects of the current tax cuts will be larger government. Republican politicians will have us believe otherwise.
That said, I reviewed Mr. Niskanen’s statistical argument a couple of years ago and found it insufficiently sophisticated and therefore not wholly convincing.
No? In what way does this differ from what I said?
I don’t mind being corrected or clarified, but you need to be accurate. This is not accurate. Changes in money supply aren’t so much implemented as they “occur.” Their are many ways in which they occur of which one is by action of the Federal Reserve. If I take money out of savings and by a product I have “implemented” a change in the money supply.
Nonsense, deficits by no means automatically follow from a capital gains tax cut, and it is silly to say so categorically. Increased tax revenue is also a possible result, and no deficit need occur as whether or not it does is also dependant on several other factors.
The first is true, while the second is likely true but not in all circumstances, and subject to debate, and you’ll note in my post I was careful to state that capital gains tax cuts are not necessarily the best way to stimulate the economy and may not always do so.
Following Scylla, tax cuts also have microeconomic effects. That is, they may change the behavior of its beneficiaries.
No. They do not prevent. In some circustances they may simply be an impediment to efficiency by stifling liquidity.
Stimulating consumption is not synomymous with reducing savings, and you can’t use it as if it were. Savings rates are not simply one side of a see-saw directly connected to consumption. There is a complex interraction of a variety of factors. The effect of any single factor changes in relation to its environment and the stance of all the other factors with which it interracts.
If things worked as simply as you posit, then lowering Japan would have responded to the stimulous of lower interest rates. It did not because other factors were at work.
Secondly, reductions in savings cannot be said to drive up long term interest rates, although I’d love to see a cite to the contrary if you got one.
Ignoring float (which is temporary) Under such a scenario, M2 would not change. Drawing down your savings account and converting it to currency does not affect M2. Handing over your currency to buy (um) a new shirt won’t affect M2 either, since the Gap’s checking account will grow by a like amount.
Now if you borrow $1000 from the bank, that would be different: that does lead to money creation in the system.
As for “occuring”, you have a point: presumably there’s an equilbrium between money supply (set by the Federal Reserve) and money demand (set by consumer preferences). To confuse matters, I’ll assert without evidence that the Fed cares a lot less about monetary metrics than they used to.
Still, tax cuts are not thought to produce an autonomous increase in the money supply, since for a given level of spending reductions in governmental revenue are offset by increased borrowing. Within the banking system, they wash out. (I confess to some background uncertainty about this paragraph. I can say with more confidence that “money supply” is a concept typically linked with monetary policy as opposed to taxing and spending).
Increased tax revenue. Sure, if people expect capital gains taxes to rise in the future, there will be a one-off burst of stock selling to lock in the lower rate. But that would still entail (categorically) lower tax revenue over even a medium-range time horizon.
What I think you’re arguing though is that the capital gains tax cut will produce so much economic growth, that it will compensate for the lower tax rates, resulting in higher governmental revenue on net.
Well, that dog won’t hunt anymore. It never had any empirical evidence to support it and even in theory it relies on some rather extreme behavioral coefficients.
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and no deficit need occur as whether or not it does is also dependant on several other factors.
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Ceterus paribus. Lots of things will affect nominal governmental revenue: population growth, economic growth and inflation will all tend to increase it. The question though is whether a tax cut will tend to lead to less revenue than would otherwise be the case. With few exceptions, it will in practice.
The hell? If market prices are at “Intrinsic value”, how can there be an efficiency loss?
National income equals savings plus consumption. For a given level of income more of one implies less of the other.
Incidentally, here’s an introduction to macroeconomics, pulled off of google. This is what I’m basing my reasoning on. It’s not all that controversial.
---------- If things worked as simply as you posit, then lowering Japan would have responded to the stimulous of lower interest rates. It did not because other factors were at work.
Er. What’s “lowering Japan”? I know you’re referring to the liquidity trap experienced by Japan during the 90s and 2000s. But I’m not certain what your argument is. No biggie, on the whole my language is more tortured than yours.
---------- Secondly, reductions in savings cannot be said to drive up long term interest rates, although I’d love to see a cite to the contrary if you got one.
Er, I would give this some thought except that the task sounds tricky and I’m not sure it would settle anything. We’ve gone through a couple semesters of material as it is.
If I had to summarize my POV, I’d challenge conservatives to show empirical evidence of the benefits of these tax cuts. This is a heavily studied area; it shouldn’t be too hard if their argument was based on empirical observation as opposed to pure ideology.
