Everything you just typed is pure conjecture on your part.
But I appreciate you trying to turn it back around on me.
Not sure what exactly you are looking for, considering your silly ‘Did the terrorists carpet bomb an entire industrial area? Did they murder a significant number of our workers? Did it bum out the entire country to the point that everyone stopped going to work?’. None of those things caused the Great Depression either…that mean it didn’t happen? You don’t seem to grasp the idea that psychological effects can have a dramatic effect on the economy.
At any rate, here is a wiki article, FWIW, that discusses some of the economic impacts that 9/11 had on the economy. It effected more than just the US as well (in fact, I think that it had a large impact abroad than here in some respects). Google ‘economic impact of 9/11’ and you will get tons of hits. Whether they are all ‘pure conjecture’ or not is probably debatable…but they aren’t simply MY ‘pure conjecture’.
-XT
Also, look at that chart for the 1970-1980 period. Even with the last few years of Vietnam, the oil shocks, and disco, we still maintained a steady growth in federal tax revenues. Yet a terrorist attack that destroyed a couple of buildings and two wars that resulted in zero damage to any domestic production assets or the loss of large numbers of workers was somehow such an immense shock to our national psyche that the economy stayed stagnant for an entire decade.
I mentioned carpet bombing of an industrial area and deaths of large numbers of workers because that would help explain lower tax revenues. But that didn’t happen, did it?
And yes, you are talking out of your ass with your “psychological effects” explanation. No, your Wikipedia cite you scrambled for doesn’t help your case.
Coupled with the dot com bust and two fresh wars? Well…yeah. It did. Again, you don’t need to bomb domestic production assets or kill large numbers of workers to provide a nasty shock to the economy. In fact, ALL of the major recessions and depressions in the US were caused by psychological effects, rather than physical attacks.
Look at the rate of change in tax revenue between 70-80 and that between 80-90…or 90-2000. Even the rate of change post recession in 2003 is greater…and we had TWO wars going on.
Dude…it didn’t happen in ANY of the recessions or depressions the US has been in. I can’t tell if you are serious or if you are just jerking my chain here. I’m HOPING you are just pulling my chain, because if not it doesn’t say good things about your grasp on this subject.
There was no vast destruction of property or loss of life that triggered the Great Depression, and nothing similar that triggered the current recession.
And your explanation would be? Seriously, this is pretty basic stuff here. AFAIK, it’s not even all that controversial.
No? Of course, you have provided exactly zero to support whatever the hell it is you are talking about. Not even talking about cites here…you’ve provided exactly zero even from yourself to support or even enumerate what your point actually is.
-XT
When you start making special cases for why the curve didn’t work according to theory in some ‘special’ set of circumstances, you are essentially adding more power factors to the curve in order to make it fit. However, when you make a curve jinkier like that between two zero points, you also increasingly limit the size of curve segments which slope monotonically up or down. Since the ‘low taxes increase revenue’ argument relies on large sections of similar slope, exceptionalism weakens the argument rather than strengthens it.
At some point one must ask, what good a theory is that is continually disrupted by the actions of ‘special circumstances.’
How did the wars result in decreased federal tax revenues for a decade? HOW?! What is your basis for this claim? Did we start rationing? Were wage controls enacted? Did a large percentage of our working-age males die? Just saying “Uh…9/11” doesn’t explain anything.
Did we not have any recessions between 1965 and 2000? Is that why we haven’t seen these results before?
Sure we could. The money’s not invisible. If the government doesn’t want people sheltering their money from taxation it can just close the shelters. The government could declare capital gains are taxable as normal income if it wanted to. Same with any other shelter. The only reason it doesn’t is because of lobbying.
As for “not bother expanding the business or finding new investments” how is that different from my second choice of “work the same and adjust to a (lower) post-tax income”?
They didn’t though. They decreased sharply in the period between 2000 and 2003, then steadily rose back up to their previous level and beyond by 2008 according to your own cite.
