Do tax cuts help the economy?

Great Debates
81

Well, I didn’t claim this part so it must have been from another poster. My impression was that the economy was poised for recovery when Clinton took control (i.e. the economic indicators were positive and the economy was begining to recover). As always, the initial recovery was slow but eventually, and in no small part due to Clintons and Congresses parts (for once), it took off into one of the most productive periods in our history. I certainly don’t blame Clinton that the initial recovery was slow. By the same token I don’t give him all the credit for the recovery, as IMHO the economy was already recovering. I DO give him full marks for what he did after the recovery though…I think he had a major hand in how things rocketted up during his second term.

Though you claim a peak in March, and for all I know this was accurate, my own understanding is that there were already plenty of indications of an economic downturn coming on prior to Bush. Again, I don’t blame Bush for the economic down turn. Hell, I don’t even blame Clinton…economies rise and economies fall after all. Its a cycle. I also don’t blame Bush for the dual hammer blows of the DOTCOM bust (it was bound to happen and had been predicted for years after all) and then what 9/11 did to our economy.

I will say that while Bush and I do not see eye to eye on fiscal policy (to say the least), the recovery was relatively swift in this case…pretty much we were in recovery mode (even with Bush’s stupid war and domestic spending policies, foreign distrust and hostility, distrust and even scandal in the tech industry and 9/11 and the WTC destroyed to top it all off) by the time his first term was over. I don’t know if it was the tax cuts that did it or if it was some other factor…IANAE after all, just an engineer. I will say that the tax cuts SEEMED to have a short term effect on boosting the economy out of recession. Which is what its supposed to do in theory anyway…at least thats my understanding. :stuck_out_tongue:

-XT

82

Please read the 2nd post on the top of page 2, Scylla. (Ok, I’ll do it for you).

The Laffer curve, I’m claiming, is empirically irrelevant. It’s similar to the Giffen good in that way.

Scylla sex:: “Please note that I’m not pointing to tax cuts as panacea for economic ills or as miracle drugs that automatically raise revenues. Simply, I am saying that in certain circumstances tax cuts can and do stimulate the economy and can increase tax revenue.”

“Stimulate the economy”: Agreed, (see my response to jshore, as well as my countercyclic shtick below). “Can increase tax revenue”: No, not empirically.

Now most of your quotes go something like, “We had a lot of growth after 3 tax cuts.” The same could be said of Clinton’s 1993 tax increase or for that matter the tax increases that occurred during WWII. You could also look at the fast growth during the 1950s, which co-existed with rather high tax rates. This sort of rough analysis proves very little.

Still to be clear, I’m a big fan of counter-cyclical fiscal policy; combining a tax cut with a spending increase during a recession seems fine to me, generally speaking. (Of course particulars matter.)

Nice Ian Flemming quote, by the way.

Your link gives us something to work with. Note that the argument for the Laffer Curve is couched entirely in supply side terms. Note that your argument though emphasized demand-side considerations. Now I’m with you Scylla, that’s the part that I would emphasize. But the Laffer curve is presented as a wholly supply side model.

Emphasis added.

Why is that? Well, it’s tricky to argue for free lunch tax cuts on Keynesian grounds, because the multiplier associated with spending increases is higher than for tax cuts. So if you argue that tax cuts will pay for themselves, you’d probably have to say the same for spending increases. (“Probably”, because tax cuts also give a (generally small, not tiny) supply side benefit. Spending can shift supply in either direction, depending.) [1]

Still, when I denounce the Laffer Curve, I’m generally talking about the pure supply side argument.

I maintain my categorical position regarding the Laffer curve (empirically irrelevant) but I’m a little more circumspect about the combined effects of a tax cut when demand stimulus is considered as well. My thought experiment involves a tax cut delivered in 1933, if pre-existing rates were something near 30% (they weren’t though: they were much lower). Frankly, I need to think a little more about whether tax cuts could have been self-financing under such circumstances.

The OMB, CBO assure us that free lunch tax cuts do not apply today, and Mankiw (a fine economist who for some reason was appointed to the CEA by GWB) calls such a possibility “snake oil”. So I’m dubious. But not yet categorical.

------ IMO, the efficacy of the laffer curve exists at the extremes. We ain’t there.

Agreed, but by “extremes”, I mean (empirically irrelevant) 90% tax rates. You may of course have a more expansive characterization.

I have not read your link in full. It’s getting late here too: perhaps I can return to this later.

[1]Note to self: There’s also permanent income to consider.