Fuller disclosure: Martin Feldstein made a reasonable case for tax cuts in the 1970s. His argument applies a lot less than it used to, but it’s one of the few vaguely respectable arguments I can think of that doesn’t operate along Sam Stone’s lines.
Tax cuts will provide a short-term boost to the economy, but you have to weigh their benefit against how lack of revenues affects the government infrastructure that is required for businesses to run smoothly.
Nobody likes paying taxes, but they are investments in both our business and community environments. These include road and bridge repairs, public education, providing police and services provided by courts for protection and to mediate disputes. Depts. of Transportation, Agriculture, the Treasury, etc. help keep commerce functioning and provide necessary oversight. Also, like it or not, a well-funded IRS with teeth can see that everyone, especially those with the most, pay their fair share so that all benefit.
You have the FED to regulate the economy, the SEC, likewise the FDA, NIH, Federal Trade Commission, the CDC, HUD and other watchdog agencies to stimulate growth and keep commercial transactions and people safe from fraud and mismanagement. There is a ton of research and development that is provided by the government including DARPA, again the NIH, and work done at public universities that have planted the roots for things such as the Internet, much of the drug and health research done in this country, and modern computing. These provide the basis for new products and services. Spinoffs from NASA alone have generated many tens of billions of dollars and created hundreds of products from MRI and CAT scan technology and heart pumps, to computer technology advances, to the all-weather tire, athletic footwear and better insulators, to satellite technology benefits. IMO on that basis alone NASA warrants a lot more funding than that agency gets even before considering the scientific benefits of its missions.
There are a number of subsidies throughout the economy, some necessary, some pork depending on your point of view, provided by the government as well as semi-governmental agencies like Freddie Mac and Fannie Mae which provide housing assistance. If we cut out airline and rail and farm subsidies tomorrow, we’d have a little problem on our hands.
I’m sure I’m leaving other things out (defense) but the bottom line is that if you allow funding to erode too far for all these services, eventually it has a significant cost. Certainly well timed cuts when the economy is humming can produce favorable results, but extended over too long a period of time the business community will suffer if the commercial environment the government provides doesn’t keep up.
Besides, if low taxes are the answer to a booming economy, why aren’t places like Oregon, Mississippi and Alabama our country’s core centers of business rather than places like NY or California?
I disagree and challenge this premise. I pointed out earlier that tax revenues are at an all time high. What you may be trying to say is that there is an optimal mix of tax revenue (from a given tax base).
Again, I’ll disagree with this because it’s both too broad a statement and also apples-to-oranges in nature. Taxes are not the single deciding factor in the development of a community. Site location is different for each business but it requires a proper mix of resources. These consist of things like raw materials, skilled labor, and transportation.
With that said, the rise and fall of taxes will affect development **within ** each state. Even within a community, taxes can affect the use of land by creating economic zones. This is often done as a method of redeveloping brown-field or blighted areas.
Snag, I meant to add something to the idea of optimal taxation. JFK showed us that lowering taxes could create more tax revenue. Given that there are no qualifications to the over $100,000 a year job as a Congressional representative I feel safe pointing out none of them are rocket scientists. I’ve yet to hear anyone propose tax optimization for revenue enhancement.
I’m with you there too. Anyone aware of whether some better metrics are starting to take hold among economists?
And, as has been pointed out to you twice already, this is a very deceptive claim, based on one-month’s revenue and ignoring any correction for inflation. To say for the 3rd time, the Bush Administration’s own projections don’t show revenues from personal income taxes exceeding their pre-tax cut 2001 values until 2008, which is a very sustained dip by historical standards.
You’re reading more into what I said. Lowering taxes historically increases tax revenue. Income tax is roughly half of that figure. As the economy grows from the increased flow of money, the resulting revenue from all taxes will go up. If revenue from income taxes eventually exceeds the payout (reduced taxes) then that would imply a more optimal tax rate. Which was the point of my last post.
The sort of tax I think the OP was talking about, sounds a lot like
Supply side economics
or
Trickle down economics
or, as one person called it,
Voodoo economics.
This is the one of modern conservatism’s central tenants: I think this is where we should focus our attention.
If you believe this, you are saying that not only do tax cuts stimulate economic growth, they do so sufficiently to overcome the lower share of economic activity captured by the government (in the form of taxes).
Now, it is true that tax revenues typically rise after tax cuts. This is because tax revenues rise every year due to higher wages, prices and population. But, for a given level of government services, so should spending, right?