Recession triggered by a major collapse coupled with the effect on the public of the 9/11 attacks. Which part of this aren’t you tracking in on? Again, what do YOU think happened between 2000 and 2003? Does that time period ring any bells with you at all? Anything? Bueller?
Which claim? The one you seem to be trying to make for me, or my own? If the later, then I’ll go with ‘reality’ as the basis. What’s the basis for…well, for whatever it is you are claiming or even saying? Hell, screw the basis, how about simply saying whatever it is you seem to think you are already saying? Let’s start there.
That might have been all you read, but that’s not all I said. I can’t force you to read what I’m writing. You can lead a dead horse to water, but you can’t beat it to death mid-stream while looking at it’s teeth, after all. I also can’t make you THINK, sadly enough. You have to do both the reading and thinking part on your own…and then you have to convey whatever the fuck it is you think you are talking about to me, if you want to have a rational discussion. Right not rational discussion seems to be off the table.
We had several small recessions and a nasty period called stagflation during the late 60’s through the mid-70’s.
Well, we have actually…several times in our history. Why didn’t we see a similar downturn between the 70’s and 80’s? Or 80’s and 90’s? Or 90’s and 2000? You’d need one of those economics experts to tell you. My guess is that the answer is some combination of a build up of different factors, including a huge economic bubble (the dot com industry and the over inflated prices of the various BS dot com companies), and a perfect storm of events that triggered a large collapse while simultaneously we took a psychological body blow from an external attack and our subsequent gearing up for two over seas wars…or, ‘we were due’.
What’s your point though? Was it the taxation rate that caused the dot com bubble bust? Or do you not acknowledge that this was the cause of the drop in federal tax revenue? If not, what do YOU think was the cause of that drop? What exactly are you trying to say?
-XT
If taxes had been lower, he would have been taking home more money to begin with, so the marginal increase in pay with the new job offer would be similar if taxes were lower (or didn’t exist)
Consider:
A raise from $65,000 to $90,000 a year represents a ~38.5% raise. Considering only FIT, and ignoring deductions, your net pay increases by ~35.2% ($52,556 to $71,073 using 2009 tax table). This means that if taxes had been eliminated entirely, this same job offer would represent nearly a 39% increase, as opposed to the current net 35.2% increase.
I can’t imagine what kind of analysis it would take to determine a job would be “worth it” if it provided a 39% raise, but wouldn’t be if the raise were 35%, but I really doubt your family member was doing that kind of number crunching to begin with, and also doubt that a lower tax rate would have sufficiently incentivized them to accept the job.
For lower (and more reasonable) pay increases, the difference is smaller (7.7% vs. 7% for a raise from 65k to 70k) and less distinguishable.
Further, hiring managers and businesses know income taxes exist, and base their offered salaries on that. Were taxes lower, the offer probably wouldn’t have been as high to begin with.
I meant “stagnant,” not “decreased.”
Look at where revenues were in 2000, and look again at 2008. What was the end result?
So some kind of post-9/11 national funk depressed the economy. Is that what you’re claiming?
No…it’s not. I’m unsure why you can’t read what I’m writing, but perhaps it’s me. At any rate I’m not going to type the same things over and over, since there is an obvious disconnect here. Maybe someone else will take a shot at explaining it, or maybe someone else will come in and explain whatever it is you are getting at to me so I can follow along.
I see a sharp drop after 2000 due to the recession, then a steady increase from 2003 when the worst of the recession had passed, culminating in an overall increase from 2000 levels by 2008. What do you see?
-XT
I’m not a rich person or an economist. But I know lots of blue collar people who work more than 40 hours a week only because they are bribed by 150% raise. My dad only works holidays for twice his normal wage. One time, they gave him triple (or maybe it was 2 1/2 times) his wages to work on Christmas, which he definitely wouldn’t have done otherwise. These are all examples of voluntarily working more because it pays more. I don’t see what is so hard to get about the fact that money is a powerful incentive. And my free time is valuable. It makes sense that each marginal work hour is worth more to me than the last, because it cuts into my precious and already-too-scarce leisure time.