83

2 things:

  1. I quoted myself on the top of my last post.
  2. I meant to type: Sylla sez:, not Sylla sex::

:smack: :smack: :smack: :smack: :smack:

84

Right, I was sort of incorporating you into the discussion I was already having with Shodan; sorry if it got confusing. My basic point was just that it’s a little misleading to claim that Bush II “inherited” a recession from Clinton but Clinton didn’t “inherit” one from Bush I. Technically, neither of them “inherited” a recession: the start of both the Clinton and the Bush II administrations occurred during a rising economy.

Now, if we’re going to talk more vague concepts like “indications of an economic downturn already coming on” and so forth, then the question of credit and blame gets fuzzier. And rightly so, IMHO: the business cycle is complex and no one policy or set of policies can be held responsible for individual ups or downs.

Actually, I think the recovery from the 2001 recession is generally considered to have been rather slow, especially in terms of how long it took to get job growth going. That is not necessarily Bush’s fault, though (although I think he or his Administration do bear responsibility for getting their overconfident predictions of speedy recovery so wrong).

Yes, I think everyone in this thread is agreed that when the government pumps money into a recession economy, by tax cuts or spending increases or both, it has a stimulating effect and boosts economic recovery.

The difficult question is, what kind and amount of tax cuts give us the most recovery bang for our revenue buck? Here, I think, there’s a strong case to be made that Bush’s tax-cut program, although it did provide some stimulus, was fairly inefficient considering how much it cost. As jshore likes to say, we paid for a Rolls-Royce of an economic stimulus package and got a Pontiac of an economic recovery.

85

Well, sort of. The difference is that Clinton inherited a rising economy that kept rising; Bush inherited a “rising” economy that went into recession three months after he took office.

Another factor being that, as recessions go, the one that Bush inherited was fairly shallow and short, so the recovery was somewhat more tepid than it might have been if the recession had been more severe.

What spending cuts have the Democrats been pushing?

You would have to cite where I or someone else has said this before I would respond.

Of course, somehow you got from “What effect (a Bush impeachment) will have on the economy is hard to say” to “are you suggesting that (the Clinton impeachment) helped cause the 2001 recession?”, which is a stretch at best and mischaracterization at worst.

:shrugs:

Regards,
Shodan

86

That’s because it is. It is “valid” insofar as the basic algebra that drives it is correct. It is not valid insofar as it has no observable connection to the real world.

I do not think I was sufficiently clear. What is wrong with this picture is not that it models only a single variable but that it ignores rational expectations and equilibrium. It is inadequate and its effects are fundamentally unobserved. Full stop.

It is not threatening. It is a tedious non-starter and tends to bog down legitimate economic discussions due to its notorious politics.

My objections are anything but idealistic. The objections are rooted in the fact that the effect predicted by the curve has not been observed and that the model is inadequate.

I disagree on two grounds. First, if basic algebra is going to be used by our government to drive critical taxation decisions, then life as we know it might as well be over.

Second, it is entirely possible that some tenuous effect might be observed that can be attributable to Laffer’s analysis. This does not mean that there is any causal connection in the real world.

If a testable hypothesis is generated and the probability of the observed effects exceeds a given critical value, then voila, it can be accepted as true. End of story, end of objections. Until a better theory comes a long.

My only ideological commitment is to quality economics and not tendentious and inadequate junk science.

If the marginal tax rate were 90%, you could make a whole host of arguments with far more rigorous theoretical support for lowering taxes. The fact that Laffer’s analysis agrees might as well be coincidental. A stopped clock is right twice a day.

87

Agreed. Mankiw is indeed an excellent economist, and unsurprisingly he was forced out of the administration after his remarks to Congress on outsourcing. Economically he was spot on. Bush bent over and sold him out.

88

[QUOTE=Measure for Measure]
Please read the 2nd post on the top of page 2, Scylla. (Ok, I’ll do it for you)

Oh.

So in other words, we really don’t disagree very much? I missed that one. Sorry.

89

There are three examples in the cite I provided. In the Kennedy example a decrease in tax rates from about 90 to 70 percent resulted in a 450% increase in the rate of increase of government tax receipts.

That looked observable as did the Harding cuts and to a lesser extent the Reagan ones.

Besides the three observable Domestic examples, Laffer provides several international observations. You may disagree or explain them but clearly they have been observed and they follow Laffer’s hypothesis.

I’ve cited the observations.

Algebra has been debunked?

Real world example, Kennedy’s cuts, 20-something percent decrease in tax rates, 450% increase in tax receipt growth. That’s an observation. Causality has not been demonstrated in that, but you can’t always do that in a complex system.