What does the data say? According to Glenn Hubbard, Bush’s head of the Council of Economic Advisors in 2003, the economy in response to tax cuts, “is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity.”
Or let’s see what Greggory Mankiw, current CEA Chairman, said in his 1998 textbook: Mankiw compared any economist who supports the view that tax cuts are self-financing to a “snake oil salesman who is trying to sell a miracle cure.” Cite (from the CBPP).
Furthermore, experience shows that budget deficits follow tax cuts that are not matched by spending reductions.
At bottom, the modern conservative argument that tax cuts pay for themselves goes something like this:
I wish that P were true.
Therefore P is true.
I’d like to extend my previous remarks.
The economist most associated with free-lunch tax cuts is Arthur Laffer, who sketched his theory on a napkin over dinner with the Wall Street Journal’s opinion page editor.
The Laffer curve reflects an economic truism: after a certain point, higher tax rates will destroy incentives to work so much that further increases in rates will only lower tax revenue. If tax rates were near 90%, for example, this would plausibly be the case.
Laffer never provided any evidence that we were anywhere near that peak in the 1970s. Those claiming otherwise typically must resort to bamboozlement such as, “Tax revenues rose when Reagan cut taxes”, an observation which blithely ignores inflation, population and average economic growth. Really, these arguments are an embarrassment.
No, what it says is that tax cuts stimulate the economy, there’s no addendum.
Budget deficits always follow a budget that doesn’t match revenue.
No, what the argument says is that tax cuts stimulate the economy. Which is the question posed. Any assumptions that you wish to make that they hurt the economy in the long run implies the former tax rate was the optimum rate. If Greggory Mankiw can predict that rate, more power o him.
And then:
Weird. These are two separate claims. The latter (tax cuts stimulating the economy) is necessary but not sufficient for the former (lowering taxes increasing tax revenue).
The idea that tax cuts increase tax revenues is modern conservative fantasy, promolgated earlier by Magiver.
OTOH, the idea that tax cuts stimulate the economy is uncontroversial: they certainly do so in the midst of a recession. Whether they are the best method is another matter. (Furthermore, cutting certain taxes would be expected to affect incentives to work and save. In some cases the magnitude of this incentive effect has been measured.)
No. Tax revenue historically increases over time. Period. (As the economy grows and, if you don’t look at it in current dollars, because of inflation.)
That is like the rooster taking credit for the sunrise. The fact that the economy eventually grows to the point where we are getting in more revenues than we were before does not mean that said growth was caused by the tax cuts. When we have had tax increases or neither tax increases nor tax cuts, the economy has also grown…and revenues have generally grown quite a bit more than when we had lots of tax cuts. As I noted, personal income tax revenue growth was much stronger in the 70s and 90s than in the 80s (or, it appears, in the 00’s).
Nobody doubts that any injection of money into the economy during a recession, whether by spending or tax cuts, will provide stimulus. However, there is no evidence that I know of that tax cuts provide long term growth superior to the growth that would have otherwise occurred. And, there is strong evidence against the fantasy that tax cuts pay for themselves because they provide so much growth that it offsets the cut in rates.
Thanks for the opening jshore. I respectfully would like to add a qualification to this subpoint.
If tax cuts increase incentives to work more, then the added labor should increase economic growth. Now the government will lose revenue, which means that it will need to either borrow additional money or cut spending. If they borrow money, they will tap into the national savings pool and crowd out investment. This effect may be offset by higher foreign purchases of domestic assets. That is, we can tap into the world’s pool of savings.
But let’s say that the tax cut is matched by a decline in federal spending, which would be the case if fiscal responsibility prevailed. Is there evidence that tax cuts, under those circumstances, would provide additional growth?
There is. Studies of 1986 tax reform, which reduced marginal rates on wages, were shown to prompt greater labor participation by married women. Cite. Male responsiveness (or their labor supply elasticity, to use the lingo) is lower.
Capital gains taxes are a separate matter.
But let’s cut to the chase.
Slemrod and Auerbach (1997), in their review of the vast literature on the tax reform act of 1986, suggest that there are a hierarchy of responses to changes in tax rates.
The most powerful relate to short-term timing decisions. For example, if Congress announces that capital gains taxes will increase next year, investors will respond by shifting asset sales to the current year and locking in lower rates.
The next most powerful behavioral effect is renaming, financial and accounting responses. For example, lower capital gains taxes (and high dividend taxes) encourages firms to return cash to shareholders by buying back stock, rather than paying dividends.