I mean, why aren’t you working now? Probably because somebody isn’t paying you. Or not paying you enough. The reason I don’t fill my free time with a second job at McDonald’s is because it wouldn’t pay me enough to justify all the time I spent there. At a decent enough wage, it probably would. It just so happens that every single wage is depressed through taxation, however, so maybe there is a job in the sweet spot in the middle that would be worth taking without taxes, but not worth it with them.
Another example was illustrated in the book Freakonomics. Realtors invariably spend more time, money and effort preparing their own houses for sale than they do for their clients. Reason? Because all of that effort results in higher bids from buyers and hence more money in the seller’s pocket. When the realtor is the seller, they keep all of that money. When the realtor is working for a client, they only see 5% of that money (I don’t know, maybe it’s 10%). So they work harder for 100% than they work for 5%. The phenomenon may be weaker with 70% instead of 5%, but it is the same concept.
This has nothing to do with rich people or tax shelters. The work is worth it for one price but not for another. Taxes effect that price and therefore whether or not I do the work.
You asked how, so I’m going to give you a couple of examples.
First, I think the ‘working harder under lower taxes’ answer is only partially correct. A more correct answer, but one I think a lot of people will disagree with because of their political beliefs, is this:
People who have high incomes have, on average, demonstrated that they are better stewards of money than people with lower incomes. This especially applies to investment capital, and which is why many supply-side advocates focus on capital gains and dividend taxes.
If Businessman A takes $1,000 and uses his superior knowledge to invest it in high-productivity uses, the economy benefits. If poor person B takes the same $1,000 and blows it on smokes and booze, it doesn’t. So some would argue that progressive taxation removes money from the most productive sectors of the economy and gives it to the least productive. I think there is some truth to this, but I don’t know how to quantify it.
Another effect is that higher taxes cause deadweight loss. In an undisturbed, well-functioning market, decisions are considered to be close to Pareto-Optimal (i.e. there’s no change you can make that will increase overall systemic efficiency). This happens because people will only trade if the marginal benefit they get from the trade exceeds the marginal cost. So prices fluctuate around until they find the point where the market clears, and this represents the optimum value for both parties in a trade.
Let me give you an example. Let’s say you, me, and Bob have $200 each, and we each have a widget to sell. We each also have a widget that we personally value at $100 (i.e. we won’t sell it for less), but which the other parties value more. So I go first, and put my widget up for sale. To you, it’s worth $150. To Bob, it’s worth $125. If we negotiate back and forth, I’ll eventually sell it for $150. The product went to the highest-valued use, and I got maximal value for it. Now Bob has something that you and I want. You’re willing to pay $140, but I’ll pay $145. So I buy it for $145. Now, you have an object that Bob and I want. I’ll pay $100 for it, but Bob will pay $130. So Bob gets it for $130.
Now, let’s add it up. Before we traded, between us we had $900 in value. After we trade, Bob has $215 plus a widget he values at $130. You have $180 plus a widget you value at $150. I have $205 plus a widget I value at $145. The total value in the system has increased from $900 to $1025, because our widgets added value when we traded them and put them in the hands of people who valued them more. That’s economic growth.
Now let’s add a sales tax of 30%. Let’s further stipulate that government is perfectly efficient and gives us all our money back with no losses. That should be a wash, right?
You still value my widget at $150. But if I sell it to you, I have to pay a sales tax of $45. Okay, I only make five bucks, but it’s still some profit. So the trade taxes place. In the second case, the sale is for $145, so Bob has to pay $43.50 in tax. That means he only gains $1.50 in profit. Okay, the trade takes place, but just barely.
The third trade, however, is different. Bob will pay $130. You value the widget at $100. If you sell it, you’ll pay $39 in tax. That means you’re losing $9 in value. So you refuse to trade with him, and the widget doesn’t find a higher-value use.
At the end of this little exercise, the government spreads the wealth around and gives us all our tax money back spread evenly among us. It doesn’t waste a cent. But our economy is $30 poorer because the tax stopped a value-added trade from taking place. That’s deadweight loss.