I got that, but I feel that you’ve ignored the actual cite with the actual hypothesis and observations.

My only ideological commitment is to quality economics and not tendentious and inadequate junk science.

Ok. You have three examples of strong correllation to 2nd order growth in tax receipts subsequent to major tax cuts. If it’s coincidental random chance, stopped clock right twice a day there should be examples examples of failures, and they should outnumber the successes.

Can you show them?

90

I’d just like to point out one thing regarding tax cuts. President’s like Reagan and Bush II cut taxes, but they did not reduce government spending. In fact, they both increased spending dramatically. The end result of that is that the government was effectively injecting wealth into the economy by borrowing. Its not an amount to shake a stick at either. Reagan averaged a deficit of 4.225% of the GDP. Of course if the economy effectively gets a big loan it will produce more.

Its as though I took out a loan and bought a bunch of new stuff, and then used that to show my income increased. My income might have increased this year, but its going to decrease in the future when I have to pay the piper.

91

While your statement about a 450% increase in the rate of increase of government tax receipts is a technically-true restatement of what he claims happened, what he actually notes is that tax receipts were growing by 2.1% per year over the 4 years before the tax cuts and by 8.6% per year over the 4 years after. I think this statement makes it clearer that the results are considerably more “fragile” than your statement of it might imply…in the sense that we are dealing with pretty small numbers here and there could have been a lot of other factors involved.

Moreover, the Kennedy tax cuts were made from a very high top marginal tax rate of 91%. Even I might venture that at such marginal tax rates, the Laffer curve might have some relevance. And, I would need to understand more about what these “cuts” involved since my impression was that there were also a lot of loopholes that made that rate more fantasy than reality. If the change in rates was coupled with changes in loopholes, that could also explain some of the effects.

As for Laffer’s take on the Reagan tax cuts, I call “bullshit” on his “analysis”. I can’t exactly figure out everything that is wrong with it…but since it contradicts my own study of this, I know he is full of shit. One thing that is strange about his analysis is his choice of January 1983, two years after Reagan took office, as his dividing line between before and after the tax cuts. This conveniently puts the major recession in the “before” category so that the revenue growth in the few years before can look like shit and the revenue growth in the few years after (with the recovery in fall swing) can look good! It is much more straightforward to just look at the real revenue from the income tax and see how long it took for it to recover to FY1981 values after the tax cuts (and recession).

He also pulls out the major deception of looking at the growth of the income tax share paid by the top 1% without noting that the rise in their share had nothing to do with the rich paying taxes in greater proportion to what they did before and everything to do with the skyrocketting of inequality, i.e., the income share of the top 1% rose even more dramatically. [For example, while the personal income tax share of the top 1% went from 19.1% to 27.5% between 1980 and 1988, their income share…as measured by AGI…went from 8.46% to 15.16% during that period. (See Table 5 here…While there is a not on that table saying “Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable”, there does not appear to be any big discontinuity between 1986 and 1987.)]

I think all we have learned from that Laffer study is that the Heritage is about equally good at publishing lies and deception as is the Cato Institute which is, quite frankly, something that many of us already knew. [It also clearly shows Laffer not to be any sort of serious economist but simply to be the partisan hack that he is.]

92

The difference between 2.1 and 8.6% growth is not small in any context, especially not in one where we are talking about the Federal government’s income. Most emphatically NOT a small number. Large. Statistically significant.

You’re assuming your conclusion, a really obvious fallacy. “Since it disagrees with me it must be wrong,” is a very bad argument.

Ok. When exactly did the tax cuts take effect and how long would we expect them to take before effects could be seen? Pick a date in respect to those issues and see if it coincides with Laffer’s before/after analysis. If it doesn’t you may have a point.

Well, if you start with the perception that if it disagrees with you it must be wrong, than I can see where you get that impression. Such a stance is, I’m sure, emotionally satisfying.

93

…as it happens I have a higher opinion of Cato than I do of Heritage.

Still, Scylla, you have to admit that the first chart is a joke. At what planet would the Laffer curve be symmetric: that is, why would one make it peak at a 50% tax rate? Now I can understand having it peak at something like 75%: the chart is an illustrative schematic after all.

But to make it symmetric just doesn’t seem like a serious argument.

Still, the article was interesting in a historical sense:

  1. The dinner where Laffer allegedly sketched his curve was also attended by Darth Cheney and -yes- Donald Rumsfeld. (What else did they discuss?)