The very smallest behavioral changes relate to “real activities”, such as working or saving.
Ah, the old “taxes increase as the economy grows” gambit. Who would have predicted that? Every President who cut taxes.
Give up guys, it’s not even a debate. You put money into the economy and it grows. Take it out and it shrinks. What is so hard to understand. It’s not theory, it’s happening now. No prediction needed for the present.
Unemployment is down, wages are up, The stock market is about to break a record, housing starts are up over last year, and tax revenues are up. This is happening after a half TRILLION dollar economic hit from 9/11 followed by a series of hurricanes. If lowering taxes were so bad we would be tanking right now. It works. It works when Democrats do it and it works when Republicans do it. The previous tax rate wasn’t the Holy Grail of tax rates. Get over it.
Hey Magiver why don’t we just drop taxes to zero? That would really get the economy moving right? :dubious:
This has been a rather instructive thread. Note the absence of data in the last post. Note the wriggling away from the contention that tax cuts will pay for themselves. That’s a pretty big argument to walk away from without comment.
Unemployment and poverty rose after Bush took office. Following Clinton’s tax increase of 1993 --opposed by every single House Republican – the economy roared. Conveniently, I reported some of these figures this a couple of days ago here.
Now I’m not claiming that tax increases automatically lead to economic growth – though a sloppy comparison of the 1990s with the 1980s and 2000s would suggest that. Economic processes are somewhat complicated, as Scylla notes.
What I’m saying is that there’s evidence that tax cuts in certain contexts can have mildly positive effects on long term economic growth, but that the effect is too tortured and ambiguous for your typical conservative pundit to discuss.
Old school demagogues used to maintain that if you stated a lie often enough, it would be believed.
Modern conservatives believe that if you repeat a contention loudly enough, it becomes the truth!
I wish P were true.
Therefore P is true.
Tough minded liberals and moderates as well as solvent businessmen know better.
I’d like to know why you don’t buy my premise. Are you saying that government does not provide these services? Why are they are not important or how can we can ignore them?
Now, let me first say that I have no argument with tax cuts providing short-term gains. Sure they do and they may even provide a broader tax base. There is no guarantee of that, it depends on different factors, but sure, it can happen, at least to some degree.
However, it is unsustainable growth because:
If you have a growing economy and or population, communities will need additional infrastructure and services as it expands. Plus you need some maintenance on these systems as well. Thus at some time, you need to increase taxes if a broader tax base doesn’t cover. Your economy will only shrink if your population significantly decreases or when it takes a downturn, such as a recession, or if you intentionally devalue it.
If business is booming, the economy is growing, yes? Making more money, spending a bit more, need more trucks, more accountants, more policing, more lawyerly involvement with courts, you’re building more. True or false? So then we should put the SEC on half days, cut the police force? Close down the fed for the summer, run the trains that bring your workers to work every other day? Don’t worry that the Chinese are unfairly selling the same product you make for half the price, Congress will get to it next year.
So unless you are reducing the size or growth of communities, a broader tax base will only keep up for so long. Likewise, even in a fairly stable situation, if governmental services lose ground, business will suffer from failing infrastructure provided by government.
Furthermore, outlays in gov’t spending will obviously determine what the revenue base needs to be if you want outlays to keep with the rise in the percentage in GDP as it goes up. Or maybe you want your police working every other day. Sure, you can trim some fat by reducing revenues, but when you start cutting off entire chunks simply because they are no longer affordable, that’s going after the budget with an axe, not a scalpel. It’s not really the best way to perform economic surgery.
Look here at table 13 of the Congressional Budget Office’s historical tax tables. It shows how a standardized percentage of revenues and outlays sit within the framework of our GDP. Revenues were higher in the mid 1990’s during the boom cycle while, as the economy expanded and gov’t spending increased, recently as a percentage those revenues have mostly dropped to 1970’s levels. So what if we see more dollars as revenue if the percentage gap grows even wider than that? We may be running faster than we ever did before, but how do we catch the train when it is going even faster still?
Sure, this statement was more rhetorical in nature, and certain geographical factors are important among others. But again I contend that the lack of skilled labor forces, transportation and such are a reflection of a system that did not make the big tax investment in their infrastructure. I’ve heard threats about a mass exodus of businesses from here in California, but then again, everything they need to do business is in place here. Despite the higher costs, we have not seen such an exodus and those that survive here are pretty sturdy. It’s good to be one of the top 10 economies in the world, but it costs us to do it too.