So higher taxes raise the threshold for value for trades. They force the trades on the margin out of the market, decreasing economic growth. It’s not just taxes that do this - it’s monopoly power, information asymmetry, or other flaws which prevent efficient markets.
This doesn’t prove the case that taxes always reduce GDP in a complex economy - perhaps there are other factors more important that the taxes correct. But that’s the theoretical reason why taxes create deadweight loss.
So, will reducing taxes cause government revenue to go up? That depends on two things - how much growth the taxes stimulate, and what kind of timespan we’re talking about.
For the sake of the argument, let’s say that at a fixed tax level growth is stable. Let’s say we have a 50% tax rate on income, which earns the government $1 million dollars. Let’s further stipulate that lowering the tax rate to 25% will cause a 10% increase in income per year. Discounting all other effects both positive and negative, this is what that looks like:
No tax cut case:
Annual Income: $2 million
Government revenue: $1 million
Total taxes collected after 10 years: $10 million
Total taxes collected after 20 years: $20 million
Tax cut case
First year income: $2 million
First Year government Revenue: $500,000
Second Year income: $2.2 million
Second Year government revenue: $550,000
Total government revenue: 1,055,000.
Third Year income: $2.42 million
Third Year revenue: $605,000
I think you see where I am going with this. When the rate of increase goes up, you get a geometric progression.
In this scenario, with the tax cut government revenue passes the steady state annual revenue revenue by year 9, and passes total revenue collected by year 15, at which point income is almost four times higher than it otherwise would be and annual revenue is almost double.
So that’s the theoretical case for how tax cuts can cause growth large enough to (eventually) offset the cuts. Whether the tax cuts really do cause revenue increases in a reasonable length of time depends entirely on your assumptions. If you don’t think tax cuts increase GDP growth, the answer is never. If you think they do, then the answer is “well yeah, at some point in the future”.
If anyone says tax cuts will cause revenue increases in the same year or even within a couple of years, they are either nuts or they’re looking at a different phenomenon, such as wholesale tax avoidance or a major shutdown of economic activity as a result of the tax rate. They could also be modeling things like taxes lost from income of workers if the taxes cause job losses. I believe this is the case with the luxury tax. It really hurt employment in the boat-building and aircraft industries, and the lost tax revenue from wages was greater than the tax collected on the goods. Thus, overall tax revenue went down almost immediately following a tax increase.
What’s the more reasonable explanation for stagnant federal tax revenues from 2000-2008:
A. The recession following the dot com bust, coupled with 9/11, damaged the economy for 8 years.
or
B. Bush cut taxes.
If your answer is “A”, you need to explain what made the dot com recession different from any other recession, seeing as how we don’t see a similar dip in revenue from 1965-2000, even though there were 5 recessions in that period. If you believe 9/11 was the difference maker, I’m hoping you can point to something more substantive than the national mood. Remember, revenues didn’t get back to the trendline for 8 long years.
Here’s the chart again for reference.
That’s not the same situation. Taxes are universal. Investment opportunities are not. Freakonomics outlined why a realtor would invest more effort into their own house because they receive a higher payoff from doing so. But if they’re selling other people’s house, the payoff per house if much lower - so they invest their hours in maximizing the number of sales rather than trying to increase the price of the sales. So they’re putting in the same amount of effort just choosing to apply it in a direction with the highest profits.
Taxes are different. They’re not an option you can pass on. The more money you earn, the more taxes you pay (assuming a balanced tax plan - in reality the government favors some forms of earnings over others). The only way to avoid paying taxes is to avoid earning money. Most people are going to act rationally and not cut off the own nose to spite the government’s face. They’re going to earn as much as they can, even with the knowledge that a percentage of their earnings will be collacted as taxes.