  2. The restaurant used cloth napkins and Laffer’s mother, “had raised me not to desecrate nice things”.

Other than that, I found the analysis crude, even for an undergraduate presentation: in the Harding case, Laffer discusses tax cuts and economic growth but doesn’t think it necessary to even mention other possible explanations, never mind modeling them. Frankly, the word that comes to mind is “hack”.

In Laffer’s defense though, he really isn’t an academic: he’s a consultant. I can’t find the Laffer Associates webpage on google, but I suspect that Laffer does ok as a speaker: here’s his webpage at Barber and Associates, “A Customer-Driven Company, Presenting the World’s Foremost Speakers, The Most Dynamic Entertainment, With Integrity and State-Of-The-Art Service!”.

94

Okay. Let me explain exactly what I mean by fragile. Laffer chooses to look at the 4 years after 1965 and the 4 years before 1965. But, one might ask why he chose exactly 4 years and why he chose 1965, which does mark when the tax cut was fully phased in…but it actually started in 1964. As this page shows, from 1963 to 1964, the top marginal tax rate had already dropped from 91% to 77% before then dropping to 69% in 1965.

So, let’s just shift things by one year and use 1964 instead of 1965. We will use all of Laffer’s own data in the table that he shows except that we need the change from 1959 to 1960, which he didn’t provide but that we can get from the historical tables of the U.S. budget that I linked to above (Table 2.1 with the composite deflator from Table 1.3). [The numbers in this table seem often close to but somewhat different than Laffer’s for the other years; I am not exactly sure why.] It turns out that 1959 to 1960 saw a whopping 14.9% real increase in revenues from individual and corporate income taxes. This, along with the weak showing of a 2.1% decrease between 1964 and 1965 then changes the whole story! We get a 6.8% increase in the revenues in the 4 years up to 1964 and a 4.3% increase in the 4 years after!

This illustrates just how sensitive Laffer’s result is to the exact dates that he chooses to look at…making the whole thing completely suspect. (If we restrict ourselves to 3 years before and after 1964, then we get 4.3% for the 3 years before and 5.6% for the 3 years after…so my result is fragile too. I don’t mean to use this to prove things one way or the other but just to show how bogus it is to look at rate of growth of revenues over a restricted number of years with a debatable date dividing the before and after.)

I have, in previous posts, giving links to the relevant info and a summary of what one finds. Again, Laffer has cherry-picked his dates in order to coax what he wants out of the data that, in a more general sense, shows a pronounced dip in individual income tax revenues that took several years to recover from. That result is much less fragile than the sort of things one gets by looking at rates of revenue growth over a specifically chosen few years.

Hopefully, my direct illustrations in this thread of how you have been lied to and deceived by both Cato and Heritage will make some impression on you.

95

By the way, a look at that Tax Foundation link with yearly tax rates shows that Laffer played the same game with the Reagan tax cuts. His start date is Jan 1, 1983 even though the top marginal rate dropped from 70% in 1981 to 50% in 1982 and actually remained steady after that (although what did change in the subsequent few years [through 1984] were the cutoffs for the various income brackets, which rose so that the top rates hit fewer people, and were then pegged to inflation after 1984).

By doing this, Laffer is able to count the -9% drop in real revenues from the income tax between 1981 and 1982 as falling before the tax cut rather than after it…How convenient!!!

96

I was reading that Laffer piece more closely and discovered that he actually gives us the recipe for how to skew the results in his favor, although he obviously doesn’t put it this way:

Now, the first paragraph is reasonable enough and brings up an interesting issue about how once a tax cut is passed, people will tend to delay what the realization of what income they can until after the lower rates go into effect. However, the second paragraph is just bizarre. Does he honestly think this is a fair way to assess the impact of the tax cut or is he trying to snow people? It is one of those mendacity or incompetence questions.

By delaying the measurement of the tax cut period until after they have been completely put into effect and then looking at the growth in the before and after years, what he is doing (for a tax cut that goes into effect not all at once) is this:

(1) He is effectively moving the revenue losses that occur due to the lower tax rate in all but the final year into the pre-tax cut time period, thus making the pre-cut period look worse and the post-cut period look better.

(2) In addition, because of the effect he noted in the previous paragraph, he is moving the period in which people are holding off on realizing income in order to wait until the cut is completely in place into the pre-cut period while keeping the first year when they can take advantage of the full cuts in the post-cut period. Again, this has the effect of making the pre-cut period look worse and the post-cut period look better.

I have to say, I am dumbfounded. If I had only realized this sort of approach to data analysis sooner, I could have saved myself a lot of heartache of sometimes having the data contradict my hypothesis! I sorta thought that meant I might have to change my hypothesis but apparently the correct approach is to adjust everything until the data confirms the hypothesis.

97

I mentioned in my previous post that I would guess you would want to draw the line after the cuts had a chance to effect the economy, and it certainly seems reasonable that they would need to be fully phased in before you could measure the effect, so 1965 does seem fair, but this is interesting. Let’s see where you are going with it.

Three things Laffer’s table comes from the Department of Commerce Bureau of Economic Analysis. To be sure that you are comparing apples to apples you need to work with their numbers rather than those from a different source. Secondly, since we know that tax revenues tend to go up we have not been working with simple increases, but changes in the rate of growth (the former is significant, the latter a peccadillo to consistency.)

Thirdly, As I think about it, Laffer’s drawing the line at 1965 seems eminently reasonable. I repeat you would want your “after” portion to show the effects of the tax cut with the time for implementation to occur. I don’t think you need to challenge that logical placement in order to demonstrate the fragility argument you’re making. If the fragility argument holds true with consistent numbers (I concede that I expect it probably will,) than you have made an excellent point.

I see your point. Would you be willing to go to the trouble to confirm it with numbers from a consistent source so that we are not mixing and matching?

No, You haven’t shown that and it doesn’t work that way. If someone presents a flawed thesis it does not mean they are lying and deceiving. It means their thesis is flawed. You’ve made an excellent argument (if it holds true with consistently sourced data,) I don’t think you should overstate or draw conclusions not supported by your argument.

Secondly, while your fragility argument appears significant it does not automatically invalidate Laffer’s thesis. “Fragility” does not equal invalid. It may simply be very important to draw your line at the proper place. In the three domestic examples Laffer gives he seems to draw his line consistently and precisely at the point of full implementation, which I find no argument with.

But, let’s see if your argument holds up.

98

Again the placement looks proper and consistent. If in a two year implementation cycle for tax cuts like in the Kennedy example we draw our line at the end of the first full year of partial implementation and the beginning of the year of full implementation, than what is the most logical place (from a consistency standpoint) to place your before/after point in a single year implementation cycle like in the Reagan example. The year follwing implementation.

This is what Laffer did.

99

Yes. You are right. Strong point.

I don’t follow you here. It seems to me that if you want to measure the effect the cut has you want to draw your line at the point where the direct effects of that cut occur. The whole point of a cut like that is to get people to take advantage of it, so that’s where you measure it. I fully recoqnize that an announced cut will actually have an opposite effect as people wait between the announcement and the implementation who otherwise would not have, bt that seems intrinsic to the process and hardly Laffer’s fault. Still, it seems like you would want to take a portion of the post implementation gains and assign them to the period between announcement and implementation in order to normalize your results for comparison (which Laffer has not done,) so I’m partially with you on that point.

Save the sarcasm. You’re making good points without it.

100

I went back and used the numbers for the change from 1959 to 1960 that you get using the BEA numbers…and you are right that for some reason there seems to be a big difference. It is almost like there is a one-year offset, as the BEA numbers show a big jump in real revenues from the personal and corporate income taxes between 1958 and 1959 (+11.7%) but a much smaller one from 1959 to 1960 (+2.5%). I got the BEA numbers from Tables 6.18B, 3.4, and 1.1.4 (the last is for converting from current to real dollars) here. They are not exactly the same as Laffer’s numbers for some unknown reason, but they always seem to be quite close…and in particular the year-to-year changes seem to very close to Laffer’s.

At any rate, using these numbers and 1964 as the dividing year then yields growth numbers of 3.7% for the 4 years before 1964 and 4.3% for the 4 years after. If one looks at just 3 years before and after, the numbers are 4.1% and 5.0% And, if one loooks at 5 years before and after, it is 5.3% and 6.3%. So, in all these cases, the after growth is a little higher that the before…but the difference isn’t nearly what Laffer got by using 1965 as the dividing year. So, I still say that Laffer’s result is pretty fragile, although not quite as fragile as the results that I got when using the federal budget numbers to calculate the change from 1959 to 1960 (which seems like it may have been a little bit of an apples-to-oranges comparison because they seem to be computed fairly different). I would also be curious to see what the numbers would work out to be using the federal budget numbers, rather than the BEA numbers, consistently throughout…although I am too lazy to go through that now.

And, one must also remember that this was for a tax cut that was from a really, really high marginal rate (92%!!!) at the top of the scale…where if the Laffer curve ought to ever apply, it should apply there. And, I still want to understand whether the cut was accompanied by other reforms in the tax code that tightened loopholes and such.