Speaking of deadweight loss, let’s consider two even simpler examples:
Let’s say the government puts a 10% sales tax on widgets. The widget normally sells for $1.00. I value the widget at $1.05. Absent a sales tax, I’ll buy the widget and gain five cents in value. But with the sales tax, the widget is $1.10, and now I’d be losing value if the sale taxes place. So no sale happens. That’s deadweight loss due to taxation. It has nothing to with efficiency, or tax avoidance, or working less. It’s purely a matter of the tax becoming a barrier to trades were the incremental value gain of the trade is lower than the tax.
Consider the reverse case - the govenrment decide to create a ‘stimulus’ by subsidizing cars. I’m thinking of buying a new car, but the car represents only $15,000 in real value to me, and the price is $18,000. So I don’t buy the car, and that’s a good thing. But now the government offers me $5,000 in stimulus to buy the car. Now I’m gaining $2,000 in value, so I buy it. But the government used $5,000 to create a gain of $2,000. That’s a direct deadweight loss. This is why you need a multiplier to prevent a stimulus of this sort from being a giant money sink, OR you need an environment where more than $5,000 in value is being created because of other secondary effects. If your stimulus is staving off a deflationary spiral, that might be a good reason.
This is often not the case. A lot of people have high incomes because their parents or grandparents were better stewards of money.
Again this is not always true. The free market may set the optimal price but there are other areas of the economy that the free market cannot address.
Consider a public school system. Businesses benefit from having an educated population. But if public education were left to the free market it would fail. No business could rationally make the investment of educating thousands of children. Especially when the graduates from the school system would be free to work anywhere, including for rival businesses. So a business that tried to assume the burden of educating the public would incur a vast expense by itself while every business would reap the benfits.
One solution is to accept this situation. It’s a tragedy of the commons - every business is hurt by an uneducated population but no individual business can afford the expense of solving the problem. Or society can step in - everyone will pay into a common pool and that money will pay for a public school system. Every business receives more benefits than it paid in and no business was placed at a competitive disadvantage because everyone paid.
Sam has it pretty much right on, but let me add a bit to clarify.
This is wrong. Federal income tax is graduated. Only income in the higher bracket is subject to the higher rate. The additional $1 in the example above will be subject to the higher rate, but none of the income below.
A key concept to understand is the multiplier effect. Less money given up in taxation goes into the economy and its effects are multiplicative. Since taxation occurs at every level of this multiplication, tax revenue has the potential to increase if tax rate decreases - granted other favorable variables.
A real world example is business tax credits for capital purchases. I believe in 2008 as part of the stimulus, there was an option to accelerate depreciation on certain types of assets purchased. Allowing accelerated depreciation effectively reduced the cost of what was being purchased, incentivizing those purchases. This causes more items to be purchased and more opportunities for the multiplier effect to operate.
Allowing for accelerated depreciation on vehicles weighing over 6000 lbs essentially subsidized Hummer sales. Instead of straight line where the cost of the vehicle got deducted over its life, now you could take a deduction all in the first year. That deduction had a measurable value and made buying Hummers (and other heavy cars (Expedition, Excursion, Suburban) cheaper than any vehicle weighing less than 6000 lbs.
Motivating these activities to increase total governmental revenue only makes sense in conjunction with the multiplier.
We had an eight month recession in 2001that started in March and ended in November. The dotcom bust was mainly a bust in equity markets and wasn’t much of a drag on the real economy, hence the 2001 recession was the mildest postwar recession on record. Bush’s term in office however was charachterised by the biggest asset bubble in history with almost all GDP and private sector employment growth in or related to the construction industry. The housing bubble absolutely dwarfed the dotcom bubble. 9/11 cost the economy an estimated $100 billion, in a $14 trillion economy. A drop in the bucket. And so despite having the biggest bubble in history inflating his econnomy and a budget surplus to allow him greatly increase unfunded spending, the biggest spending spree in history, and to put things like Iraq/Afghanistan off budget, Bush’s economy grew at a 1.9% average rate with disastrous falls in revenue from trend and his period in office ended with the biggest recession since the Depression and a financial meltdown, record deficits, etc. etc. I don’t see how that’s a record that anybody would ant to defend.